<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1997
REGISTRATION NO. 333-11813
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
AMENDMENT NO. 6
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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Item
Number Item Caption in Form S-1 Location in Prospectus
---------- -------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page of Prospectus; Additional
Prospectus Information; Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting
6. Dilution Dilution
7. Selling Security Holders Not applicable
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to Be Registered Prospectus Summary; Capitalization; Description of
Securities; Certain Federal Income Tax
Considerations
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to the Registrant Outside Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; Use of Proceeds;
Capitalization; Dividend Policy; Dilution; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Executive
Compensation; Principal Stockholders; Certain
Relationships and Related Transactions; Description
of Securities; Shares Eligible for Future Sale;
Financial Statements; Outside Back Cover Page of
Prospectus
12. Disclosure of Commission Position on Not applicable
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED MARCH 25, 1997
PROSPECTUS
UNITS CONSISTING OF 1,500,000 SHARES OF 10% SENIOR
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
UNITS CONSISTING OF 1,500,000 SHARES OF COMMON STOCK
AND 1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
COMMODORE SEPARATION TECHNOLOGIES, INC.
------
Commodore Separation Technologies, Inc., a Delaware corporation (the
"Company"), hereby offers (the "Offering") two separate units of securities
(together, the "Units") consisting of (a) 1,500,000 shares of 10% Senior
Convertible Redeemable Preferred Stock, par value $.001 per share and
liquidation preference of $10.00 per share (the "Convertible Preferred
Stock"), and 1,500,000 Redeemable Common Stock Purchase Warrants (the
"Warrants"), each unit (the "Preferred Units") consisting of one share of
Convertible Preferred Stock and one Warrant, and (b) 1,500,000 shares of
Common Stock, par value $.001 per share (the "Common Stock"), and 1,500,000
Warrants, each unit (the "Common Units") consisting of one share of Common
Stock and one Warrant. The Convertible Preferred Stock, Common Stock and
Warrants included in the Units are sometimes collectively referred to as the
"Securities." Until completion of the Offering, the Securities included in
the Preferred Units and Common Units may only be purchased together in their
respective Units, but each of the Securities will trade separately
immediately after the Offering. The Convertible Preferred Stock is
convertible into Common Stock at any time prior to redemption at the rate of
1.33 shares of Common Stock for each share of Convertible Preferred Stock, an
effective conversion price of $7.50 per share or 125% of the initial public
offering price per share of Common Stock (subject to adjustment under certain
circumstances). Commencing March , 2000, the Convertible Preferred Stock is
subject to redemption by the Company, in whole but not in part, at $10.00 per
share, plus accumulated and unpaid dividends on 30 days' prior written
notice, provided that the closing bid price of the Common Stock for at least
20 consecutive trading days ending not more than 10 trading days prior to the
date of the notice of redemption equals or exceeds $11.25 per share, or,
after March , 2001, at the cash redemption prices set forth herein, plus
accumulated and unpaid dividends. Cumulative dividends on the Convertible
Preferred Stock at the rate of $1.00 per share per annum are payable
quarterly, out of funds legally available therefor, on the last business day
of March, June, September and December of each year, commencing June 30,
1997. Each Warrant included in the Preferred Units and Common Units contains
identical terms and entitles the registered holder thereof to purchase one
share of Common Stock at an initial exercise price of $8.40 per share,
subject to adjustment, at any time commencing one year after the date of this
Prospectus until five years after the date of this Prospectus. Commencing 18
months after the date of this Prospectus, the Warrants are subject to
redemption by the Company, in whole but not in part, at $.10 per Warrant on
30 days' prior written notice provided that the average closing sale price of
the Common Stock equals or exceeds $18.00 per share (subject to adjustment
under certain circumstances) for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. See "Description of Securities."
Prior to this Offering, there has been no public market for the Securities
and there can be no assurance that such a market will develop after the
completion of this Offering or, if developed, that it will be sustained. It
is currently anticipated that the initial public offering prices of the
Preferred Units and the Common Units will be $10.10 per unit and $6.10 per
unit, respectively, with the Convertible Preferred Stock, Common Stock and
Warrants priced at $10.00 per share, $6.00 per share and $.10 per Warrant,
respectively. For information regarding the factors considered in determining
the initial public offering prices of the Securities and the terms of the
Convertible Preferred Stock and Warrants, see "Risk Factors" and
"Underwriting." Application has been made to include the Convertible
Preferred Stock, the Common Stock and the Warrants on the Nasdaq Small-Cap
Market ("Nasdaq") under the symbols "CXOTP," "CXOT" and "CXOTW,"
respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 11 AND
"DILUTION."
------
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<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 of
Convertible Preferred Stock, shares of Common Stock and Warrants, solely
shares of Convertible Preferred Stock or shares of Common Stock or
Warrants, or any combination thereof. If such Over-allotment Option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $27,945,000, $2,235,600 and $25,709,400,
respectively. See "Underwriting."
------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING PURCHASES OF THE SECURITIES TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE SECURITIES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
SECURITIES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, and make
available such other periodic reports as the Company may deem to be
appropriate or as may be required by law.
------
This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that may
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified by, and must be read in conjunction
with, the more detailed information and financial statements and notes
thereto appearing elsewhere in this Prospectus. Unless otherwise indicated,
all references in the Prospectus to (a) share and per share information
reflects a 150,000-for-one stock split effected on September 5, 1996 and a
one-for-1.5 reverse stock split effected on November 26, 1996, and (b) the
Company's authorized and outstanding securities give effect to the filing
prior to the date of this Prospectus of a Certificate of Designation,
Preferences and Rights amending the Company's Certificate of Incorporation to
authorize the Convertible Preferred Stock, and does not give effect to (i)
any exercise of the Underwriters' Over-allotment Option, (ii) the issuance of
up to 2,000,000 shares of Common Stock upon conversion of the Convertible
Preferred Stock, (iii) the issuance of up to 3,000,000 shares of Common Stock
upon exercise of the Warrants, (iv) the issuance of up to 150,000 shares of
Convertible Preferred Stock, 150,000 shares of Common Stock and/or 300,000
Warrants upon exercise of the Representative's Warrants, (v) the issuance of
up to 500,000 shares of Common Stock upon conversion of the Convertible
Preferred Stock and exercise of the Warrants included in the Representative's
Warrants, (vi) the issuance of up to 766,689 shares of Common Stock upon
exercise of stock options outstanding as of the date of this Prospectus, and
(vii) the issuance of up to 583,311 additional shares of Common Stock
reserved for issuance upon exercise of additional stock options that may be
granted under the Company's 1996 Stock Option Plan. See "Executive
Compensation -- Stock Options" and "Underwriting." The Company is a
development stage company which has had no commercial operations to date.
THE COMPANY
Commodore Separation Technologies, Inc. (the "Company") has developed and
intends to commercialize its membrane separation and recovery system called
CST. Based on the results of more than 100 laboratory and other tests to
date, the Company believes that CST can separate and recover chrome,
chromium, cadmium, silver, mercury, platinum, lead, zinc, nickel,
trichlorethylene, polychlorinated biphenyls, methylene chloride, amino acids,
antibiotics, radionuclides, and other organic and inorganic targeted
substances from liquid or gaseous feedstreams. CST utilizes a process whereby
a contaminated liquid or gaseous feedstream is introduced into a fibrous
membrane unit or module containing a proprietary chemical solution, the
composition of which is customized depending on the types and concentrations
of compounds in the feedstream. As the feedstream enters the membrane, the
targeted substance reacts with CST's proprietary chemical solution and is
extracted through the membrane into a strip solution where it is then stored.
The remaining feedstream is either recycled or discharged as non-toxic
effluent. In some instances, additional treatment may be required prior to
disposal.
CST is distinguishable from other existing forms of membrane filtration
technology in that it:
o requires low initial capital costs and low operating costs;
o has the capability of treating a wide variety of elements and compounds
in a wide variety of industrial settings at great speed and with a high
degree of effectiveness, regardless of contaminant concentrations,
volume requirements and other variables;
o is environmentally safe, in most instances producing no sludges or
other harmful by-products which would require additional post-treatment
prior to disposal;
o can selectively extract target substances, while extracting
substantially fewer unwanted substances;
o can typically operate on-site and in less than 40 square feet of space
for the entire system;
o can extract metals, organic chemicals and other elements and compounds
in degrees of concentration and purity which permit their reuse; and
o has the capability, in a single process application, of selectively
extracting multiple elements or compounds from a mixed process stream.
5
<PAGE>
In August 1996, the Company completed an on-site demonstration of CST for
the decontamination of chromium-contaminated groundwater at the Port of
Baltimore, Maryland. During this demonstration, a CST unit, in a single
feedstream pass-through, reduced the contamination level of chromium from
more than 400 parts per million (ppm) to less than one ppm. The results of
this test were verified by Artesian Laboratories, Inc., an independent
testing laboratory. The Company has since completed additional on-site
demonstrations of CST at the Port of Baltimore with similar results. Due to
the success of such demonstrations, in February 1997 the State of Maryland
informed the Company that it will recommend including the CST process as an
eligible technology in the bid specifications to remediate the groundwater at
the Port of Baltimore. Based on management studies and discussions with
metals industry executives, the Company believes that CST represents a
significant technological advancement in the area of environmental
remediation as the only technology capable of on-site chromium removal and
recovery that enables effluent discharge without additional treatment.
In September 1996, the Company installed a commercial scale CST unit at a
Columbus, Ohio metal plating company. DLZ Laboratories, Inc., an independent
testing laboratory, verified that the CST unit processed the initial batch of
process effluent stream and reduced nickel and zinc contamination from 900
ppm to 2 ppm in one hour. The Company has continued to operate this CST unit
to process nickel and zinc effluent streams containing concentrations of 200
to 400 ppm, and the unit has consistently reduced the contaminant levels to 1
to 5 ppm. The decontaminated process effluent stream is being recycled into
the plating line rinse tanks, saving the plating company its normal
consumption of make-up water at a rate of five gallons per minute. The
recovered nickel and zinc solution is currently being analyzed by the plating
company for reuse in its plating operations.
In January 1997, the Company entered into a license agreement with
Lockheed Martin Energy Research Corporation ("Lockheed Martin"), manager of
the Oak Ridge National Laboratory, a U.S. Department of Energy national
laboratory ("Oak Ridge"). Under the terms of the agreement, the Company
received the exclusive worldwide license, subject to a government use
license, to use and develop the technology related to the separation of the
radionuclides technetium and rhenium from mixed wastes containing radioactive
materials. Based on tests conducted at Oak Ridge since May 1994, the Company
believes that this technology is capable of selectively extracting and
recovering technetium, rhenium and other radioactive isotopes as a
concentrated aqueous solution which can be reused in various scientific
applications or disposed of by government-approved techniques including
long-term storage. The Company believes that this technology can be used to
remediate nuclear waste tanks stored at the U.S. Department of Energy's
atomic energy plants in Rocky Flats, Colorado, Idaho Falls, Idaho, Paducah,
Kentucky, Weldon Springs, Missouri, Frenchman Flat, Nevada, Los Alamos, New
Mexico, Aiken, South Carolina, Oak Ridge, Tennessee, Pantex, Texas and
Hanford, Washington, and intends to pursue such opportunities. According to
Department of Energy sources, there are approximately 100 million gallons of
mixed radioactive and hazardous chemical waste stored at these plants.
The Company will market its technology to industries engaged in
metallurgical processing, metal plating and mining, as well as companies
producing organic chemicals and biochemicals and those engaged in gas
separation. The Company is also targeting governmental agencies that have
sites which require remediation, and has already completed an on-site
demonstration at the Port of Baltimore.
The Company intends to pursue collaborative joint working and marketing
arrangements with, or acquisitions of or investments in, companies that have
a presence in target markets and those that focus on obtaining environmental
remediation projects, including clean-up of harbors, groundwater and nuclear
waste sites. Although the Company has entered into memorandums of
understanding for proposed working arrangements with Teledyne Brown
Engineering, Inc., a subsidiary of Allegheny Teledyne Inc. ("Teledyne
Brown"), and Sverdrup Environmental, Inc. ("Sverdrup"), and is bidding on
certain projects, there can be no assurance that any of these activities will
result in definitive collaborative agreements or project awards. Even if
project contracts are awarded to the Company, CST has never been utilized on
a large- scale basis, and there is no assurance that this technology will
perform successfully on a large-scale commercial basis, or that it will be
profitable to the Company. There can also be no assurance that this
technology will not be superseded by other competing technologies.
6
<PAGE>
The Company was incorporated in the State of Delaware in November 1995,
and is a wholly-owned subsidiary of Commodore Applied Technologies, Inc.
("Applied"), which, in turn, is a 69.3%-owned subsidiary of Commodore
Environmental Services, Inc. ("Commodore"). To date, Commodore and Applied
have financed the Company's development through direct equity investments and
loans. The principal executive offices of the Company are located at 8000
Towers Crescent Drive, Suite 1350, Vienna, Virginia 22182, and its telephone
number is (703) 748-0200.
THE OFFERING
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<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
exercise of Warrants ............. 11,500,000 shares of Common Stock, 1,500,000 shares of Convertible Preferred
Giving effect to full conversion of Stock, and 3,000,000 Warrants.
the Convertible Preferred Stock
and full exercise of Warrants .... 16,500,000 shares of Common Stock.
Terms of Convertible
Preferred Stock:
Dividend Rate and Payment Dates ..... Cumulative dividends are payable at the rate of $1.00 per share per annum,
quarterly on the last business day of March, June, September and December
of each year, commencing June 30, 1997, when, as and if declared by the Board
of Directors, before any dividends are declared or paid on the Common Stock
or any capital stock ranking junior to the Convertible Preferred Stock. Failure
to pay any quarterly dividend will result in a reduction of the conversion
price. See "Dividend Policy" and "Description of Securities -- Convertible
Preferred Stock."
</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 March , 2000 at $10.00 per share, plus accumulated
and unpaid dividends, provided the closing bid price of the Common Stock
for at least 20 consecutive trading days ending not more than 10 trading
days prior to the date of the notice of redemption equals or exceeds $11.25
per share or, after March , 2001, at the cash redemption prices set forth
herein, plus accumulated and unpaid dividends. See "Description of Securities
-- Convertible Preferred Stock."
Voting Rights ...................... The holders of Convertible Preferred Stock have the right, voting as a class,
to approve or disapprove of the issuance of any class or series of stock
ranking senior to or on a parity with the Convertible Preferred Stock with
respect to declaration and payment of dividends or the distribution of assets
on liquidation, dissolution or winding-up. In addition, if the Company fails
to pay dividends on the Convertible Preferred Stock for four consecutive
quarterly dividend payment periods, holders of Convertible Preferred Stock
voting separately as a class will be entitled to elect one director; such
voting right will be terminated as of the next annual meeting of stockholders
of the Company following payment of all accrued dividends. See "Description
of Securities -- Convertible Preferred Stock."
Liquidation Preference ............. Upon liquidation, dissolution or winding up of the Company, holders of
Convertible Preferred Stock are entitled to receive liquidation distributions
equivalent to $10.00 per share (plus accumulated and unpaid dividends) before
any distribution to holders of the Common Stock or any capital stock ranking
junior to the Convertible Preferred Stock. See "Description of Securities
-- Convertible Preferred Stock."
Priority ........................... The Convertible Preferred Stock will be senior to and have priority over
the Common Stock with respect to the payment of dividends and upon liquidation,
dissolution or winding-up of the Company.
</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; purchase CST components; finance potential
acquisitions; fund proposed collaborative arrangements; repay an outstanding
line of credit; and for working capital and general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq Symbols:(1)
Common Stock .................... CXOT
Convertible Preferred Stock ....... CXOTP
Warrants .......................... CXOTW
Risk Factors ........................ An investment in the Securities offered hereby involves a high degree of
risk and immediate and substantial dilution, and should be made only by investors
who can afford the loss of their entire investment. See "Risk Factors" and
"Dilution."
</TABLE>
- ------
(1) There can be no assurance that the Securities will be accepted for
quotation on Nasdaq.
9
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data included in the following table as of June 30,
1996 and for the period from November 15, 1995 (date of inception) to June
30, 1996 are derived from the audited Financial Statements appearing
elsewhere herein. The summary financial data as of December 31, 1996, for the
six months then ended and for the period from November 15, 1995 (date of
inception) to December 31, 1996 are unaudited and, in the opinion of
management, include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of such data. Financial data
for the periods through December 31, 1996 are not necessarily indicative of
the results of operations to be expected for the Company's fiscal year ending
June 30, 1997. The summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
November 15, 1995
(date of Six Months November 15, 1995
inception) Ended (date of inception)
Statement of Operations Data(1) to June 30, 1996 December 31, 1996 to December 31, 1996
----------------- ----------------- --------------------
<S> <C> <C> <C>
Revenue ...................................... $ 0 $ 7,758 $ 7,758
----------------- ----------------- --------------------
Costs and expenses:
Research and development ................ 50,080 412,340 462,420
General and administrative .............. 9,720 443,423 453,143
Amortization ............................ 101 1,199 1,300
----------------- ----------------- --------------------
Loss before interest and taxes ............... (59,901) (849,204) (909,105)
Interest expense ............................. 1,035 4,600 5,635
----------------- ----------------- --------------------
Net loss ..................................... $(60,936) $(853,804) $(914,740)
================= ================= ====================
Net loss per share(2) ........................ (.01) (.08) (.09)
Ratio of earnings to preferred stock dividends --(3) --(3) --(3)
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1996
--------------- ------------------------------
Balance Sheet Data: Actual As Adjusted(4)
------------ --------------
<S> <C> <C> <C>
Working capital (deficit) .................. $(81,630) $(134,677) $20,958,823
Total assets ............................... 23,327 530,644 21,624,144
Total current liabilities .................. 84,163 454,184 454,184
Deficit accumulated during development stage (60,936) (914,740) (914,740)
Stockholders' equity (deficit) ............. (60,836) 76,460 21,169,960
</TABLE>
- ------
(1) The Company is in the development stage, and has had no commercial
operations to date. See Note 1 of Notes to Financial Statements.
(2) Net loss per share is calculated on the basis of 10,000,000 shares of
Common Stock being outstanding for the period presented. See Note 1 of
Notes to Financial Statements.
(3) The Company's operating results are not sufficient to cover the
Convertible Preferred Stock cash dividends. See "Risk Factors --
Inadequate Dividend Coverage" and "Dividend Policy."
(4) Gives effect on an as adjusted basis to the sale by the Company of the
Units offered hereby at an assumed initial public offering price of
$10.10 per Preferred Unit, consisting of one share of Convertible
Preferred Stock at $10.00 per share and one Warrant at $.10 per Warrant,
and $6.10 per Common Unit, consisting of one share of Common Stock at
$6.00 per share and one Warrant at $.10 per Warrant, and the initial
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
10
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk and should be made only by investors who can afford the loss of their
entire investment. Prospective investors should carefully review and consider
the risk factors described below and the other information in this Prospectus
before purchasing the Securities.
NO OPERATING HISTORY; ACCUMULATED AND WORKING CAPITAL DEFICITS; INITIAL
COMMERCIALIZATION STAGE; GOING CONCERN DISCLOSURE IN INDEPENDENT AUDITORS'
REPORT
The Company was organized in November 1995 and has had no commercial
operations to date. Since its inception, the Company has been engaged
principally in organizational activities, including developing a strategic
operating plan, entering into contracts, hiring personnel, developing test
modules and installing and operating modules on a limited basis for
demonstration or test purposes. The Company is considered a development stage
company for accounting purposes because it has not generated any material
revenues to date. Accordingly, the Company has no relevant operating history
upon which an evaluation of its performance and prospects can be made. The
Company is subject to all of the business risks associated with a new
enterprise, including, but not limited to, risks of unforeseen capital
requirements, failure of market acceptance, failure to establish business
relationships, and competitive disadvantages as against larger and more
established companies. The report of the independent auditors with respect to
the Company's financial statements included in this Prospectus includes a
"going concern" qualification, indicating that the Company's significant
operating losses and deficits in working capital and stockholders' equity
raise substantial doubt about its ability to continue as a going concern. See
Financial Statements.
The Company has generated nominal revenues to date, and will not generate
any material revenues until after the Company successfully completes the
installation of modules in a significant number of industrial companies, of
which no assurance can be given. As of December 31, 1996 and June 30, 1996,
the Company had working capital deficits of $(134,677) and $(81,630),
respectively, and stockholders' equity and deficit of $76,460 and $(60,836),
respectively. During the period from November 15, 1995 (date of inception) to
December 31, 1996, the Company has incurred operating losses of $(914,740),
and anticipates that it may continue to incur significant operating losses
for the foreseeable future. There can be no assurance as to whether or when
the Company will generate material revenues or achieve profitable operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business" and Financial Statements.
INADEQUATE DIVIDEND COVERAGE
The annual dividend requirement on the Convertible Preferred Stock is
$1,500,000 ($1,725,000 if the Over-allotment Option is exercised in full).
The future earnings of the Company, if any, will not initially be adequate to
pay the dividends on the Convertible Preferred Stock, and, although the
Company will pay quarterly dividends out of available capital surplus, there
can be no assurance that the Company will maintain sufficient capital surplus
or that future earnings, if any, will be adequate to pay the dividends on the
Convertible Preferred Stock. Under the Delaware General Corporation Law,
dividends may be paid only out of legally available funds. Failure to pay any
quarterly dividend will result in a reduction in the conversion price and
failure to pay a total of four consecutive quarterly dividends will entitle
the holders of the Convertible Preferred Stock, voting separately as a class,
to elect one director. In addition, no dividends or distributions may be
declared, paid or made if the Company is or would be rendered insolvent by
virtue of such dividend or distribution. See "Dividend Policy" and
"Description of Securities -- Convertible Preferred Stock."
UNPROVEN ON LARGE-SCALE COMMERCIAL BASIS
CST has never been utilized on a large-scale commercial basis. All of the
tests conducted to date by the Company with respect to CST have been
performed on limited quantities of process streams, and there can be no
assurance that the same or similar results could be obtained on a large-scale
commercial basis or on any specific project. The Company has never utilized
CST under the conditions and in the volumes that will be required to be
profitable and cannot predict all of the difficulties that may arise. In
addition, most of the results of more than 100 laboratory and other tests
conducted by the Company have not been verified by an independent testing
laboratory. Thus, it is possible that the Company's CST unit may require
further research, development,
11
<PAGE>
design and testing, as well as regulatory clearances, prior to larger-scale
commercialization. Additionally, the Company's ability to operate its
business successfully will depend on a variety of factors, many of which are
outside the Company's control, including competition, cost and availability
of strategic components, changes in governmental initiatives and
requirements, changes in regulatory requirements, and the costs associated
with equipment repair and maintenance. See "Business."
DEPENDENCE ON STRATEGIC COMPONENTS FROM SUPPLIERS; LIMITED MANUFACTURING
OPERATIONS
The Company currently has a limited number of sources of supply for some
CST components, such as fibers and membrane casings. Business disruptions or
financial difficulties of suppliers, or raw material shortages or other
causes beyond the Company's control, could adversely affect the Company by
increasing the cost of goods sold or reducing the availability of such
components. In its development to date, the Company has been able to obtain
adequate supplies of these strategic components. However, as it commences
commercial activities, the Company expects to experience a rapid and
substantial increase in its requirements for these components. If the Company
were unable to obtain a sufficient supply of required components, the Company
could experience significant delays in the manufacture of CST equipment,
which could result in the loss of orders and customers, and could have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company plans to use a portion of the net
proceeds of this Offering to build its own manufacturing plant for these
strategic components, there can be no assurance as to whether or when such
plant will be completed, that it will be able to manufacture components more
inexpensively than the cost of current sources of supply or that, prior to
the completion of such plant, the Company will not require alternative
sources of such components or experience delays in obtaining adequate CST
components. The occurrence of any of such events would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if the cost of raw materials or finished components
were to increase, there can be no assurance that the Company would be able to
pass such increases to its customers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Dependence on
Suppliers" and "Business -- Proposed Manufacturing Operations."
UNCERTAINTY OF MARKET ACCEPTANCE
Many prospective users of CST have committed substantial resources to
other forms of process stream treatments or technologies. The Company's
growth and future financial performance will depend on its ability to
demonstrate to prospective users the technical and economic advantages of CST
over these alternatives. There can be no assurance that the Company will be
successful in this effort. Furthermore, it is possible that competing
alternatives may be perceived to have, or may actually have, certain
advantages over CST for certain industries or applications. See "Business."
RISK OF INTERNATIONAL OPERATIONS
The Company intends to market CST in international markets, including both
industrialized and developing countries. International operations entail
various risks, including political instability, economic instability and
recessions, exposure to currency fluctuations, difficulties of administering
foreign operations generally, and obligations to comply with a wide variety
of foreign import and United States export laws, tariffs and other regulatory
requirements. The Company's competitiveness in overseas markets may be
negatively impacted when there is a significant increase in the value of the
dollar against the currencies of the other countries in which the Company
does business. In addition, the laws of certain foreign countries may not
protect the Company's proprietary rights to the same extent as the laws of
the United States and there may be no legal recourse for the Company in
certain adverse circumstances as United States companies may not have
jurisdiction in other countries. See "Business -- Environmental Matters," "--
Intellectual Property" and "-- Competition."
UNSPECIFIED ACQUISITION-RELATED RISKS
As part of its growth strategy, the Company will seek to acquire or invest
in complementary (including competitive) businesses, products or
technologies. The Company has allocated $1,750,000 (or 8.3%) of the net
proceeds of this Offering for financing such possible acquisitions or
investments. See "Use of Proceeds." The process of integrating such acquired
assets into the Company's operations may result in unforeseen operating
difficulties and expenditures and may absorb significant management attention
that would otherwise be available for the ongoing development of the
Company's business. There can be no assurance that the anticipated benefits
of any acquisitions will be realized. In addition, future acquisitions by the
Company could result in potentially
12
<PAGE>
dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and
other intangible assets, any of which could materially adversely affect the
Company's operating results and financial position. Acquisitions also involve
other risks, including entering markets in which the Company has no or
limited prior experience. The Company currently has no commitments or
agreements with respect to any possible acquisitions or investments.
EFFECT OF ACQUISITIONS ON PERSONNEL
As noted above, future acquisitions by the Company could also result in
the possibility of changing current Company management with no opportunity
for the Company's stockholders to evaluate new key personnel.
UNPREDICTABILITY OF PATENT PROTECTION AND PROPRIETARY TECHNOLOGY
The Company currently has one United States utility patent application
pending and two United States provisional patent applications pending and may
in the future file foreign patent applications. The Company's success
depends, in part, on its ability to obtain patents, maintain trade secrecy,
and operate without infringing on the proprietary rights of third parties.
There can be no assurance that the patents of others will not have an adverse
effect on the Company's ability to conduct its business, that any of the
Company's pending patent applications will be approved, that the Company will
develop additional proprietary technology which is patentable or that any
patents issued to the Company will provide the Company with competitive
advantages or will not be challenged by third parties. Furthermore, there can
be no assurance that others will not independently develop similar or
superior technologies, duplicate elements of CST, or design around CST.
The Company's liquid membrane technology patent applications are based on
the selective combination of different known solvents, supports, diluents,
carriers and other components to separate a variety of metals, chemicals and
other targeted substances. While the Company believes that its technology
covers all separation applications, third parties may have developed, or may
subsequently assert claims to, certain of these solvents, supports, diluents,
carriers or other components for one or more specific applications. In such
event, the Company may need to acquire licenses to, or to contest the
validity of, issued or pending patents or claims of third parties. There can
be no assurance that any license acquired under such patents would be made
available to the Company on acceptable terms, if at all, or that the Company
would prevail in any such contest. In addition, the Company could incur
substantial costs in defending itself in suits brought against the Company
for alleged infringement of another party's patents or in defending the
validity or enforceability of the Company's patents, or in bringing patent
infringement suits against other parties based on the Company's patents.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technology which it seeks to protect, in
part, by confidentiality agreements with its prospective working partners and
collaborators, employees and consultants. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets and proprietary
know-how will not otherwise become known or be independently discovered by
others. See "Business -- Intellectual Property."
ROYALTY OBLIGATIONS
Pursuant to an assignment of technology agreement between the Company and
Srinivas Kilambi, Ph.D., the Company's Vice President-Technology, the Company
agreed to pay Dr. Kilambi a royalty through December 3, 2002 equal to 2% of
the Company's revenues actually received and attributed to the commercial
application of the technology acquired from Dr. Kilambi, except for
applications related to the radionuclides technetium and rhenium, for which
Dr. Kilambi is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight and excise or other
taxes). Pursuant to the Company's license agreement with Lockheed Martin, the
Company made an initial cash payment of $50,000 upon the execution of the
agreement and is obligated to pay, commencing in the third year of the
agreement, a royalty to Lockheed Martin of 2% of net sales (less allowances
for returns, discounts, commissions, freight, and excise or other taxes) up
to total net sales of $4,000,000 and 1% of net sales thereafter. In addition,
the Company has agreed to guarantee Lockheed Martin, commencing in the third
year of the agreement, an annual minimum royalty of $15,000. See "Business --
Commercialization and Marketing Strategy -- Radionuclide/Mixed Waste
Separation." Payments of such royalties to Dr. Kilambi and Lockheed Martin
are based on Company revenues and are not related to or contingent upon the
Company attaining profitability or positive cash flow. As a result, such
payments will adversely
13
<PAGE>
affect operating results and divert cash resources from use in the Company's
business, and possibly at times when the Company's liquidity and access to
funding may be limited. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Business -- Intellectual Property" and "Certain Relationships
and Related Transactions -- Organization and Capitalization of the Company."
RISK OF ENVIRONMENTAL LIABILITY; POSSIBLE INADEQUACY OF INSURANCE COVERAGE
The Company's operations, as well as the use of the specialized technical
equipment by its customers, are subject to numerous federal, state and local
regulations relating to the storage, handling and transportation of certain
regulated materials. Although the Company's role is generally limited to the
leasing of its specialized technical equipment for use by its customers,
there is always the risk of the mishandling of such materials or
technological or equipment failures, which could result in significant claims
against the Company. Any such claims against the Company could materially
adversely affect the Company's business, financial condition and results of
operations.
As CST is commercialized, the Company may be required to obtain
environmental liability insurance in the future in amounts greater than it
currently maintains. There can be no assurance that such insurance will
provide coverage against all claims, and claims may be made against the
Company (even if covered by the Company's insurance policy) for amounts
substantially in excess of applicable policy limits. Any such event could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Environmental Matters."
POTENTIAL NEED FOR ADDITIONAL FINANCING
Prior to this Offering, financing for all of the Company's activities had
been provided in the form of direct equity investments and loans by Commodore
and Applied. Although the Company anticipates that the net proceeds of this
Offering will be sufficient to sustain its operations for approximately 24
months following the date of this Prospectus, the Company's future capital
requirements could vary significantly and will depend on certain factors,
many of which are not within the Company's control. These include the ongoing
development and testing of CST as a remediation and industrial waste
management technology; the nature and timing of remediation and clean-up
projects and permits required; and the availability of financing.
In the environmental remediation market, the Company may not be able to
enter into favorable business collaborations and might thus be required to
bid upon projects for its own account. If such bids were successful, the
Company would be required to make significant expenditures on personnel and
capital equipment which would require significant financing in amounts
substantially in excess of the net proceeds of this Offering. In addition,
the Company's lack of operational experience and limited capital resources
could make it difficult, if not highly unlikely, to successfully bid on major
reclamation or clean-up projects. In such event, the Company's business
development could be limited to remediation of smaller commercial and
industrial sites with significantly lower potential for profit.
The expansion of the Company's business will require the commitment of
significant capital resources toward the hiring of technical and operational
support personnel, the development of a manufacturing and testing facility
for CST equipment, and the building of equipment to be used both for on-site
test demonstrations and the remediation of contaminated elements. In the
event the Company is presented with one or more significant reclamation or
clean-up projects, individually or in conjunction with collaborative working
partners, it may require additional capital to take advantage of such
opportunities. There can be no assurance that such financing will be
available or, if available, that it will be on favorable terms. If adequate
financing is not available, the Company may be required to delay, scale back
or eliminate certain of its development programs, to relinquish rights to
certain of its technologies, or to license third parties to commercialize
technologies that the Company would otherwise seek to develop itself. To the
extent the Company raises additional capital by issuing equity securities,
investors in this Offering will be diluted. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
MANAGEMENT'S BROAD DISCRETION IN APPLICATION OF PROCEEDS
Approximately 32.0% of the net proceeds of this Offering has been
allocated for working capital and general corporate purposes. In addition,
approximately 8.3% of the net proceeds of this Offering has been allocated
14
<PAGE>
for each of potential acquisitions and proposed collaborative arrangements
for which the Company has no binding agreements as of the date of this
Prospectus. Accordingly, the Company will have broad discretion as to the
application of a significant portion of the net proceeds of this Offering.
See "Use of Proceeds."
COMPETITION AND TECHNOLOGICAL ALTERNATIVES
The Company anticipates that CST's primary market will be for industrial
by-products treatment and disposal. The Company has had limited experience in
marketing CST and has not previously had any employees or personnel whose
primary responsibilities for the Company consisted of sales or marketing
functions. Other participants in both the private and public sectors include
several large domestic and international companies and numerous small
companies, many of whom have substantially greater financial and other
resources and more manufacturing, marketing and sales experience than the
Company. In addition, as membrane separation technology evolves, there exists
the possibility that CST may be rendered obsolete by one or more competing
technologies. Any one or more of the Company's competitors, or one or more
other enterprises not presently known to the Company, may develop
technologies which are superior to CST or other technologies utilized by the
Company. To the extent that the Company's competitors are able to offer more
cost-effective separation technology alternatives, the Company's ability to
compete could be materially and adversely affected. See "Business."
NO ASSURANCE OF COLLABORATIVE AGREEMENTS OR PROJECT AWARDS
In addition to its direct marketing efforts, the Company proposes to
pursue opportunities in the environmental remediation market through
collaborative joint working arrangements with companies that have a
significant presence in well-established industries or markets, and that can
introduce CST as an enabling technology to industry participants. However,
neither the Company nor any of its prospective collaborative joint working
partners have been awarded any project contracts. There can be no assurance
that the Company will enter into any definitive joint project arrangements
with its prospective working partners or others, or that any such definitive
arrangements will be on terms and conditions that will enable the Company to
generate profits. Furthermore, even if the Company is successful in obtaining
one or more project awards, such projects may be curtailed or eliminated, or
other problems may arise, which could materially adversely affect the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY MANAGEMENT AND OTHER PERSONNEL
The Company is dependent on the efforts of its senior management and
scientific staff, including Edwin L. Harper, Ph.D., Chairman of the Board and
Chief Executive Officer, Kenneth J. Houle, President and Chief Operating
Officer, James M. DeAngelis, Senior Vice President, Srinivas Kilambi, Ph.D.,
Vice President -- Technology, Michael D. Kiehnau, Vice President --
Operations and Andrew P. Oddi, Vice President -- Finance. Messrs. Houle,
DeAngelis, Kilambi and Kiehnau have employment agreements with the Company.
Dr. Harper has an employment agreement with Commodore which requires him to
serve from time to time in senior executive positions with one or more of
Commodore's subsidiaries, including the Company. The proceeds of key man life
insurance policies on the lives of certain of such individuals may not be
adequate to compensate the Company for the loss of any of such individuals.
The loss of the services of any one or more of such persons may have a
material adverse effect on the Company. See "Executive Compensation --
Employment Agreements." Alan R. Burkart, who had served as the Company's
President and Chief Executive Officer since August 1996, resigned from such
positions in December 1996 for health reasons. Although Mr. Burkart had
previously been listed as a key employee, the loss of whom would materially
adversely affect the Company, the Company believes that the loss of the
services of Mr. Burkart will not have a material adverse effect on the
Company.
The Company's future success will depend in large part upon its ability to
attract and retain skilled scientific, management, operational and marketing
personnel. Prior to this Offering, the Company has not had any employees or
personnel whose responsibilities for the Company were focused primarily on
sales or marketing. The Company faces competition for hiring such personnel
from other companies, government entities and other organizations. There can
be no assurance that the Company will continue to be successful in attracting
and retaining such personnel. See "Use of Proceeds," "Management" and
"Executive Compensation."
15
<PAGE>
POTENTIAL CONFLICTS OF INTEREST
Edwin L. Harper, Ph.D., the Company's Chairman of the Board and Chief
Executive Officer, also serves as the President and Chief Operating Officer
of both Commodore and Applied and devotes a portion of his business and
professional time and efforts to the respective businesses of Commodore and
Applied. In addition, Paul E. Hannesson, Bentley J. Blum, Kenneth L. Adelman,
Ph.D. and David L. Mitchell (the "Commodore Directors"), all of whom are
directors of the Company, also serve as directors of Commodore and/or
Applied. While the Company believes that its business and technologies are
distinguishable from those of Commodore and Applied, and that it does not
compete in the markets in which Commodore and Applied compete, Dr. Harper and
the Commodore Directors may have potential conflicts of interest with respect
to, among other things, potential corporate opportunities, business
combinations, joint ventures and/or other business opportunities that may
become available to them, the Company, Commodore and/or Applied. Moreover,
while Dr. Harper has agreed to devote a majority of his business and
professional time and efforts to the Company, potential conflicts of interest
also include the amount of time and effort devoted by him to the affairs of
Commodore and Applied. The Company may be materially adversely affected if
Dr. Harper and/or the Commodore Directors choose to place the interests of
Commodore and/or Applied before those of the Company. Each of Dr. Harper and
the Commodore Directors has agreed that, to the extent such opportunities
arise, he will carefully consider a number of factors, including whether such
opportunities were presented to him in his capacity as an officer or director
of the Company, whether such opportunities are within the Company's line of
business or consistent with its strategic objectives and whether the Company
will be able to undertake or benefit from such opportunities. In addition,
the Company's Board of Directors has adopted a policy whereby any future
transactions between the Company and any of its subsidiaries, affiliates,
officers, directors, principal stockholders or any affiliates of the
foregoing will be on terms no less favorable to the Company than could
reasonably be obtained in "arm's length" transactions with independent third
parties, and any such transactions will also be approved by a majority of the
Company's disinterested outside directors. Dr. Harper and the Commodore
Directors also owe fiduciary duties of care and loyalty to the Company under
Delaware law. However, the failure of the Company's management to resolve any
conflicts of interest in favor of the Company could materially adversely
affect the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The Company and its customers are required to comply with a number of
federal, state and local laws and regulations in the areas of safety, health
and environmental controls, including without limitation, the Resource
Conservation and Recovery Act, as amended ("RCRA"), and the Occupational
Safety and Health Act of 1970 ("OSHA"), which may require the Company, its
prospective working partners or its customers to obtain permits or approvals
to utilize CST and related equipment on certain job sites. In addition, if
the Company begins to market CST internationally, the Company will be
required to comply with laws and regulations and, when applicable, obtain
permits or approvals in those other countries. There is no assurance that
such required permits and approvals will be obtained. Furthermore,
particularly in the environmental remediation market, the Company may be
required to conduct performance and operating studies to assure government
agencies that CST and its by-products do not pose environmental risks. There
is no assurance that such studies, if successful, will not be more costly or
time-consuming than anticipated. Further, if new environmental legislation or
regulations are enacted or existing legislation or regulations are amended,
or are interpreted or enforced differently, the Company, its prospective
working partners and/or its customers may be required to meet stricter
standards of operation and/or obtain additional operating permits or
approvals. There can be no assurance that the Company will meet all of the
applicable regulatory requirements. Failure to obtain such permits, or
otherwise to comply with such regulatory requirements, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Government Regulation."
DILUTION
Purchasers of shares of Common Stock in this Offering will experience an
immediate and substantial dilution of $4.16 per share (based on an assumed
initial public offering price of $6.00 per share of Common Stock in this
Offering), or approximately 69.3%, in the net tangible book value of the
shares of Common Stock purchased by them in this Offering. Additional
dilution to future net tangible book value per share may occur upon
16
<PAGE>
exercise of outstanding stock options and warrants (including the Warrants
and the Representative's Warrants) and may occur, in addition, if the Company
issues additional equity securities in the future, including issuances of
Common Stock pursuant to the conversion of the Convertible Preferred Stock.
Applied acquired its shares of Common Stock for cash consideration which was
substantially less than the initial public offering price of the shares of
Common Stock offered hereby. As a result, new investors will bear
substantially all of the risks inherent in an investment in the Company. See
"Dilution" and "Certain Relationships and Related Transactions."
CONTROL BY PRINCIPAL STOCKHOLDER; LOANS INVOLVING AFFILIATES
Applied is currently the sole stockholder of the Company and, after
completion of this Offering, will own approximately 87.0% of the outstanding
Common Stock of the Company (approximately 60.6% assuming conversion of all
Convertible Preferred Stock and exercise of all Warrants). Applied is a
public company whose shares are traded on the American Stock Exchange.
Commodore, which owns 69.3% of the common stock of Applied, is also a public
company whose shares are quoted on the OTC Bulletin Board. Accordingly,
events or circumstances having an adverse effect on either or both of
Commodore or Applied, including fluctuations in their respective market
prices, could have a material adverse effect on the market prices of the
Securities.
Bentley J. Blum, a director of the Company, beneficially owned, directly
and through entities controlled by him, approximately 51.8% of the
outstanding common stock of Commodore as of December 31, 1996. Paul E.
Hannesson, a director of the Company, beneficially owned approximately 11.6%
of the outstanding Commodore common stock as of such date. Accordingly,
through his indirect beneficial ownership of a controlling stock interest in
Applied, Mr. Blum will be able to control the voting of Applied's shares at
all meetings of stockholders of the Company and, because the Common Stock
does not have cumulative voting rights, will be able to determine the outcome
of the election of all of the Company's directors and determine corporate and
stockholder action on other matters. Messrs. Blum and Hannesson are also
directors of both Commodore and Applied. See "-- Potential Conflicts of
Interest," "Management," "Principal Stockholders" and "Certain Relationships
and Related Transactions."
In March 1997, the Company entered into a $1,250,000 line of credit with a
commercial bank. It is expected that the entire line of credit will have been
borrowed prior to the completion of this Offering to repay advances made by
Applied to the Company since December 1, 1996 for working capital purposes.
The line of credit is guaranteed by Applied and secured by cash collateral
provided by Applied. Upon completion of this Offering, the Company will apply
$1,250,000 of the net proceeds to repay such line of credit, and such
guarantee and collateral will be released to Applied. Accordingly, Applied
will directly benefit from the sale of the Securities offered hereby. In
addition, in the event the Over-allotment Option is exercised, the Company
intends to enter into a two-year revolving credit agreement with Commodore.
Pursuant to such agreement, the Company may lend the net proceeds, if any,
from the exercise of the Over-allotment Option (estimated to be up to
approximately $3,250,000) to Commodore for its working capital needs. To the
extent of such borrowings, cash resources will be diverted from use in the
Company's business, and possibly at times when the Company's liquidity and
access to funding may be limited. There can be no assurance that Commodore
will promptly repay any outstanding amounts under the revolving credit
agreement or not otherwise default under such agreement. In the event of any
such default, the collateral held by the Company under the agreement may not
be sufficient to adequately compensate the Company for any loans made
thereunder. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions -- Loans
Involving Affiliates."
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
17
<PAGE>
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 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 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
18
<PAGE>
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 interested stockholder,
unless the business combination is approved in a prescribed manner. Section
203 could have the effect of delaying or preventing a change of control of
the Company. See "Description of Securities -- Preferred Stock" and "--
Section 203 of the Delaware Law."
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation includes provisions to
eliminate, to the full extent permitted by the DGCL as in effect from time to
time, the personal liability of directors of the Company for monetary damages
arising from a breach of their fiduciary duties as directors. The Certificate
of Incorporation also includes provisions to the effect that (subject to
certain exceptions) the Company shall, to the maximum extent permitted from
time to time under the law of the State of Delaware, indemnify, and upon
request shall advance expenses to, any director or officer to the extent that
such indemnification and advancement of expenses is permitted under such law,
as it may from time to time be in effect. In addition, the Company's By-Laws
(the "By-Laws") require the Company to indemnify, to the full extent
permitted by law, any director, officer, employee or agent of the Company for
acts which such person reasonably believes are not in violation of the
Company's corporate purposes as set forth in the Certificate of
Incorporation. As a result of such provisions in the Certificate of
Incorporation and the By-Laws, stockholders may be unable to recover damages
against the directors and officers of the Company for actions taken by them
which constitute negligence, gross negligence or a violation of their
fiduciary duties, which may reduce the likelihood of stockholders instituting
derivative litigation against directors and officers and may discourage or
deter stockholders from suing directors, officers, employees and agents of
the Company for breaches of their duty of care, even though such action, if
successful, might otherwise benefit the Company and its stockholders. See
"Executive Compensation -- Limitation of Directors' and Officers' Liability
and Indemnification."
POSSIBLE ISSUANCE OF ADDITIONAL PREFERRED STOCK SENIOR TO THE CONVERTIBLE
PREFERRED STOCK
In addition to the Convertible Preferred Stock, the Company will have
approximately 3,125,000 shares of Preferred Stock authorized after the
designation of Convertible Preferred Stock which may be issued with dividend,
liquidation, voting and redemption rights senior to the Convertible Preferred
Stock; provided, however, that any such issuance of senior preferred stock
must be approved by the holders of a majority of the outstanding shares of
Convertible Preferred Stock. See "Description of Securities -- Convertible
Preferred Stock."
SPECULATIVE NATURE OF THE WARRANTS; POSSIBLE REDEMPTION OF WARRANTS
The Warrants do not confer any rights of Common Stock ownership on their
holders, such as voting rights or the right to receive dividends, but merely
represent the right to acquire shares of Common Stock at a fixed price for a
limited period of time. Specifically, commencing one year after the date of
this Prospectus, holders of the Warrants may exercise their right to acquire
Common Stock and pay an exercise price of $8.40 per share, subject to
adjustment upon the occurrence of certain events, until five years after the
date of this Prospectus, after which date any unexercised Warrants will
expire and have no further value. Moreover, following the completion of this
Offering, the market value of the Warrants is uncertain and there can be no
assurance that the market value of the Warrants will equal or exceed their
initial public offering price. There can be no assurance that the market
price of the Common Stock will ever equal or exceed the exercise price of the
Warrants, and consequently, whether it will ever be profitable for holders of
the Warrants to exercise the Warrants.
Commencing 18 months after the date of this Prospectus, the Warrants are
subject to redemption at $.10 per Warrant on 30 days' prior written notice
provided that the average closing sale price of the Common Stock equals or
exceeds $18.00 per share for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. If the Warrants are redeemed, holders
19
<PAGE>
of the Warrants will lose their right to exercise the Warrants after the
expiration of the 30-day notice period. Upon receipt of a notice of
redemption, holders will be required to: (i) exercise the Warrants and pay
the exercise price at a time when it may be disadvantageous for them to do
so, (ii) sell the Warrants at the then-prevailing market price, if any, when
they might otherwise wish to hold the Warrants, or (iii) accept the
redemption price which is likely to be substantially less than the market
value of the Warrants at the time of redemption. In the event that holders of
the Warrants elect not to exercise their Warrants upon notice of redemption,
the 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 March , 2000 and extending through March , 2001, the
Convertible Preferred Stock may be redeemed by the Company in whole but not
in part, provided certain market conditions are met or alternatively, after
March , 2001 may be redeemed by the Company in whole or in part at any time
at specified premiums in excess of the initial public offering price of the
Convertible Preferred Stock. The Company may choose to redeem the Convertible
Preferred Stock rather than incur the cost of keeping a registration
statement current with the Securities and Exchange Commission (the
"Commission") for the shares of Common Stock underlying the Convertible
Preferred Stock. Redemption or automatic conversion of the Convertible
Preferred Stock could force the holders to convert the Convertible Preferred
Stock at a time when it may be disadvantageous for the holders to do so, to
sell the Convertible Preferred Stock at the then current market price when
they might otherwise wish to hold the Convertible Preferred Stock for
possible additional appreciation and receipt of dividends, or to accept the
redemption price, which is likely to be substantially less than the market
value of the Convertible Preferred Stock at the time of redemption.
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS
The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants and such shares have been registered, qualified
or deemed to be exempt under the securities or "blue sky" laws of the state
of residence of the exercising holder of the Warrants. There can be no
assurance that the Company will be able to have all of the shares of Common
Stock issuable upon exercise of the Warrants registered or qualified on or
before the exercise date and will be able to maintain a current prospectus
relating thereto until the expiration of the Warrants. The value of the
Warrants may be greatly reduced if a current prospectus covering the Common
Stock issuable upon the exercise of the Warrants is not kept effective or if
such Common Stock is not qualified or exempt from qualification in the states
in which the holders of the Warrants reside. The Warrants will be separately
tradeable immediately after this Offering. In the event investors purchase
the Warrants in the secondary market or move to a jurisdiction in which the
shares underlying the Warrants are not registered or qualified during the
period that the Warrants are exercisable, the Company will be unable to issue
shares to those persons desiring to exercise their Warrants unless and until
the shares are qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such qualification exists in such jurisdictions,
and holders of the Warrants will have no choice but to attempt to sell the
Warrants in a jurisdiction where such sale is permissible or allow them to
expire unexercised. See "Description of Securities -- Warrants."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby (assuming an initial public offering price of $10.10 per Preferred
Unit, consisting of one share of Convertible Preferred Stock at $10.00 per
share and one Warrant at $.10 per Warrant, and $6.10 per Common Unit,
consisting of one share of Common Stock at $6.00 per share and one Warrant at
$.10 per Warrant), after deduction of underwriting discounts and other
estimated offering expenses, are estimated to be approximately $21,093,500
(approximately $24,337,550 if the Over-allotment Option is exercised in
full). The Company intends to utilize such net proceeds as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Dollar Amount Net Proceeds
--------------- ---------------
<S> <C> <C>
Technology and development costs (1) ............. $ 3,000,000 14.2%
Acquisition of manufacturing equipment (2) ....... 2,750,000 13.0
Atlanta facility (3) ............................. 2,000,000 9.5
CST module systems (4) ........................... 1,850,000 8.8
Potential acquisitions (5) ....................... 1,750,000 8.3
Funding of proposed collaborative arrangements (6) 1,750,000 8.3
Repayment of outstanding line of credit (7) ...... 1,250,000 5.9
Working capital and general corporate purposes (8) 6,743,500 32.0
--------------- ---------------
Total ......................................... $21,093,500 100.0%
=============== ===============
</TABLE>
- ------
(1) Includes the hiring of additional personnel (including marketing
personnel) and the costs associated with conducting ongoing tests,
demonstrations and enhancements of CST. See "Business -- Research and
Development."
(2) Consists of costs anticipated to be incurred in connection with
purchasing the equipment or licensing technology necessary to manufacture
the modules and produce the proprietary chemicals used in CST. See
"Business -- Proposed Manufacturing Operations."
(3) Consists of costs anticipated to be incurred in connection with equipping
a new facility of approximately 20,000 square feet near Atlanta, Georgia,
which the Company has leased and began occupying in March 1997 and which
will comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. See "Business -- Proposed
Manufacturing Operations" and "-- Properties."
(4) 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.
(5) Represents funds which the Company intends to utilize to finance the
possible acquisitions of, or investments in, complementary (including
competitive) businesses, products or technologies. The Company currently
has no commitments or agreements with respect to any such acquisitions or
investments. See "Risk Factors -- Unspecified Acquisition-Related Risks."
(6) Expenditures in respect of collaborative arrangements will include
salaries and benefits of personnel, equipment design and procurement
costs, costs of leasing or otherwise obtaining additional operating
facilities, analytical and other testing costs, professional fees,
insurance and other administrative expenses. In each arrangement,
personnel expenses may be expected to account for at least 50% of the
costs of each collaborative arrangement, and equipment costs are likely
to constitute the next largest component of expenditures. As of the date
of this Prospectus, the Company has not determined the amount of net
proceeds of this Offering to be applied to any one particular proposed
collaborative arrangement because the Company is currently in
negotiations with a number of companies involving, among other issues,
the level of its proposed funding commitment. The estimated allocation of
the net proceeds for funding of proposed collaborative arrangements is on
an aggregate basis. In addition, in the event a definitive agreement is
not entered into by the Company and Teledyne Brown or Sverdrup,
respectively, on or before August 31, 1997, such memorandum of
understanding may be terminated by either company upon written notice.
See "Risk Factors -- No Assurance of Collaborative Agreements or Project
Awards" and "Business -- Collaborative Working Arrangements."
21
<PAGE>
(7) Represents a line of credit bearing interest at the prime lending rate
(8.25% at March 17, 1997) provided by a commercial bank to the Company in
March 1997 and expiring on April 17, 1997, which is guaranteed by Applied
and secured by cash collateral provided by Applied. Upon completion of
this Offering, the Company will apply $1,250,000 of the net proceeds to
repay such line of credit. The line of credit had been used by the
Company to repay advances made by Applied to the Company since December
1, 1996 for working capital purposes. See "Certain Relationships and
Related Transactions -- Loans Involving Affiliates."
(8) Working capital and general corporate purposes include amounts required
to pay officers' salaries, professional fees, ongoing public reporting
costs, ongoing license fees and royalties, office-related expenses and
other corporate expenses, including interest and overhead. In the event
the Over-allotment Option is exercised, the Company intends to enter into
a two-year revolving credit agreement with Commodore. Pursuant to such
agreement, the Company may lend the net proceeds, if any, from the
exercise of the Over-allotment Option (estimated to be up to
approximately $3,250,000) to Commodore for its working capital needs. In
the event that the Company does not consummate the revolving credit
agreement, such funds will be utilized by the Company for working capital
and general corporate purposes. See "Risk Factors -- Control by Principal
Stockholder; Loans Involving Affiliates," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and "Certain Relationships and Related
Transactions -- Loans Involving Affiliates."
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 -- Management's Broad Discretion
in Application of Proceeds." However, there can be no assurance that the net
proceeds of the Offering will satisfy the Company's requirements for any
particular period of time. The Company anticipates that, after 24 months from
the receipt of the net proceeds of this Offering, additional funding may be
needed. No assurance can be given that such additional financing will be
available on terms acceptable to the Company, if at all. See "Risk Factors --
Potential Need for Additional Financing." Pending specific allocation of the
net proceeds of this Offering, the net proceeds will be invested in
short-term, investment grade, interest-bearing obligations.
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (a) as of
December 31, 1996 and (b) at December 31, 1996, as adjusted giving effect to
the sale by the Company of the Securities offered hereby (at an assumed
initial public offering price of $10.10 per Preferred Unit, consisting of one
share of Convertible Preferred Stock at $10.00 per share and one Warrant at
$.10 per Warrant, and $6.10 per Common Unit, consisting of one share of
Common Stock at $6.00 per share and one Warrant at $.10 per Warrant) and the
initial application of the estimated net proceeds therefrom. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Description of
Securities." This table should be read in conjunction with the Company's
Financial Statements and the notes thereto which are included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
December 31, 1996
----------------------------
Actual As Adjusted
----------- -------------
<S> <C> <C>
Short-term debt of sole stockholder (1) ........................ $ 273,600 $ 273,600
=========== =============
Stockholders' equity:
Preferred Stock, $.001 per value; authorized 5,000,000
shares; no shares issued and outstanding; 1,500,000
shares issued and outstanding, as adjusted .............. $ -- $ 1,500
Common Stock, $.001 par value; authorized 50,000,000
shares; 10,000,000 shares issued and outstanding;
11,500,000 shares issued and outstanding, as adjusted ... 10,000 11,500
Additional paid-in capital ................................ 981,200 22,071,700
Accumulated deficit ....................................... (914,740) (914,740)
----------- -------------
Total stockholders' equity ..................................... $ 76,460 $21,169,960
----------- -------------
Total capitalization ....................................... $ 76,460 $21,169,960
=========== =============
</TABLE>
(1) Represents additional advances to the Company made by Applied since
December 1, 1996, which were repaid by the Company subsequent to its
obtaining a line of credit provided by a commercial bank in March 1997.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
23
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends, and does not intend
to pay any dividends in the foreseeable future on its shares of Common Stock.
Pursuant to the terms governing the Convertible Preferred Stock, the
Company's Board of Directors may not declare dividends payable to holders of
Common Stock unless and until all accrued cash dividends through the most
recent past annual payment date have been paid in full to holders of the
Convertible Preferred Stock. Earnings of the Company, if any, not paid as
dividends to holders of the Convertible Preferred Stock are expected to be
retained for use in expanding the Company's business. The payment of
dividends on the Common Stock is within the discretion of the Board of
Directors of the Company and will depend upon the Company's earnings, if any,
capital requirements, financial condition and such other factors as are
considered to be relevant by the Board of Directors from time to time. The
Company's future earnings, if any, will not initially be adequate for the
payment of dividends on the Convertible Preferred Stock, in which event such
dividends will be paid out of the Company's then capital surplus (the
Company's net assets minus the aggregate par or stated value of the
outstanding shares of the Company's capital stock), if any. On an as adjusted
basis, after giving effect to this Offering, the Company's capital surplus as
of December 31, 1996 was $22,071,700. The payment of dividends and any future
operating losses will reduce such capital surplus, which may adversely affect
the Company's ability to continue to pay dividends on the Convertible
Preferred Stock. The failure to pay quarterly dividends will result in a
reduction of the conversion price on the Convertible Preferred Stock and may
give rise to voting rights to the holders of such Convertible Preferred
Stock. See "Risk Factors -- Inadequate Dividend Coverage" and "Description of
Securities -- Convertible Preferred Stock."
24
<PAGE>
DILUTION
At December 31, 1996, the Company's negative net tangible book value was
$(164,160), or $(.02) per share of Common Stock. The net tangible book value
of the Company is the tangible assets less total liabilities. After giving
effect to the sale by the Company of the Securities offered hereby (assuming
an initial public offering price of $10.10 per Preferred Unit, consisting of
one share of Convertible Preferred Stock at $10.00 per share and one Warrant
at $.10 per Warrant, and $6.10 per Common Unit, consisting of one share of
Common Stock at $6.00 per share and one Warrant at $.10 per Warrant) and the
initial application of the estimated net proceeds therefrom, the pro forma
net tangible book value of the Company as of December 31, 1996 would have
been approximately $21,148,804, or $1.84 per share. This represents an
increase in net tangible book value per share of $1.86 to the Company's
existing stockholders and an immediate dilution of $4.16 per share (or 69.3%)
to new stockholders purchasing Common Stock and Convertible Preferred Stock
in this Offering. The following table illustrates this dilution on a per
share basis:
<TABLE>
<CAPTION>
Assumed initial public offering price per share ......... $6.00
<S> <C> <C> <C>
Negative net tangible book value per share before
the Offering ..................................... $(.02)
Increase per share attributable to payments by new
stockholders ..................................... $1.86
--------
Pro forma net tangible book value per share after the
Offering .............................................. $1.84
-------
Dilution per share to new stockholders .................. $4.16
=======
</TABLE>
In the event the Over-allotment Option is exercised in full, the net
tangible book value at December 31, 1996 would have been approximately
$24,392,854 and the dilution of net tangible book value per share to new
stockholders would have been approximately $3.92.
The following table sets forth the number of shares of Common Stock
purchased from the Company by its existing stockholder, the number of shares
of Common Stock to be purchased by investors in this Offering at an assumed
initial public offering price of $6.00 per share and the total consideration
paid and to be paid to the Company, and the average price paid per share.
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration per Share
------------------------- ---------------------------- ---------------
Number Percent Amount Percent
------------ --------- --------------- ---------
<S> <C> <C> <C> <C> <C>
New investors ...... 1,500,000 13.0% $ 9,000,000 90.1% $6.00
Existing stockholder 10,000,000 87.0% 991,200(1) 9.9% $ .10
------------ --------- --------------- --------- ---------------
Total ........... 11,500,000 100.0% $9,991,200(2) 100.0%
============ ========= =============== =========
</TABLE>
- ------
(1) Includes a total capital contribution by Commodore of $976,200 of Company
notes, representing advances made by Commodore to the Company from its
inception through November 26, 1996, which notes were purchased by
Applied as of December 2, 1996. See "Certain Relationships and Related
Transactions -- Organization and Capitalization of the Company" and Note
1 of Notes to Financial Statements. For these purposes, no value is
attributed to the shares of common stock of Commodore issued by Commodore
to enable the Company to acquire certain intellectual property rights
relating to CST from Srinivas Kilambi, Ph.D., the Company's Vice
President - Technology. See "Business -- Intellectual Property."
(2) Does not include $15,000,000 paid by new investors for 1,500,000 shares
of Convertible Preferred Stock and $300,000 paid for 3,000,000 Warrants.
25
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data included in the following table as of June 30,
1996 and for the period from November 15, 1995 (date of inception) to June
30, 1996 are derived from the audited Financial Statements appearing
elsewhere herein. The selected financial data as of December 31, 1996, for
the six months then ended and for the period from November 15, 1995 (date of
inception) to December 31, 1996 are unaudited and, in the opinion of
management, include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of such data. Financial data
for the periods through December 31, 1996 are not necessarily indicative of
the results of operations to be expected for the Company's fiscal year ending
June 30, 1997. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
November 15, 1995
(date of Six Months November 15, 1995
inception) Ended (date of inception)
Statement of Operations Data:(1) to June 30, 1996 December 31, 1996 to December 31, 1996
----------------- ----------------- --------------------
<S> <C> <C> <C>
Revenue ............................ $ 0 $ 7,758 $ 7,758
----------------- ----------------- --------------------
Costs and expenses:
Research and development ......... 50,080 412,340 462,420
General and administrative ....... 9,720 443,423 453,143
Amortization. .................... 101 1,199 1,300
----------------- ----------------- --------------------
Loss before interest and taxes ..... (59,901) (849,204) (909,105)
Interest expense ................... 1,035 4,600 5,635
----------------- ----------------- --------------------
Net loss ........................... $(60,936) $(853,804) $(914,740)
================= ================= ====================
Net loss per share(2) .............. (.01) (.08) (.09)
Ratio of earnings to preferred stock
dividends ........................ -- (3) -- (3) -- (3)
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1996
--------------- ------------------------------
Balance Sheet Data: Actual As Adjusted(4)
------------ --------------
<S> <C> <C> <C>
Working capital (deficit) .................. $(81,630) $(134,677) $20,958,823
Total assets ............................... 23,327 530,644 21,624,144
Total current liabilities .................. 84,163 454,184 454,184
Deficit accumulated during development stage (60,936) (914,740) (914,740)
Stockholders' equity (deficit) ............. (60,836) 76,460 21,169,960
</TABLE>
- ------
(1) The Company is in the development stage, and has had no commercial
operations to date. See Note 1 of Notes to Financial Statements.
(2) Net loss per share is calculated on the basis of 10,000,000 shares of
Common Stock being outstanding for the period presented. See Note 1 of
Notes to Financial Statements.
(3) The Company's operating results are not sufficient to cover the
Convertible Preferred Stock cash dividends. See "Risk Factors --
Inadequate Dividend Coverage" and "Dividend Policy."
(4) Gives effect on an as adjusted basis to the sale by the Company of the
Units offered hereby at an assumed initial public offering price of
$10.10 per Preferred Unit, consisting of one share of Convertible
Preferred Stock at $10.00 per share and one Warrant at $.10 per Warrant,
and $6.10 per Common Unit, consisting of one share of Common Stock at
$6.00 per share and one Warrant at $.10 per Warrant, and the initial
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized in November 1995 and has had no commercial
operations to date. Since its inception, the Company has been engaged
principally in organizational activities, including developing a strategic
operating plan, entering into contracts, hiring personnel, developing test
modules and installing and operating modules on a limited basis for
demonstration or test purposes. Accordingly, the Company has no relevant
operating history upon which an evaluation of its performance and prospects
can be made. The Company is subject to all of the business risks associated
with a new enterprise, including, but not limited to, risks of unforeseen
capital requirements, failure of market acceptance, failure to establish
business relationships, and competitive disadvantages as against larger and
more established companies. The report of the independent auditors with
respect to the Company's financial statements included in this Prospectus
includes a "going concern" qualification, indicating that the Company's
significant losses and deficits in working capital and stockholders' equity
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company has generated nominal revenues to date, and will not generate
any material revenues until after the Company successfully completes the
installation of modules in a significant number of industrial companies, of
which no assurance can be given. During the period from November 15, 1995
(date of inception) to June 30, 1996, the Company incurred a net loss of
$(60,936). From July 1, 1996 to December 31, 1996, the Company incurred
additional operating losses of $(853,804), and anticipates that it may
continue to incur significant operating losses for the foreseeable future.
There can be no assurance as to whether or when the Company will generate
material revenues or achieve profitable operations. See "Business" and
Financial Statements.
DEPENDENCE ON SUPPLIERS
The Company has not to date conducted any manufacturing operations, but
has relied on unaffiliated suppliers to provide fibers, membrane casings and
other materials and components utilized in CST. The Company has not
previously experienced any delays or difficulties in obtaining any of these
items, although there can be no assurance that such difficulties may not be
encountered in the future. The Company has allocated a portion of the net
proceeds of this Offering to the establishment of a facility in Atlanta, part
of which will be dedicated to operations related to the manufacturing of
chemicals, fibers, membrance casings and other materials and components
utilized in CST. See "Risk Factors -- Dependence on Strategic Components from
Suppliers; Limited Manufacturing Operations" and "Use of Proceeds."
LIQUIDITY AND CAPITAL RESOURCES
The Company has to date financed its development efforts through direct
equity investments and loans from Commodore and Applied. From November 15,
1995 (date of inception) to December 31, 1996, the Company has purchased or
constructed equipment totalling $201,109 and has incurred patent filing and
maintenance costs of $22,456. As of December 31, 1996, the Company's
aggregate indebtedness to Applied was $273,600. Effective December 2, 1996,
Commodore sold 100% of the Company's capital stock and the capital stock of
another subsidiary to Applied and assigned the Company's $976,200 of notes to
Applied in consideration of $3,000,000 and, subject to any applicable
stockholder approval and notification requirements, shall issue a seven-year
warrant to purchase 7,500,000 shares of Applied common stock at $15.00 per
share. Applied has agreed to contribute the entire amount of such $976,200
Company indebtedness to the Company's equity prior to completion of this
Offering. See "Certain Relationships and Related Transactions."
The Company has sustained losses of $(853,804) and $(60,936) for the six
month period ended December 31, 1996 and for the period from November 15,
1995 (date of inception) to June 30, 1996, respectively. The Company had no
revenues during the period from November 15, 1995 (date of inception) to June
30, 1996 and had revenues of $7,758 for the six-month period ended December
31, 1996 as a result of billings from the Port of Baltimore field test of the
CST process. Substantially all of the Company's losses are attributable to
the expenses detailed above. At December 31, 1996 and June 30, 1996, the
Company had working capital deficits
27
<PAGE>
of $(134,677) and $(81,630), respectively, and stockholders' equity and
deficit of $76,460 and $(60,836), respectively. The Company has received
significant advances in working capital from Commodore and Applied which has
allowed it to continue its operations. There can be no assurance that it will
continue to receive such financial assistance.
The Company believes that the net proceeds of the Offering will be
sufficient to meet its cash, operational and liquidity requirements for a
minimum of 24 months after the date of this Prospectus.
The Company has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which it began occupying in March 1997 and which will
comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. It is anticipated that
approximately $2,000,000 of the net proceeds of this Offering will be
required with respect to leasing such facility and related leasehold
improvements. Additionally, it is anticipated that approximately $2,750,000
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 $1,850,000
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 $1,750,000 of the net proceeds of this
Offering to finance possible acquisitions of, or investments in,
complementary (including competitive) businesses, products or technologies.
The Company currently has no commitments or agreements with respect to any
such acquisitions or investments. See "Risk Factors -- Unspecified
Acquisition-Related Risks."
The Company has allocated $1,750,000 of the net proceeds of this Offering
for the funding of proposed collaborative arrangements. These costs include,
but are not limited to, salaries and benefits of personnel, equipment design
and procurement costs, cost of leasing or otherwise obtaining additional
operating facilities, analytical and other testing costs, professional fees,
insurance and other administrative expenses. As of the date of this
Prospectus, the Company has not determined the amount of net proceeds of this
Offering to be applied to any one particular proposed collaborative
arrangement because the Company is currently in negotiations with a number of
companies involving, among other issues, the level of its proposed funding
commitment. The estimated allocation of the net proceeds for funding of
proposed collaborative arrangements is on an aggregate basis. In addition, in
the event a definitive agreement is not entered into by the Company and
Teledyne Brown or Sverdrup, respectively, on or before August 31, 1997, such
memorandum of understanding may be terminated by either company upon written
notice. See "Risk Factors -- No Assurance of Collaborative Agreements or
Project Awards," "Use of Proceeds" and "Business -- Collaborative Working
Arrangements."
In March 1997, the Company entered into a $1,250,000 line of credit with a
commercial bank. The line of credit bears interest at the prime lending rate,
as announced from time to time by such bank (8.25% at March 17, 1997), and
expires on April 17, 1997. It is expected that the entire line of credit will
have been borrowed prior to the completion of this Offering to repay advances
made by Applied to the Company since December 1, 1996 for working capital
purposes. The line of credit is guaranteed by Applied and secured by cash
collateral provided by Applied. Upon completion of this Offering, the Company
will apply $1,250,000 of the net proceeds to repay such line of credit, and
such guarantee and cash collateral will be released to Applied. See "Risk
Factors -- Control by Principal Stockholder; Loans Involving Affiliates,"
"Use of Proceeds" and "Certain Relationships and Related Transactions --
Loans Involving Affiliates."
In addition, in the event the Over-allotment Option is exercised, the
Company intends to enter into a two-year revolving credit agreement with
Commodore. Pursuant to such agreement, the Company may lend the net proceeds,
if any, from the exercise of the Over-allotment Option (estimated to be up to
approximately $3,250,000) to Commodore for its working capital needs.
Borrowings under the agreement will be secured by Commodore's pledge of
2,000,000 shares of Applied common stock held by it and will bear interest at
the rate of 10% per annum, with interest payable quarterly on outstanding
amounts. The principal balance outstanding will be due on the second
anniversary of the date of such agreement. The Company's obligation to lend
such
28
<PAGE>
funds to Commodore is subject to a number of conditions, including review by
the Company of the proposed use of such funds by Commodore. See "Risk Factors
- -- Control by Principal Stockholder; Loans Involving Affiliates," "Use of
Proceeds" and "Certain Relationships and Related Transactions -- Loans
Involving Affiliates."
Pursuant to an assignment of technology agreement between the Company and
Srinivas Kilambi, Ph.D., the Company's Vice President-Technology, the Company
agreed to pay Dr. Kilambi a royalty through December 3, 2002 equal to 2% of
the Company's revenues actually received and attributed to the commercial
application of the technology acquired from Dr. Kilambi, except for
applications related to the radionuclides technetium and rhenium, for which
Dr. Kilambi is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight, and excise or other
taxes). Pursuant to the license agreement with Lockheed Martin, the Company
made an initial cash payment of $50,000 upon the execution of the agreement
and is obligated to pay, commencing in the third year of the agreement, a
royalty to Lockheed Martin of 2% of net sales (less allowances for returns,
discounts, commissions, freight, and excise or other taxes) up to total net
sales of $4,000,000 and 1% of net sales thereafter. In addition, the Company
has agreed to guarantee Lockheed Martin, commencing in the third year of the
agreement, an annual minimum royalty of $15,000. See "Business --
Commercialization and Marketing Strategy -- Radionuclide/Mixed Waste
Separation." Payment of such royalties to Dr. Kilambi and Lockheed Martin is
based on Company revenues and is not related to or contingent upon the
Company attaining profitability or positive cash flow. As a result, such
payments will adversely affect operating results and divert cash resources
from use in the Company's business, and possibly at times when the Company's
liquidity and access to funding may be limited. See "Business -- Intellectual
Property" and "Certain Relationships and Related Transactions -- Organization
and Capitalization of the Company."
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standard Statement No. 121, "Accounting for Long Lived
Assets" and No. 123, "Accounting and Disclosure of Stock-Based Compensation."
Statement No. 121 is effective for years beginning after December 15, 1995.
The effect of adoption of Statement No. 121 will not have a material effect
on the Company's financial statements. Statement No 123 is effective for
years beginning after December 15, 1995. The effect of adoption of Statement
No. 123 is not expected to have a material effect on the Company's financial
statements as the Company has adopted only the disclosure requirements of
Statement No. 123.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1996, the Company had net operating loss carryforwards
of approximately $914,000, which expire in the year 2011. The amount of net
operating loss carryforward that can be used in any one year will be limited
by the applicable tax laws which are in effect at the time such carryforward
can be utilized. A valuation allowance of $311,000 has been established to
offset any benefit from the net operating loss carryforward as it cannot be
determined when or if the Company will be able to utilize the net operating
losses.
29
<PAGE>
BUSINESS
GENERAL
The Company has developed and intends to commercialize its membrane
separation and recovery system called CST. Based on the results of more than
100 laboratory and other tests to date, the Company believes that CST can
separate and recover chrome, chromium, cadmium, silver, mercury, platinum,
lead, zinc, nickel, trichlorethylene, polychlorinated biphenyls, methylene
chloride, amino acids, antibiotics, radionuclides, and other organic and
inorganic targeted substances from liquid or gaseous feedstreams. CST
utilizes a process whereby a contaminated liquid or gaseous feedstream is
introduced into a fibrous membrane unit or module containing a proprietary
chemical solution, the composition of which is customized depending on the
types and concentrations of compounds in the feedstream. As the feedstream
enters the membrane, the targeted substance reacts with CST's proprietary
chemical solution and is extracted through the membrane into a strip solution
where it is then stored. The remaining feedstream is either recycled or
discharged as non-toxic effluent. In some instances, additional treatment may
be required prior to disposal.
CST is distinguishable from other existing forms of membrane filtration
technology in that it:
o requires low initial capital costs and low operating costs;
o has the capability of treating a wide variety of elements and compounds
in a wide variety of industrial settings at great speed and with a high
degree of effectiveness, regardless of contaminant concentrations,
volume requirements and other variables;
o is environmentally safe, in most instances producing no sludges or
other harmful by-products which would require additional post-treatment
prior to disposal;
o can selectively extract target substances, while extracting
substantially fewer unwanted substances;
o can typically operate on-site and in less than 40 square feet of space
for the entire system;
o can extract metals, organic chemicals and other elements and compounds
in degrees of concentration and purity which permit their reuse; and
o has the capability, in a single process application, of selectively
extracting multiple elements or compounds from a mixed process stream.
In August 1996, the Company completed an on-site demonstration of CST for
the decontamination of chromium-contaminated groundwater at the Port of
Baltimore, Maryland. During this demonstration, a CST unit, in a single
feedstream pass-through, reduced the contamination level of chromium from
more than 400 parts per million (ppm) to less than one ppm. The results of
this test were verified by Artesian Laboratories, Inc., an independent
testing laboratory. The Company has since completed additional on-site
demonstrations of CST at the Port of Baltimore with similar results. Due to
the success of such demonstrations, in February 1997 the State of Maryland
informed the Company that it will recommend including the CST process as an
eligible technology in the bid specifications to remediate the groundwater at
the Port of Baltimore. Based on management studies and discussions with
metals industry executives, the Company believes that CST represents a
significant technological advancement in the area of environmental
remediation as the only technology capable of on-site chromium removal and
recovery that enables effluent discharge without additional treatment.
In September 1996, the Company installed a commercial scale CST unit at a
Columbus, Ohio metal plating company. DLZ Laboratories, Inc., an independent
testing laboratory, verified that the CST unit processed the initial batch of
process effluent stream and reduced nickel and zinc contamination from 900
ppm to 2 ppm in one hour. The Company has continued to operate this CST unit
to process nickel and zinc effluent streams containing concentrations of 200
to 400 ppm, and the unit has consistently reduced the contaminant levels to 1
to 5 ppm. The decontaminated process effluent stream is being recycled into
the plating line rinse tanks, saving the plating company its normal
consumption of make-up water at a rate of five gallons per minute. The
recovered nickel and zinc solution is currently being analyzed by the plating
company for reuse in its plating operations.
In January 1997, the Company entered into a license agreement with
Lockheed Martin, manager of Oak Ridge. Under the terms of the agreement, the
Company received the exclusive worldwide license, subject to a government use
license, to use and develop the technology related to the separation of the
radionuclides technetium and rhenium from mixed wastes containing radioactive
materials. Based on tests conducted at Oak Ridge
30
<PAGE>
since May 1994, the Company believes that this technology is capable of
selectively extracting and recovering technetium, rhenium and other
radioactive isotopes as a concentrated aqueous solution which can be reused
in various scientific applications or disposed of by government-approved
techniques including long-term storage. The Company believes that this
technology can be used to remediate nuclear waste tanks stored at the U.S.
Department of Energy's atomic energy plants in Rocky Flats, Colorado, Idaho
Falls, Idaho, Paducah, Kentucky, Weldon Springs, Missouri, Frenchman Flat,
Nevada, Los Alamos, New Mexico, Aiken, South Carolina, Oak Ridge, Tennessee,
Pantex, Texas and Hanford, Washington, and intends to pursue such
opportunities. According to Department of Energy sources, there are
approximately 100 million gallons of mixed radioactive and hazardous chemical
waste stored at these plants.
The Company will market its technology to industries engaged in
metallurgical processing, metal plating and mining, as well as companies
producing organic chemicals and biochemicals and those engaged in gas
separation. The Company is also targeting governmental agencies that have
sites which require remediation, and has already completed an on-site
demonstration at the Port of Baltimore.
The Company intends to pursue collaborative joint working and marketing
arrangements with, or acquisitions of or investments in, companies that have
a presence in target markets and those that focus on obtaining environmental
remediation projects, including clean-up of harbors, groundwater and nuclear
waste sites. Although the Company has entered into memorandums of
understanding for proposed working arrangements with Teledyne Brown and
Sverdrup, and is bidding on certain projects, there can be no assurance that
any of these activities will result in definitive collaborative agreements or
project awards. Even if project contracts are awarded to the Company, CST has
never been utilized on a large-scale basis, and there is no assurance that
this technology will perform successfully on a large-scale commercial basis,
or that it will be profitable to the Company. There can also be no assurance
that this technology will not be superseded by other competing technologies.
MARKET OVERVIEW
Based on market data compiled by the Company, the Company estimates that,
as of August 1, 1996, there were approximately 7,500 companies operating
metal plating and metal finishing facilities in the United States, and an
additional 1,500 such facilities in Canada. Based on estimated sales by these
facilities, the Company believes that on average each of these facilities
could utilize four to ten CST membrane units. The Company estimates that, as
of such date, there were approximately 50 companies in the United States
involved in industrial gas separation, and based on these companies'
estimated sales, the Company believes that on average each of these companies
could utilize two to four membrane units operating at significant volumes.
Further, as of August 1, 1996, based on market data compiled by the Company,
the potential market from organic chemical companies is in excess of 10,000
companies in the United States. Based on these companies' estimated sales,
the Company believes that on average each of these companies could utilize
two to four membrane units operating at significant volumes. Additionally, as
of such date, there were more than 5,000 biochemical, bulk drug manufacturing
and pharmaceutical companies operating in the United States and Canada, and
based on these companies' estimated sales, the Company believes that on
average the typical such company could utilize two to four membrane units
operating at substantial volumes. The Company believes that the potential
international market for each of the above applications could be twice the
size of the North American market. Federal, state and local government
entities are also a potential market for the Company, particularly in the
area of environmental remediation and clean-up.
As with any new technology or process, or a significant advancement of an
existing technology or process, there may be initial resistance to the use of
CST on a large scale, and certain prospective projects for the Company may
have already been committed to other forms of technology. In each case, the
Company expects to introduce its process on a test basis through the
introduction of sample membrane units to demonstrate the efficacy of the
technology, with the aim of full installation and/or project awards based on
the performance of the sample units.
ALTERNATIVE SEPARATION TECHNOLOGIES
Membrane separation and extraction technologies have been utilized
commercially for several decades. Prior to the development of CST, membrane
separation and extraction capabilities were broken into four subranges,
consisting of microfiltration, ultrafiltration, nanofiltration and reverse
osmosis (hyperfiltration), each distinguished and defined by the relative
particle size which the particular process was capable of separating from
31
<PAGE>
the feedstream, and by whether the compounds were suspended or dissolved in
the feedstream. Existing technologies currently in use for the treatment of
solubilized feedstreams (in which the containment is dissolved, rather than
suspended, in the feedstream) include: (i) ion exchange (wherein electrically
charged ions that are electrochemically held by ion exchange resin beads are
exchanged for ions of similar charge in a solution in which the beads are
immersed), (ii) reverse osmosis (wherein solutions are desalted or
concentrated by driving them through membranes using relatively high
hydraulic pressure, resulting in contaminants being excluded or rejected by
the membranes), (iii) precipitation (wherein chemicals are used to
precipitate out the contaminants for eventual off-site disposal), (iv)
ultrafiltration (wherein moderate hydraulic pressure is used to transfer
water and low molecular weight species through a membrane while blocking
relatively large-sized contaminants such as suspended solids, colloids and
large organic molecules) and (v) chromatography (wherein mixtures are
separated into their constituents by preferential adsorption on solids).
CST
Although CST uses the same basic principles as other membrane separation
technologies, the Company believes that CST represents a significant advance
in membrane separation technology in the treatment of solubilized
feedstreams. In contrast to the five alternative separation technologies
described above, CST acts by separating and extracting the targeted
material(s) from the feedstream, rather than extracting the feedstream from
the targeted material(s). As a result, for the first time, a single process
is capable of treating a wide variety of elements and compounds in a wide
variety of industrial settings, and doing so at great speed and with a high
degree of effectiveness regardless of particle size, volume requirements and
other variables. The Company also believes that CST is the first membrane
separation technology which is capable, in a single process application, of
selectively extracting multiple elements or compounds from a mixed process
stream. The CST membrane modules can also be configured in various sizes and
numbers and for varying capacities, and operate on the manufacturing site at
ambient temperatures and pressures.
CST involves injecting a contaminated liquid or gaseous feedstream into
the Company-designed fibrous membrane unit or module. This module is
continuously fed with a recycled stream of proprietary chemical solution
whose composition will vary depending on the types of compounds in the
feedstream. As the feedstream enters the membrane unit, the metal or other
substance to be extracted reacts with the proprietary chemical solution in
the fibrous membrane, and the metallic or other ions are extracted through
the membrane into a strip solution which is concentrated and gathered in a
separate storage container. The balance of the feedstream is either recycled
or simply discharged as normal effluent. In some instances, additional
treatment may be required prior to disposal, or disposal may need to be made
in a regulated manner. The Company believes that CST can be utilized for the
separation and recovery of chrome, chromium, cadmium, silver, mercury,
platinum, lead, zinc, nickel, trichlorethylene, polychlorinated biphenyls,
methylene chloride, amino acids, antibiotics, radionuclides, and other
organic and inorganic substances.
The typical CST module is cylindrical in shape and can be situated on a
surface or in an area the size of a desktop. The module casing is constructed
of either steel or plastic (depending on the required durability for the
particular process application), and contains the microporous fiber membrane
through which the target element or compound is separated from the
contaminated feedstream. At one end of the module, there is attached a set of
pumps and tubing that feeds the contaminated feedstock from its point of
origin (such as a metal plating tank or bath) into the module. Additional
pumps and tubing are attached to feed and recycle the chemical solution which
is the active element in the membrane, and discharge tubing or piping is
attached at the other end of the module, to carry away the separated
concentrated metal solution or other compound, and the wastewater and other
non-reusable by-product. The Company plans to produce a range of modules that
will precisely conform to the customer's requirements for volume and
capacity, and thus accommodate the available space in the customer's
facility. The Company also formulates the active chemical compound for the
process in each customer application, and performs the initial installation
of the equipment at the customer site. The customer will operate the
equipment and, by computer hook-up, the Company will monitor the equipment
and process while in operation.
32
<PAGE>
LABORATORY AND OTHER TEST RESULTS
In more than 100 laboratory and other tests to date, CST has demonstrated
the ability to successfully separate a variety of metals and other substances
from liquid and gaseous process streams. In each instance, the process stream
was reduced to levels approaching federal guidelines under the Federal Clean
Water Act for the disposal of the reacted process stream as normal wastewater
effluent, and the recovered materials were of sufficient quantity and purity
as to economically permit the reuse thereof in most commercial applications.
Test results included the following:
<TABLE>
<CAPTION>
Applicable
Material Before Treatment After Treatment Federal Guideline
- -------- ---------------- --------------- ---------------------
<S> <C> <C> <C>
Metals:
Zinc ........ 1,000 ppm Less than 2 ppm (after 30 minutes) Less than 2 ppm
Nickel ...... 3,200 ppm Less than 1.6 ppm (after 30 minutes) Less than 2 ppm
Chromium .... 430 ppm 0.49 ppm (field test) 5 ppm
Aluminum .... 195 ppm 100 ppm (after 15 minutes) 30 ppm
Silver ...... 177 ppm 1 ppm Less than 2 ppm
Organics:
Phenol ...... 10,000 ppm Less than 10 ppm Less than 30 ppm
Nitrophenol . 10,000 ppm Less than 10 ppm Less than 30 ppm
Biochemicals:
Phenylalanine 5,000 ppm Less than 10 ppm Less than 30 ppm
Radionuclides:
Cesium ...... 10 ppm Less than 5 parts per billion (ppb) Less than 10 ppb
Rhenium ..... 5 ppm Less than 5 ppb Less than 10 ppb
Anions:
Nitrates .... 62,000 ppm Less than 100 ppm Less than 10 ppm
</TABLE>
All of these tests were performed on limited quantities of process
streams, and there can be no assurance that the same or similar results would
or could be obtained on a large-scale commercial basis or on any specific
project. Other than with respect to the Company's tests involving the
separation and recovery of zinc, nickel and chromium, no other tests
conducted by the Company have been independently verified. See "Risk Factors
- -- Unproven on Large-Scale Commercial Basis."
33
<PAGE>
COMPETITIVE AND OPERATIONAL ASPECTS OF CST
The following chart highlights certain of the salient differences which
the Company believes, based on the limited quantities of process streams
tested, distinguish CST from other membrane separation technologies. As shown
below, the Company believes that CST has substantially broader applications
than most of the other technologies, and is generally capable of superior
results in less time. Other than with respect to the Company's tests
involving the separation and recovery of zinc, nickel and chromium, no other
independent tests have been conducted by the Company to verify the accuracy
of the specifications shown below.
<TABLE>
<CAPTION>
CST PROCESS ION EXCHANGE
----------- ------------
<S> <C> <C>
Process Description Reaction-diffusion membrane transport Ionic exchange
- --------------------------------------------------------------------------------------------------------
Process Temperatures Ambient-80 (degrees)SDC Ambient-80 (degrees) 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 (degrees) 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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<PAGE>
Organics Separation and Recovery
As of August 1, 1996, based on market data compiled by the Company, there
were more than 10,000 organic chemical industry companies operating in the
United States. These companies generate significant volumes of waste process
streams, including mixed organic/non-organic streams. CST has been
demonstrated to have significant capabilities in the separation and recovery
of a variety of contaminants, including phenol and nitrophenol (a phenolic
derivative), and the Company believes that such capabilities, although
untested, extend to other organic chemicals such as volatile organic
compounds, petrochemicals, other phenolic derivatives, olefin alkanes and
acid gases.
Currently, the primary technology utilized in this area is activated
carbon treatment. Like the other slow biological treatment processes utilized
in this area, the by-products are often more toxic than the original
compound. The Company intends to demonstrate to chemical manufacturers that
CST is effective in dealing with the wide variety of contaminants generated
by these businesses, and that use of CST will substantially reduce the
environmental risks and costs associated with traditional separation methods.
Biochemicals Separation and Recovery
CST has also been demonstrated to have significant capabilities in the
separation and recovery of biochemicals, including phenylalanine (an amino
acid), and the Company believes that such capabilities, although untested,
extend to other biochemicals such as proteins, other amino acids,
antibiotics, glycerides, fatty acids, drug delivery vehicles and other
pharmaceuticals. Mixed wastes containing these materials are generated in
both research and development functions and in manufacturing functions. These
materials have substantial value, and the Company intends to emphasize both
the value of the recovered materials and the enhanced and speedier
environmental compliance attributes of CST.
Currently, the primary competing technology in this area is
chromatography, which requires substantially greater time to treat
significant volumes of material, and is substantially less selective in the
types of materials that can be separated from the liquid feedstream.
Environmental Remediation and Restoration
The Company believes that CST has significant potential for application to
environmental remediation and restoration. The Company is currently involved
in pilot projects for the decontamination of water in the Port of Baltimore,
and for clean-up of trichlorethylene-contaminated groundwater on Cape Cod,
Massachusetts. In the case of a project such as the Port of Baltimore
project, it is expected that the remediating technology will be applied
continuously over a period of many years, until the subject contamination (in
the case of Baltimore, chromium leaching from underlying soil into the
aquifer) has been demonstrated to have been abated for a significant period
of time.
In contrast to other remediation technologies, the Company believes that
CST has the attributes of low initial capital costs, low operating costs and
the ability to recover heavy metals, organic chemicals and varied volatile
organic compounds for reuse.
In August 1996, the Company completed an on-site demonstration of CST for
the decontamination of water in the Port of Baltimore. During seven hours of
operation, a single CST unit, in a single pass-through of feedstream,
processed 90 gallons of water containing more than 400 ppm of chromium, and
reduced the contamination level to 0.49 ppm. This reduced level of
contamination was below the federal guideline (5 ppm) for the unregulated
discharge of water. The results of this test were verified by Artesian
Laboratories, Inc., an independent testing laboratory. The Company has since
completed additional on-site demonstrations of CST at the Port of Baltimore
with similar results. Due to the success of such demonstrations, in February
1997 the State of Maryland informed the Company that it will recommend
including the CST process as an eligible technology in the bid specifications
to remediate the groundwater at the Port of Baltimore. The Company believes
that compliance with the federal guideline can be achieved either by
refinement of chemical formulation or process procedure, by dilution of the
processed water with a small amount of uncontaminated water, or by passing
the processed water through a larger or supplemental CST unit. The Company
believes that the same process is capable of achieving comparable results in
the same time period on substantially greater volumes of contaminated water,
either by increasing the flow of feedstream into the membrane, by configuring
and utilizing a larger module, or by installing and operating additional
modules. As indicated above, this demonstration was performed on limited
quantities of process streams, and there can be no assurance that the same or
similar results would or could be obtained on a larger scale.
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To speed its entry in this market, the Company intends to enter into
collaborative joint working and marketing arrangements with established
engineering and environmental service organizations which are expected to
provide technical and professional expertise, market presence and
credibility. Although the Company has entered into memorandums of
understanding with several such companies, the Company has not to date
entered into any definitive agreements or received any firm contract awards.
See "-- Collaborative Working Arrangements."
Radionuclide/Mixed Waste Separation
In the United States, there are numerous sites operated or maintained by
the Department of Energy ("DOE") and/or the Department of Defense at which
there are present "mixed wastes" containing radionuclides intermingled with
other hazardous wastes. These sites are also contaminated with other
compounds associated with nuclear weapons, testing and energy. CST has been
demonstrated to have significant capabilities in the separation of
radionuclides such as cesium, technetium and rhenium, and the Company
believes that such capabilities, although untested, extend to most of the
other compounds found at such sites. The United States government estimates
that potential government expenditures in this market could be between $234
billion and $389 billion over the course of the next 75 years.
This element of the market is a significant subcategory of the general
environmental remediation that can be undertaken with CST. In addition to low
initial capital costs and low operational costs, CST has the advantage of
cost-effectively separating both dissolved mixed waste and radionuclides, and
allowing separate handling and disposal of both hazardous waste types. The
Company anticipates pursuing this market area in collaboration with
established engineering and environmental service organizations, who can
provide technical and professional expertise, market presence and
credibility. Neither the Company nor any of its collaborative partners have
been awarded any contracts to use CST, and there can be no assurance as to
whether or when any such contracts may be obtained.
In January 1997, the Company entered into a license agreement with
Lockheed Martin, manager of Oak Ridge (the "Lockheed License Agreement").
Under the terms of the Lockheed License Agreement, the Company received the
exclusive worldwide license, subject to a government use license, to use and
develop the technology related to the separation of the radionuclides
technetium and rhenium from mixed wastes containing radioactive materials.
The Company also received under the Lockheed License Agreement the right to
exploit the technology for other commercial applications. Pursuant to the
Lockheed License Agreement, the Company made an initial cash payment of
$50,000 upon the execution of the agreement and is obligated to pay,
commencing in the third year of the Lockheed License Agreement, a royalty to
Lockheed Martin of 2% of net sales (less allowances for returns, discounts,
commissions, freight, and excise or other taxes) up to total net sales of
$4,000,000 and 1% of net sales thereafter. In addition, the Company has
agreed to guarantee Lockheed Martin, during the term of the Lockheed License
Agreement, an annual minimum royalty of $15,000 commencing in the third year
of the Lockheed License Agreement. The Lockheed License Agreement, which may
be terminated at any time solely by the Company, has a term which will last
until the end of the life of all patents or patentable claims described in or
ultimately arising out of the provisional patent recently filed jointly by
the Company and three of Dr. Kilambi's colleagues who worked with him at Oak
Ridge, covering their inventions related to radionuclides. See "--
Intellectual Property" below.
Based on tests conducted at Oak Ridge since May 1994, the Company believes
that this technology is capable of selectively extracting and recovering
technetium, rhenium and other radioactive isotopes as a concentrated aqueous
solution which can be reused in various scientific applications or disposed
of by government-approved techniques including long-term storage. The
Company believes that this technology can be used to remediate nuclear waste
tanks stored at the DOE's atomic energy plants in Rocky Flats, Colorado,
Idaho Falls, Idaho, Paducah, Kentucky, Weldon Springs, Missouri, Frenchman
Flat, Nevada, Los Alamos, New Mexico, Aiken, South Carolina, Oak Ridge,
Tennessee, Pantex, Texas and Hanford, Washington, and intends to pursue such
opportunities. According to DOE sources, there are approximately 100 million
gallons of mixed radioactive and hazardous chemical waste stored at these
plants.
The DOE has reported that better methods of separating radionuclides could
lead to reduced volumes of high-level waste and lower ongoing costs.
Radionuclides in high-level wastes are a small fraction (.001% or less)
38
<PAGE>
of DOE's waste volume. Each disposal canister for high-level waste is
expected to cost approximately $1,000,000 to build and maintain. The Company
believes that concentrating the radionuclides in these wastes could reduce
the number of canisters needed by at least tenfold, and save significant sums
in ongoing costs. The Company currently does not have, nor can there be any
assurance that it will be awarded, any contract with the DOE to use its
separation technology at DOE plants.
PROPOSED MANUFACTURING OPERATIONS
The Company currently has a limited number of outside sources of supply
for some strategic components used in CST, including chemicals, fibers and
membrane casings. Business disruptions or financial difficulties of such
suppliers, or raw material shortages or other causes beyond the Company's
control, could adversely affect the Company by increasing their cost of goods
sold or reducing the availability of such components. The use of outside
suppliers also entails risks of quality control and disclosure of proprietary
information.
The Company has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which it began occupying in March 1997 and will
comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. It is anticipated that
approximately $2,000,000 of the net proceeds of this Offering will be
required with respect to leasing such facility and related leasehold
improvements. Additionally, it is anticipated that approximately $2,750,000
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 $1,850,000
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 from
Suppliers; Limited Manufacturing Operations," "-- Unpredictability of Patent
Protection and Proprietary Technology" and "Use of Proceeds."
COLLABORATIVE WORKING ARRANGEMENTS
As of the date of this Prospectus, the Company has entered into
memorandums of understanding with Teledyne Brown and Sverdrup for various
uses and applications of CST, principally in connection with large-scale
clean-ups of governmental facilities.
Pursuant to separate memorandums of understanding with each of Teledyne
Brown and Sverdrup, the Company and each of Teledyne Brown and Sverdrup,
respectively, have agreed to negotiate, on a non-exclusive basis, the
formation of one or more mutually agreeable business arrangements concerning
the marketing, application and commercialization of CST. In addition to
conducting due diligence with respect to each company's technology in
accordance with the confidentiality provisions contained in the memorandums
of understanding, the Company and each of Teledyne Brown and Sverdrup,
respectively, are currently negotiating the scope, covered applications and
geographical territory encompassed by the proposed joint marketing and
commercialization activities. It is expected that the Company's relationship
with Teledyne Brown will focus on Department of Energy sites such as Hanford,
Washington and Mound, Ohio, and that the Company's initial opportunities with
Sverdrup will focus on Department of Defense sites such as Cape Cod,
Massachusetts. In the event a definitive agreement is not entered into by the
Company and Teledyne Brown or Sverdrup, respectively, on or before August 31,
1997, such memorandum of understanding may be terminated by either company
upon written notice and, except for the survival of the confidentiality
provisions, without any further liability to the other company. As of the
date of the Prospectus, the Company has not determined the amount of net
proceeds of this Offering to be applied to these or any other particular
proposed collaborative working arrangement. See "Use of Proceeds." Although
the Company believes that it will enter into definitive joint working
agreements with Teledyne Brown, Sverdrup and other potential collaborative
partners, there can be no assurance that these memorandums of understanding
or other future discussions will result in any definitive joint ventures or
related agreements, or, even if such agreements are executed, that the
Company and its prospective collaborators will be awarded any projects that
will ultimately result in revenues and earnings for the Company.
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<PAGE>
CFC SERVICES AGREEMENT
Effective upon completion of this Offering, the Company will enter into a
services agreement (the "Services Agreement") with Commodore CFC
Technologies, Inc., a wholly-owned subsidiary of Applied ("CFC
Technologies"), which has developed and patented a process which, based on
test applications of limited quantities of chlorofluorocarbons ("CFCs"), may
be able to separate mixtures of refrigerants so that they can be returned to
productive use at purity levels meeting industry standards. Pursuant to the
Services Agreement, the Company will provide advice, assistance and guidance,
and, where necessary, personnel to implement the same, in connection with,
among others, administrative, financial and related matters, product design,
development and promotion, and marketing, sales and related operations to CFC
Technologies in connection with its business and operations in exchange for
which the Company will be paid an annual fee equal to 75% of the net income
of CFC Technologies, if any, and reimbursement of expenses incurred in
furnishing such services. The Services Agreement may be terminated by either
party at any time upon not less than 90 days' prior notice.
GOVERNMENT REGULATION
The Company and its customers are required to comply with a number of
federal, state and local laws and regulations in the areas of safety, health
and environmental controls including, without limitation, RCRA and OSHA,
which may require the Company, its prospective working partners or its
customers to obtain permits or approvals to utilize CST and related equipment
on certain job sites. In addition, if the Company begins to market CST
internationally, the Company will be required to comply with laws and
regulations and, when applicable, obtain permits or approvals in those other
countries. There is no assurance that such required permits and approvals
will be obtained. Furthermore, particularly in the environmental remediation
market, the Company may be required to conduct performance and operating
studies to assure government agencies that CST and its by-products do not
pose environmental risks. There is no assurance that such studies, if
successful, will not be more costly or time-consuming than anticipated.
Further, if new environmental legislation or regulations are enacted or
existing legislation or regulations are amended, or are interpreted or
enforced differently, the Company, its prospective working partners and/or
its customers may be required to meet stricter standards of operation and/or
obtain additional operating permits or approvals.
ENVIRONMENTAL MATTERS
The Company's operations, as well as the use of specialized technical
equipment by its customers, are subject to numerous federal, state and local
regulations relating to the storage, handling and transportation of certain
regulated materials. Although the Company's role is generally limited to the
leasing of its specialized technical equipment for use by its customers,
there is always the risk of the mishandling of such materials or
technological or equipment failures, which could result in significant claims
against the Company. Any such claims against the Company could materially
adversely affect the Company's business, financial condition and results of
operations.
The Company maintains environmental liability insurance with limits of
$1,000,000 per occurrence and $1,000,000 in the aggregate. The Company may be
required to obtain environmental liability insurance in greater amounts in
the future as CST is commercialized. There can be no assurance that such
insurance will provide coverage against all claims, and claims may be made
against the Company (even if covered by the Company's insurance policy) for
amounts substantially in excess of applicable policy limits. Any such event
could have a material adverse effect on the Company's business, financial
condition and results of operations.
INTELLECTUAL PROPERTY
The basic principles underlying the CST technology were developed by
Srinivas Kilambi, Ph.D., the Company's Vice President - Technology. Effective
February 29, 1996, pursuant to an assignment of technology agreement between
the Company and Dr. Kilambi, the Company acquired rights to the CST
technology from Dr. Kilambi, together with associated patent rights,
confidential know-how and other property rights created or obtained by Dr.
Kilambi, whether then existing or thereafter created, relating to the
construction, design, development and exploitation of the processes,
equipment and technology related to CST and any other product or development
resulting from the acquired patent rights.
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In consideration for his assignment of the CST technology, the Company
transferred to Dr. Kilambi 200,000 shares of common stock of Commodore, which
had been contributed to the Company by Commodore to effect the transaction,
and the Company agreed to pay Dr. Kilambi a royalty through December 3, 2002
equal to 2% of its revenues actually received and attributed to the
commercial application of the acquired technology, except for applications
related to the radionuclides technetium and rhenium, for which Dr. Kilambi is
entitled to receive a royalty of .66% of net sales (less allowances for
returns, discounts, commissions, freight and excise or other taxes). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions -- Organization and Capitalization of the Company."
The Company has filed one United States utility patent application and two
United States provisional patent applications covering the principal features
of its CST technology. One provisional patent application covers the joint
inventions of Dr. Kilambi and Lockheed Martin, and a corresponding utility
patent application containing the specific patent claims is expected to be
filed in the near future. The Company may also pursue foreign patent
protection where it deems appropriate.
The Company's liquid membrane technology patent applications are based on
the selective combination of different known solvents, supports, diluents,
carriers and other components to separate a variety of metals, chemicals and
other targeted substances. While the Company believes that its technology
covers all separation applications, third parties may have developed, or may
subsequently assert claims to, certain of these solvents, supports, diluents,
carriers or other components for one or more specific applications. In such
event, the Company may need to acquire licenses to, or to contest the
validity of, issued or pending patents or claims of third parties.
To protect its trade secrets and the unpatented proprietary information in
its development activities, the Company requires its employees, consultants
and contractors to enter into agreements providing for the confidentiality
and the Company's ownership of such trade secrets and other unpatented
proprietary information originated by such persons while in the employ of the
Company. The Company also requires potential collaborative partners to enter
into confidentiality and non-disclosure agreements.
There can be no assurance that any patents which may hereafter be
obtained, or any of the Company's confidentiality and non-disclosure
agreements, will provide meaningful protection of the Company's confidential
or proprietary information in the case of unauthorized use or disclosure. In
addition, there can be no assurance that the Company will not incur
significant costs and expenses, including the costs of any future litigation,
to defend its rights in respect of any such intellectual property.
COMPETITION
The most common alternative methods for metals separation from solubilized
process streams presently include ion exchange, reverse osmosis,
precipitation, ultrafiltration and chromatography. The Company believes that
most of these methods have certain drawbacks, including lack of selectivity
in the separation process, inability to handle certain metals in the process
streams, and the creation of sludges and other harmful by-products which
require further post-treatment prior to disposal. For example, reverse
osmosis and ultrafiltration are incapable of separating chrome and chromium
materials from wastewater streams, and precipitation results in the
production of sludge which requires dewatering, drying and disposal in a
landfill. Certain of these other technologies also entail long process times,
and are relatively expensive.
By contrast, CST is capable of handling a broad range of compounds in a
faster and relatively inexpensive manner. Furthermore, the by-products of the
CST process consist primarily of wastewater, which can be discharged as
normal wastewater effluent, and to a substantially lesser extent and in only
rare circumstances, materials requiring landfill disposal.
Separation technologies are currently utilized by a wide variety of
domestic and international companies, including several large companies
having substantially greater financial and other resources than the Company.
Although the Company believes that CST has substantial advantages over all
other known separation technologies, any one or more of the Company's
competitors, or other enterprises not presently known, may develop
technologies which are superior to CST. To the extent the Company's
competitors are able to offer comparable
41
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services at lower prices or of higher quality, or more cost-effective
alternatives, the Company's ability to compete effectively could be
materially adversely affected. The Company believes that its ability to
compete in both the commercial and governmental sectors is dependent upon CST
being a superior, more cost-effective method to achieve separation and/or
recovery of a variety of materials in varying amounts and configurations. In
the event that the Company is unable to demonstrate that CST is a technical
and cost-effective alternative to other separation technologies on a
commercial scale, the Company may not be able to successfully compete.
RESEARCH AND DEVELOPMENT
The Company continues to perform research and development activities with
respect to CST, utilizing its internal technical staff as well as independent
consultants. Such activities have to date been entirely Company-sponsored.
Research and development expenditures were $412,340 and $462,420 for the six
month period ended December 31, 1996 and the period from November 15, 1995
(date of inception) to December 31, 1996, respectively.
The Company intends to expand its research and development efforts
following this Offering. In addition to conducting ongoing tests,
demonstrations and enhancements of CST, the Company's efforts are expected to
focus on the optimization of performance and design for module manufacturing,
development of new carriers and diluents, and investigation of additional
process applications. The Company will use a portion of the net proceeds of
this Offering for such ongoing development costs, which will include the
hiring of additional personnel. See "Use of Proceeds."
EMPLOYEES
As of December 31, 1996, the Company had 12 full-time employees, including
five with advanced scientific degrees. The Company believes that it has been
successful in attracting experienced and capable personnel. All of the
Company's employees have entered into agreements with the Company requiring
them not to disclose the Company's proprietary information, assigning to the
Company all rights to inventions made during their employment, and
prohibiting them from competing with the Company. The Company's employees are
not represented by any labor union. The Company believes that relations with
its employees are satisfactory.
PROPERTIES
The Company currently leases approximately 7,000 square feet of space in
Columbus, Ohio from an unaffiliated third party under a lease expiring on
June 30, 1997, which the Company uses as its laboratory and administrative
offices. The Company shares such space with Commodore and certain of its
other subsidiaries. As of July 1, 1996, the Company pays an allocable share
of the rent equal to $750 per month for such space.
The Company's principal executive offices are located in approximately
1,000 square feet of office space in Vienna, Virginia under a lease expiring
in December 1997. The Company pays approximately $5,000 per month for rent
and related office support services. Such office also serves as the principal
executive offices of Applied. The Company also maintains offices located in
approximately 2,000 square feet of office space in New York, New York, which
also serves as offices of Commodore, Applied, certain of their affiliates,
and Bentley J. Blum and Paul E. Hannesson, directors of each of the Company,
Commodore and Applied. The Company does not pay any rent with respect to such
offices. An allocable share of such rent would not be material. See "Certain
Relationships and Related Transactions -- Offices."
The Company has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which it began occupying in March 1997 and which will
comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. See "Use of Proceeds." Upon
commencement of full occupancy at such facility, the Company, together with
Commodore, may elect to terminate the existing lease in Columbus, Ohio.
LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or
its properties is subject.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The names and ages of the executive officers, key employees and directors
of the Company, and their positions with the Company, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- ----- --------
<S> <C> <C>
Edwin L. Harper, Ph.D .... 55 Chairman of the Board
and Chief Executive Officer
Kenneth J. Houle ......... 57 President and Chief Operating Officer
James M. DeAngelis ....... 36 Senior Vice President
Srinivas Kilambi, Ph.D. .. 32 Vice President -- Technology
Michael D. Kiehnau, P.E. . 35 Vice President -- Operations
Andrew P. Oddi ........... 35 Vice President -- Finance
Bentley J. Blum .......... 55 Director
Paul E. Hannesson ........ 56 Director
Kenneth L. Adelman, Ph.D. 49 Director(1)
David L. Mitchell ........ 74 Director(1)
William R. Toller ........ 66 Director(1)
</TABLE>
- ------
(1) Positions will be assumed upon completion of this Offering.
Edwin L. Harper, Ph.D. was appointed Chairman of the Board and Chief
Executive Officer of the Company effective January 1, 1997, and also served
as President of the Company for an interim period from January 1, 1997
through January 27, 1997. Dr. Harper has been the President and Chief
Operating Officer of both Commodore and Applied since November 18, 1996. Dr.
Harper had been the President and Chief Executive Officer of the Association
of American Railroads, a trade association for the major railroads in North
America, since January 1992. Prior to such appointment, Dr. Harper was the
Co-Chief Executive Officer of Campbell Soup Company from November 1989 to
January 1990, and its Executive Vice President and Chief Financial Officer
from 1986 to 1991. Dr. Harper has held several other senior executive officer
positions in the past, with Dallas Corporation (1983 to 1986), Emerson
Electric Company (1978 to 1981) and CertainTeed Corporation (1975 to 1978),
and served in the White House as Assistant to the President, Deputy Director
of the Office of Management and Budget and Chairman of the President's
Council on Integrity and Efficiency in Government from 1981 to 1983. Dr.
Harper holds a Ph.D. degree from the University of Virginia. Dr. Harper has
agreed to devote a majority of his business and professional time to the
Company.
Kenneth J. Houle was appointed President and Chief Operating Officer of
the Company effective January 27, 1997. Mr. Houle previously served as the
President of The Hall Chemical Company, a manufacturer of inorganic metal
catalysts and compounds, from April 1995 to September 1996. Prior to such
time, Mr. Houle had served as Vice President and Business Director of the
Personal Care Business Unit of International Specialty Products, Inc., a
producer of specialty chemicals, from April 1992 to March 1995, and the
President and Chief Executive Officer of Ruetgers - Nease Chemical Company, a
manufacturer of organic chemical intermediates and surfactants, from February
1990 to January 1991. Mr. Houle was an independent consultant in the chemical
industry from October 1996 to January 1997. Mr. Houle is a graduate of Siena
College, with a Bachelor's degree in Chemistry, and the Accounting and
Financial Management Program at Columbia University. Mr. Houle also
participated in the Masters degree program in Organic Chemistry at Iowa State
University. He is a board member of the Chemist's Club (New York, New York)
and a member of the American Chemical Society, American Institute of Chemical
Engineers and Societe de Chemie Industrielle (American section). Mr. Houle is
also a trustee and board member of the Ohio Center of Science and Industry.
James M. DeAngelis was appointed Senior Vice President of the Company
effective September 1, 1996. He served prior to such time as Vice President
- -- Marketing of Commodore and President of CFC Technologies since January
1993. Prior to January 1993, Mr. DeAngelis was completing M.B.A. and Masters
in International Management degrees from the American Graduate School of
International Management. Mr. DeAngelis holds B.S. degrees in Biology and
Physiology from the University of Connecticut.
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Srinivas Kilambi, Ph.D. has served as Vice President -- Technology of the
Company since February 1996, and was a part-time consultant to the Company
from December 1995 to the time he became an officer of the Company. Prior to
joining the Company, Dr. Kilambi was a graduate student at the University of
Tennessee, where he received a Ph.D. in Chemical Engineering in January 1996.
During the course of his graduate studies, Dr. Kilambi also performed
research at Clarkson University, Potsdam, New York (from August 1991 to June
1993) and Oak Ridge National Laboratory, Oak Ridge, Tennessee (from September
1993 to June 1996), and briefly served as an environmental consultant to
Jacobs Engineering Group, Inc. from December 1993 to May 1994. Prior to his
graduate studies in the United States, Dr. Kilambi served as the President
and Managing Director of Chemopol Complex India, Pvt. Ltd., a developer of
chemical and biochemical products, from 1987 to August 1991.
Michael D. Kiehnau, P.E. was appointed Vice President --Operations of the
Company effective January 1, 1997, after having served as its Chief Financial
Officer since September 1996. From 1992 to August 1996, Mr. Kiehnau served as
a manager for Brown & Root, Inc. (an engineering and construction firm), and
from 1983 to 1990, Mr. Kiehnau served in various engineering capacities with
the U.S. Army Corps of Engineers in the United States, Europe and Central
America. From 1990 to 1992, Mr. Kiehnau was a full-time student. Mr. Kiehnau
holds a B.S. degree from the United States Military Academy, an M.A. in
International Relations from Boston University, and an M.B.A. from the
Harvard Graduate School of Business Administration. He is a licensed
professional engineer.
Andrew P. Oddi was appointed Vice President -- Finance of the Company
effective January 1, 1997. Mr. Oddi has been the Vice President -- Finance
and Administration and Chief Financial Officer of Commodore since 1987, and
had been the Vice President of Finance, Chief Financial Officer and Secretary
of Applied from March to November 1996. From 1982 to 1987, he was employed as
an auditor with Ernst & Young, independent accountants. Mr. Oddi is a
certified public accountant.
Bentley J. Blum has been a director of the Company since August 1996. Mr.
Blum has been a director of Commodore since 1984 and a director of Applied
since July 1996. For more than 15 years, Mr. Blum has been a private investor
and currently is the sole stockholder and director of a number of
corporations which hold real estate interests, oil drilling interests and
other corporate interests. Mr. Blum is a director of Lanxide Corporation, a
research and development company developing metal and ceramic materials
("Lanxide"); Federal Resources Corporation, a company formerly engaged in
manufacturing, retail distribution and natural resources development;
Specialty Retail Services, Inc., a former distributor of professional beauty
products; and North Valley Development Corp., an inactive real estate
development company. Mr. Blum is the controlling stockholder of Commodore,
and is the brother-in-law of Paul E. Hannesson, a director of the Company.
Paul E. Hannesson has been a director of the Company since its inception
and served as its Chairman of the Board until January 1, 1997. Mr. Hannesson
has been a director of Commodore since February 1993 and currently serves as
its Chairman, and served as its President and Chief Executive Officer until
July 1996. Mr. Hannesson has also been a director of Applied and its Chief
Executive Officer since March 1996 and currently serves as its Chairman, and
was its President from March to September 1996. Mr. Hannesson was a private
investor and business consultant from 1990 to 1993. He currently serves as
Chairman of the Board of Lanxide, where he also serves on its Compensation
Committee. Mr. Hannesson is the brother-in-law of Bentley J. Blum, a director
of the Company.
Kenneth L. Adelman, Ph.D. has agreed to join the Board of Directors of the
Company upon completion of this Offering. Dr. Adelman has been a member of
the Board of Directors of Applied and Commodore since July 1996. Since 1987,
Dr. Adelman has been an independent consultant on international issues to
various corporations, including Lockheed Martin Marietta Corporation and
Loral Corporation. Previously, Dr. Adelman held positions of responsibility
in arms control during most of the Reagan Administration. From 1983 to the
end of 1987, he was Director of the United States Arms Control and
Disarmament Agency. Dr. Adelman was a Professor at Georgetown University and
a writer for Washingtonian Magazine from 1987 to 1991. Dr. Adelman
accompanied President Reagan on summits with Mikhail Gorbachev, and
negotiated with Soviet diplomats on nuclear and chemical weapons control
issues, from 1985 to 1987. He also headed the United States team on
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<PAGE>
annual arms control discussions with top-level officials of the People's
Republic of China from 1983 through 1986. From 1981 to 1983, he served as
Deputy United States Representative to the United Nations with the rank of
Ambassador Extraordinary and Plenipotentiary. Dr. Adelman holds M.A. and
Ph.D. degrees from Georgetown University.
David L. Mitchell has agreed to join the Board of Directors of the Company
upon completion of this Offering. Mr. Mitchell has been a member of the Board
of Directors of Applied and Commodore since July 1996. For the past 13 years,
Mr. Mitchell has been President and co-founder of Mitchell & Associates,
Inc., a banking firm providing financial advisory services in connection with
corporate mergers, acquisitions and divestitures. Prior to forming Mitchell &
Associates in 1982, Mr. Mitchell was a Managing Director of Shearson/American
Express Inc. from 1979 to 1982, a Managing Director of First Boston
Corporation from 1976 to 1978, and a Managing Director of the investment
banking firm of S.G. Warburg & Company from 1965 to 1976. Mr. Mitchell holds
a bachelor's degree from Yale University.
William E. Toller has agreed to join the Board of Directors of the Company
upon completion of this Offering. Mr. Toller is a director and the former
Chairman and Chief Executive Officer of Witco Corporation, a New York Stock
Exchange-traded manufacturer of quality specialty chemical and petroleum
products ("Witco"). Mr. Toller had been the Chairman and Chief Executive
Officer of Witco since October 1990 and recently retired in July 1996. Mr.
Toller joined Witco in 1984 as an executive officer when it acquired the
Continental Carbon Company of Conoco, Inc., where he had been its President
and an officer since 1955. Mr. Toller is a graduate of the University of
Arkansas with a bachelor's degree in economics, and the Stanford University
Graduate School Executive Program. He serves on the board of directors of the
Chemical Manufacturers Association and is a member of the National Advisory
Board of First Commercial Bank in Arkansas, the American Petroleum Institute
and the American Chemical Society.
BOARD COMMITTEES
The Company's Board of Directors has an Audit Committee, a Compensation
Committee and a Stock Option Committee. The responsibilities of the Audit
Committee (which, upon completion of this Offering, will consist of Messrs.
Mitchell (Chairman) and Toller) include recommending to the Board of
Directors the firm of independent accountants to be retained by the Company,
reviewing with the Company's independent accountants the scope and results of
their audits, and reviewing with the independent accountants and management
the Company's accounting and reporting principles, policies and practices, as
well as the Company's accounting, financial and operating controls and staff.
The Compensation Committee (which, upon completion of this Offering, will
consist of Messrs. Toller (Chairman), Mitchell and Hannesson) has
responsibility for establishing and reviewing employee compensation. The
Stock Option Committee (which, upon completion of this Offering, will consist
of Messrs. Adelman (Chairman), Mitchell and Blum) has responsibility for
administering and interpreting the Company's 1996 Stock Option Plan (the
"Plan"), and determining the recipients, amounts, and other terms (subject to
the requirements of the Plan) of options which may be granted under the Plan
from time to time.
COMPENSATION OF DIRECTORS
Non-management directors of the Company will receive directors' fees of
$500 per meeting for attendance at Board of Directors meetings, and are
reimbursed for actual expenses incurred in respect of such attendance. The
Company does not intend to separately compensate employees for serving as
directors.
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<PAGE>
EXECUTIVE COMPENSATION
The Company was organized in November 1995. No salaries were paid by the
Company at any time through June 30, 1996, except for approximately $33,000
paid to Dr. Kilambi in the six months ended June 30, 1996 pursuant to his
employment agreement. The Company has entered into employment agreements with
its executive officers, as more fully described below. Except for Dr.
Kilambi, whose employment agreement commenced on February 29, 1996, and Mr.
Houle, whose employment agreement commenced on January 27, 1997, the
employment agreements for the other executive officers commenced on August 1,
1996. To date, the salaries of the Company's executive officers have been
paid from the proceeds of advances made to the Company by Commodore. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
EMPLOYMENT AGREEMENTS
Each of Kenneth J. Houle, James M. DeAngelis, Srinivas Kilambi, Ph.D. and
Michael D. Kiehnau, P.E. has entered into an employment agreement with the
Company for a term expiring on December 31, 1999. Pursuant to these
employment agreements, Messrs. Houle, DeAngelis, Kilambi and Kiehnau have
agreed to devote substantially all of their business and professional time
and efforts to the business of the Company as its President and Chief
Operating Officer, Senior Vice President, Vice President -- Technology, and
Vice President -- Operations, respectively. The employment agreements provide
that Messrs. Houle, DeAngelis, Kilambi and Kiehnau shall receive a fixed base
salary at an annual rate of $180,000, $145,000, $110,000 and $88,000,
respectively, for services rendered in such positions, and each may be
entitled to receive, at the sole discretion of the Board of Directors of the
Company or a committee thereof, bonuses and/or stock options based on the
achievement (in whole or in part) by the Company of its business plan and by
the employee of fixed personal performance objectives. Each of Messrs. Houle,
DeAngelis, Kilambi and Kiehnau are entitled to participate in the Company's
Stock Option Plan and Executive Bonus Plan. See "-- Stock Options" and "--
Executive Bonus Plan" below.
The employment agreements also provide for termination by the Company upon
death or disability (defined as three aggregate months of incapacity during
any 365-consecutive day period) or upon conviction of a felony crime of moral
turpitude or a material breach of their obligations to the Company. In the
event any of the employment agreements are terminated by the Company without
cause, such executive will be entitled to compensation for the balance of the
term. The Company intends to obtain commitments for $1,000,000 key-man life
insurance policies in respect of each of Messrs. Houle, DeAngelis and
Kilambi.
The employment agreements also contain covenants (a) restricting the
executive from engaging in any activities competitive with the business of
the Company during the terms of such employment agreements and one year
thereafter, (b) prohibiting the executive from disclosure of confidential
information regarding the Company at any time, and (c) confirming that all
intellectual property developed by the executive and relating to the business
of the Company constitutes the sole and exclusive property of the Company.
Edwin L. Harper, Ph.D., the Company's Chairman of the Board and Chief
Executive Officer, entered into an employment agreement with Commodore in
October 1996 for a term expiring on December 31, 1999. Pursuant to such
employment agreement, Dr. Harper agreed to devote his business and
professional time and efforts to the business of Commodore as its President
and Chief Operating Officer, and to serve in senior executive positions with
one or more of Commodore's subsidiaries, including the Company. The
employment agreement provides that Dr. Harper shall receive a fixed base
salary at an annual rate of $375,000 for services rendered as President and
Chief Operating Officer of Commodore, as well as options to purchase an
aggregate of 2,000,000 shares of Commodore common stock, exercisable in
installments over a period of five years commencing on the date of his
employment agreement, but shall not receive any additional compensation for
services rendered in senior executive positions with any of Commodore's
subsidiaries, including the Company. Dr. Harper is also eligible to receive
options to purchase common stock of each publicly-traded subsidiary of
Commodore in the amount of .75% of such subsidiary's total outstanding shares
of common stock on the date of grant. The employment agreement also provides
that Dr. Harper shall be entitled to receive bonuses based on the achievement
(in whole or in part) by Commodore of its business plan and by Dr. Harper of
fixed personal performance objectives. In addition, Dr. Harper shall be
eligible to participate in Commodore's group health, life and other benefit
plans made available by Commodore to its employees. Dr. Harper's employment
agreement contains covenants (a) restricting him from engaging in any
activities competitive with the business of Commodore or
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<PAGE>
any of its subsidiaries during the term of such employment agreement and one
year thereafter, (b) prohibiting him from disclosure of confidential
information regarding Commodore or any of its subsidiaries at any time and
(c) confirming that all intellectual property developed by him and relating
to the business of Commodore or any of its subsidiaries constitutes the sole
and exclusive property of Commodore or its subsidiaries.
Pursuant to an assignment of technology agreement between the Company and
Dr. Kilambi, effective February 29, 1996, the Company agreed to pay to Dr.
Kilambi a royalty through December 3, 2002 equal to 2% of the Company's
revenues actually received and attributed to the commercial application of
the acquired technology, except for applications related to the radionuclides
technetium and rhenium, for which Dr. Kilambi is entitled to receive a
royalty of .66% of net sales (less allowances for returns, discounts,
commissions, freight, and excise or other taxes). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Business -- Intellectual Property" and
"Certain Relationships and Related Transactions -- Organization and
Capitalization of the Company."
STOCK OPTIONS
On September 5, 1996, Commodore (as sole stockholder of the Company)
approved the Company's 1996 Stock Option Plan, as previously adopted by the
Company's Board of Directors (the "Plan"), pursuant to which officers,
directors, and/or key employees and/or consultants of the Company can receive
incentive stock options and non-qualified stock options to purchase up to an
aggregate of 1,350,000 shares of the Company's Common Stock (of which no more
than 1,147,500 shares may be issued pursuant to non-qualified stock options).
On September 5, 1996, December 18, 1996 and January 27, 1997, the Company's
Board of Directors awarded, effective upon completion of this Offering,
non-qualified stock options under the Plan to certain key executive officers
entitling them to purchase an aggregate of 630,000 shares of Common Stock,
all of which provide for an exercise price equal to the initial public
offering price of the Common Stock, are exercisable at the rate of 20% of the
number of options granted in each of calendar 1996 (1997 in the case of Mr.
Houle) through 2000, inclusive, beginning on the closing date of this
Offering and, unless exercised, expire on December 31, 2001 (subject to prior
termination in accordance with the applicable stock option agreements). In
addition, non-qualified options to purchase an aggregate of 136,689 shares of
Common Stock were awarded, effective upon completion of this Offering, to
members of the Board of Directors who are not employed or otherwise
affiliated with the Company, all of which are exercisable at an exercise
price equal to the initial public offering price of the Common Stock, are
exercisable at the rate of 33 1/3 % of the number of options granted in each
of calendar 1996 through 1998, inclusive, beginning on the closing date of
this Offering, and, unless exercised, expire on December 31, 2001 (subject to
prior termination in accordance with the applicable stock option agreements).
The exercise price applicable to all outstanding stock options represents not
less than 100% of the fair market value of the underlying Common Stock as of
the date that such options were granted, as determined by the Board of
Directors of the Company on the date that such options were granted. In
December 1996 and January 1997, Applied, as purchaser of 100% of the capital
stock of the Company, ratified the Plan and all issuances thereunder.
With respect to incentive stock options, the Plan provides that the
exercise price of each such option must be at least equal to 100% of the fair
market value of the Common Stock on the date that such option is granted (and
110% of fair market value in the case of stockholders who, at the time the
option is granted, own more than 10% of the total outstanding Common Stock),
and requires that all such options have an expiration date not later than
that date which is one day before the tenth anniversary of the date of the
grant of such options (or the fifth anniversary of the date of grant in the
case of 10% stockholders). However, with certain limited exceptions, in the
event that the option holder ceases to be associated with the Company, or
engages in or is involved with any business similar to that of the Company,
such option holder's incentive options immediately terminate. Pursuant to the
provisions of the Plan, the aggregate fair market value, determined as of the
date(s) of grant, for which incentive stock options are first exercisable by
an option holder during any one calendar year cannot exceed $100,000.
With respect to non-qualified stock options, the Plan requires that the
exercise price of all such options be at least equal to 100% of the fair
market value of the Common Stock on the date such option is granted, provided
that non-qualified options may be issued at a lower exercise price (but in no
event less than 85% of fair market value) if the net pre-tax income of the
Company in the full fiscal year immediately preceding the date
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<PAGE>
of the grant of such option (the "Prior Year") exceeded 125% of the mean
annual average net pre-tax income of the Company for the three fiscal years
immediately preceding such Prior Year. Non-qualified options must have an
expiration date not later than that date which is the day before the eighth
anniversary of the date of the grant of the subject option. However, with
certain limited exceptions, in the event that the option holder ceases to be
associated with the Company, or engages in or becomes involved with any
business similar to that of the Company, such option holder's non-qualified
options immediately terminate.
The following table lists information on stock options granted to each of
the Company's executive officers and directors and to all executive officers
and directors as a group. All of such stock options were granted on September
5, 1996, December 18, 1996 and January 27, 1997, and (i) with respect to all
stock options other than those in favor of Messrs. Adelman, Mitchell and
Toller, are exercisable at the rate of 20% per calendar year in each of 1996
(1997 in the case of Mr. Houle) through 2000, inclusive (subject to prior
termination under the terms of the applicable option agreements), or (ii)
with respect to the stock options granted to Messrs. Adelman, Mitchell and
Toller, subject to their election as directors of the Company, are
exercisable at the rate of 33 1/3 % per calendar year in each of 1996 through
1998, inclusive (subject to prior termination under the terms of the
applicable option agreements), and, to the extent not exercised, expire on
December 31, 2001. As of the date of this Prospectus, none of such options
have been exercised.
<TABLE>
<CAPTION>
Number of Percentage of
Shares Total
Name of Underlying Type of Options Exercise
Officer or Options Option Granted Price per
Director Granted Granted Under Plan Share
------------ ------------ --------------- --------------- -----------
<S> <C> <C> <C> <C>
Edwin L. Harper, Ph.D. ............. 125,000 Non-Qualified 16.3% *
Paul E. Hannesson .................. 135,000 Non-Qualified 17.6% *
Kenneth J. Houle ................... 100,000 Non-Qualified 13.0% *
James M. DeAngelis ................. 101,250 Non-Qualified 13.2% *
Srinivas Kilambi, Ph.D. ............ 67,500 Non-Qualified 8.8% *
Michael D. Kiehnau ................. 50,625 Non-Qualified 6.7% *
Andrew P. Oddi ..................... 50,625 Non-Qualified 6.7% *
Kenneth L. Adelman, Ph.D. .......... 45,563 Non-Qualified 5.9% *
David L. Mitchell .................. 45,563 Non-Qualified 5.9% *
William R. Toller .................. 45,563 Non-Qualified 5.9% *
------------ --------------- -----------
All executive officers and directors
as a group (eleven persons) ....... 766,689 100.0%
============ ===============
</TABLE>
- ------
* To be equal to the initial public offering price per share of the Common
Stock in this Offering.
EXECUTIVE BONUS PLAN
On September 5, 1996, the Company's Board of Directors established a
five-year Executive Bonus Plan (the "Bonus Plan") to reward executive
officers and other key employees based upon the Company achieving certain
performance levels. Under the Bonus Plan, commencing with the Company's 1997
fiscal year and for each of the four fiscal years thereafter, the Company
will have discretion to award bonuses in an aggregate amount in each fiscal
year equal to 1% of the Company's consolidated net revenues for such fiscal
year, provided and on the condition that the Company achieves a consolidated
net profit before taxes of not less than 5% of consolidated net sales in each
year, and provided that the aggregate bonuses in each year (out of the
maximum amount of 1% of annual net sales) shall not be in excess of the
proportion by which the Company's consolidated net profit before taxes is
greater than 5% of consolidated net sales but less than 15% of consolidated
net sales. The Compensation Committee of the Board of Directors of the
Company will determine the allocable amounts or percentages of the bonus pool
which may be paid annually to participants. Bonuses under the Bonus Plan are
not exclusive of other bonuses that may be awarded by the Board of Directors
or the Compensation Committee from time to time.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Company has included in its Certificate of Incorporation and By-Laws
provisions to (i) eliminate the personal liability of its directors and
officers for monetary damages resulting from breaches of their fiduciary duty
(provided that such provisions do not eliminate liability for breaches of the
duty of loyalty, acts or omis-
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sions not in good faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the Delaware General
Corporation Law (the "Delaware Law"), or for any transaction from which the
director and/or officer derived an improper personal benefit), and (ii)
indemnify its directors and officers to the fullest extent permitted by the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus with respect to (i) the beneficial ownership of the Common Stock
of the Company by each beneficial owner of more than 5% of the outstanding
shares of Common Stock of the Company, each director, each executive officer
and all executive officers and directors of the Company as a group, and (ii)
the number of shares of Common Stock owned by each such person and group.
Unless otherwise indicated, the owners have sole voting and investment power
with respect to their respective shares.
<TABLE>
<CAPTION>
Percentage of Outstanding
Common Stock
Number of Shares Beneficially Owned
of Common Stock -----------------------------------
Name and Address of Beneficially After
Beneficial Owner(1) Owned(2) Before Offering Offering(15)
----------------------------------------- ---------------- --------------- ----------------
<S> <C> <C> <C>
Commodore Applied
Technologies, Inc. ..................... 10,000,000 100.0% 87.0%
Commodore Environmental Services,
Inc.(3) ................................ 10,000,000 100.0% 87.0%
Bentley J. Blum(4) ...................... 10,000,000 100.0% 87.0%
Paul E. Hannesson(5) .................... 947,059 9.5% 8.2%
Edwin L. Harper, Ph.D.(6) ............... 101,177 1.0% *
Kenneth J. Houle(7) ..................... 20,000 * *
James M. DeAngelis(8) ................... 97,092 * *
Srinivas Kilambi, Ph.D.(9) .............. 39,996 * *
Michael D. Kiehnau(10) .................. 10,125 * *
Andrew P. Oddi(11) ...................... 40,035 * *
Kenneth L. Adelman, Ph.D(12) ............ 15,188 * *
David L. Mitchell(13) ................... 15,188 * *
William R. Toller(14) ................... 15,188 * *
All executive officers and directors as a
group (eleven persons) ................. 10,000,000 100.0% 87.0%
</TABLE>
- ------
*Percentage ownership is less than 1%.
(1) The addresses of each of Commodore Applied Technologies, Inc., Commodore
Environmental Services, Inc., Bentley J. Blum, Paul E. Hannesson, Andrew
P. Oddi, Kenneth L. Adelman, Ph.D., David L. Mitchell and William R.
Toller is 150 East 58th Street, Suite 3400, New York, New York 10155.
The address of Edwin L. Harper, Ph.D. is 8000 Towers Crescent Drive,
Suite 1350, Vienna, Virginia 22182. The address of Kenneth J. Houle is
26500 Amhearst Circle, Beachwood, Ohio 44122. The address of James M.
DeAngelis and Srinivas Kilambi, Ph.D. is 1487 Delashmut Avenue,
Columbus, Ohio 43212. The address of Michael D. Kiehnau is 215 Prairie
Street, Concord, Massachusetts 01742. Bentley J. Blum and Paul E.
Hannesson are brothers-in-law.
(2) As used herein, the term beneficial ownership with respect to a security
is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, as consisting of sole or shared voting power (including the
power to vote or direct the vote) and/or sole or shared investment power
(including the power to dispose or direct the disposition of) with
respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to acquire
such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting and investment
rights.
(3) Represents all of the shares of Common Stock held by Applied, its
69.3%-owned subsidiary.
(4) Represents all of the shares of Common Stock held indirectly by
Commodore, based upon Mr. Blum's beneficial ownership of 28,224,050
shares and his spouse's ownership of 2,000,000 shares of common stock of
Commodore, representing together 51.8% of the outstanding shares of
Commodore common stock. As of December 31, 1996, there were 58,299,368
outstanding shares of Commodore common stock. Does not include 440,000
shares of Commodore common stock owned by Simone Blum, the mother of Mr.
Blum, and 395,000 shares of Commodore common stock owned by Samuel Blum,
the father of Mr. Blum. Mr. Blum disclaims any beneficial interest in
the shares of Commodore common stock owned by his spouse, mother and
father.
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(5) Consists of (a) 27,000 shares of Common Stock, representing 20% of the
135,000 stock options granted to Mr. Hannesson under the Plan, which are
currently exercisable, and (b) Mr. Hannesson's indirect beneficial
interest in the shares of Common Stock, based upon an aggregate of (i)
2,650,000 shares of Commodore common stock owned by Suzanne Hannesson,
the spouse of Mr. Hannesson, (ii) 2,650,000 shares of Commodore common
stock owned by the Hannesson Family Trust (Suzanne Hannesson and John D.
Hannesson, trustees) for the benefit of Mr. Hannesson's spouse, (iii)
currently exercisable options to purchase 500,000 and 950,000 shares of
Commodore common stock at $.53 per share and $1.12 per share,
respectively, representing collectively 11.6% of the outstanding shares
of Commodore common stock, and (iv) 80,000 shares of Applied common
stock, representing 20% of the 400,000 stock options granted to Mr.
Hannesson under Applied's 1996 Stock Option Plan, which are currently
exercisable. Does not include 1,000,000 shares of Commodore common stock
owned by each of Jon Paul and Krista Hannesson, the adult children of
Mr. Hannesson and additional stock options to purchase 2,500,000 shares
of Commodore common stock at $1.12 per share, which vest and become
exercisable ratably on November 18 of each of 1997 through 2001. Mr.
Hannesson disclaims any beneficial interest in the shares of Commodore
common stock owned by or for the benefit of his spouse and children.
(6) Consists of (a) Dr. Harper's indirect beneficial interest in the shares
of Common Stock, based upon his ownership of 375,000 shares of Commodore
common stock, and currently exercisable options to purchase 200,000
shares of Commodore common stock at $1.12 per share, of which additional
options to purchase 1,800,000 shares of Commodore common stock vest and
become exercisable ratably on November 18 of each of 1997 through 2001,
and (b) 25,000 shares of common stock, representing 20% of the 125,000
stock options granted to Dr. Harper under the Plan, which are currently
exercisable.
(7) Consists of 20,000 shares of Common Stock, representing 20% of the
100,000 stock options granted to Mr. Houle under the Plan, which are
currently exercisable.
(8) Consists of (a) Mr. DeAngelis' indirect beneficial interest in the
shares of Common Stock, based upon his ownership of 480,000 shares of
Commodore common stock, and currently exercisable options to purchase
100,000 shares of Commodore common stock at $.03 per share, and (b)
20,250 shares of Common Stock, representing 20% of the 101,250 stock
options granted to Mr. DeAngelis under the Plan, which are currently
exercisable.
(9) Consists of (a) Dr. Kilambi's indirect beneficial interest in the shares
of Common Stock, based upon his ownership of 200,000 shares of Commodore
common stock, and (b) 13,500 shares of Common Stock, representing 20% of
the 67,500 stock options granted to Dr. Kilambi under the Plan, which
are currently exercisable.
(10) Consists of 10,125 shares of Common Stock, representing 20% of the
50,625 stock options granted to Mr. Kiehnau under the Plan, which are
currently exercisable.
(11) Consists of (a) Mr. Oddi's indirect beneficial interest in the shares of
Common Stock, based upon his ownership of 250,000 shares of Commodore
common stock, and (b) 10,125 shares of Common Stock, representing 20% of
the 50,625 stock options granted to Mr. Oddi under the Plan, which are
currently exercisable.
(12) Consists of 15,188 shares of Common Stock, representing 33 1/3 % of the
45,563 stock options granted to Dr. Adelman under the Plan, which are
currently exercisable.
(13) Consists of 15,188 shares of Common Stock, representing 33 1/3 % of the
45,563 stock options granted to Mr. Mitchell under the Plan, which are
currently exercisable.
(14) Consists of 15,188 shares of Common Stock, representing 33 1/3 % of the
45,563 stock options granted to Mr. Toller under the Plan, which are
currently exercisable.
(15) Assuming the full conversion of the Convertible Preferred Stock and the
exercise of the Warrants offered hereby, the percentage of outstanding
common stock beneficially owned by Applied, Commodore and Mr. Blum would
be 60.6% and by Mr. Hannesson would be 5.7%.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
The Company was organized in November 1995 as a wholly-owned subsidiary of
Commodore. Effective February 29, 1996, pursuant to an assignment of
technology agreement between the Company and Srinivas Kilambi, Ph.D., the
Company's Vice President--Technology, the Company acquired rights to the CST
technology from Dr. Kilambi. In consideration for such technology, the
Company transferred to Dr. Kilambi 200,000 shares of common stock of
Commodore, which had been contributed to the Company by Commodore to effect
the transaction, and the Company agreed to pay Dr. Kilambi a royalty through
December 3, 2002 equal to 2% of the Company's revenues actually received and
attributed to the commercial application of the acquired technology, except
for applications related to the radionuclides technetium and rhenium, for
which Dr. Kilambi is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight, and excise or other
taxes). In exchange for Commodore's issuance of such shares to the Company,
as well as Commodore's funding and support of the Company, the Company issued
to Commodore 10,000,000 shares of Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and "Business -- Intellectual Property."
Since the Company's inception, Commodore has financed the research and
development activities of the Company through direct equity investments and
loans to the Company. As of September 30, 1996, the Company's aggregate
indebtedness to Commodore was approximately $408,000. As of December 2, 1996,
$568,000 in additional funds had been advanced by Commodore to the Company.
Commodore has agreed to contribute the entire amount of such intercompany
debt to the Company's equity, without requirement of the issuance of any
additional shares of capital stock.
Effective as of December 2, 1996, as part of a corporate restructuring to
consolidate all of its current environmental technology businesses within
Applied (its 69.3%-owned, publicly-traded subsidiary), Commodore transferred
to Applied 100% of the capital stock of the Company and 100% of the capital
stock of CFC Technologies, another subsidiary of Commodore.
In addition, Commodore assigned to Applied outstanding Company notes
aggregating $976,200 at December 2, 1996, representing advances previously
made by Commodore to the Company. Such advances have been capitalized by
Applied prior to the date of this Offering as its capital contribution to the
Company. In consideration for such transfers, Applied paid Commodore
$3,000,000 in cash and, subject to any applicable stockholder approval and
notification requirements, shall issue to Commodore a warrant expiring
December 1, 2003 to purchase 7,500,000 shares of Applied common stock at an
exercise price of $15.00 per share.
LOANS INVOLVING AFFILIATES
In March 1997, the Company entered into a $1,250,000 line of credit with a
commercial bank. The line of credit bears interest at the prime lending rate,
as announced from time to time by such bank (8.25% at March 17, 1997), and
expires on April 17, 1997. It is expected that the entire line of credit will
have been borrowed prior to the completion of this Offering to repay advances
made by Applied to the Company since December 1, 1996 for working capital
purposes. The line of credit is guaranteed by Applied and secured by cash
collateral provided by Applied. Upon completion of this Offering, the Company
will apply $1,250,000 of the net proceeds to repay such line of credit, and
such guarantee and cash collateral will be released to Applied. See "Risk
Factors -- Control by Principal Stockholder; Loans Involving Affiliates" and
"Use of Proceeds."
In addition, in the event the Over-allotment Option is exercised, the
Company intends to enter into a two- year revolving credit agreement with
Commodore. Pursuant to such agreement, the Company may lend the net proceeds,
if any, from the exercise of the Over-allotment Option (estimated to be up to
approximately $3,250,000) to Commodore for its working capital needs.
Borrowings under the agreement will be secured by Commodore's pledge of
2,000,000 shares of Applied common stock held by it and will bear interest at
the rate of 10% per annum, with interest payable quarterly on outstanding
amounts. The principal balance outstanding will be due on the second
anniversary of the date of such agreement. The Company's obligation to lend
such
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funds to Commodore is subject to a number of conditions, including review by
the Company of the proposed use of such funds by Commodore. See "Risk Factors
- -- Control by Principal Stockholder; Loans Involving Affiliates," "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
OFFICES
The Company's principal executive offices are located in approximately
1,000 square feet of office space in Vienna, Virginia under a lease expiring
in December 1997. The Company pays approximately $5,000 per month for rent
and related office support services. Such office also serves as the principal
executive offices of Applied. The Company also maintains offices located in
approximately 2,000 square feet of office space in New York, New York, which
also serves as offices of Commodore, Applied, certain of their affiliates,
and Messrs. Bentley J. Blum and Paul E. Hannesson, directors of each of the
Company, Commodore and Applied. The Company does not pay any rent with
respect to such offices. In addition, the Company currently shares facilities
in Columbus, Ohio with Commodore and certain of its other subsidiaries. The
Company pays an allocable share of rent equal to $750 per month for such
space. See "Business - Properties."
The Company has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which it began occupying in March 1997 and which will
comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. See "Use of Proceeds." Upon
commencement of full occupancy at such facility, the Company, together with
Commodore, may elect to terminate the existing lease in Columbus, Ohio.
FUTURE TRANSACTIONS
In connection with the Offering, the Company's Board of Directors has
adopted a policy whereby any future transactions between the Company and any
of its subsidiaries, affiliates, officers, directors, principal stockholders
or any affiliates of the foregoing will be on terms no less favorable to the
Company than could reasonably be obtained in "arm's length" transactions with
independent third parties, and any such transactions will also be approved by
a majority of the Company's disinterested outside directors.
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DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Certificate of Incorporation to issue an
aggregate of 50,000,000 shares of Common Stock, par value $.001 per share,
and 5,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"), which Preferred Stock may be issued with such rights,
designations and privileges (including redemption and voting rights) as the
Board of Directors may, from time to time, determine.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share and,
subject to the rights of the holders of the Preferred Stock (discussed
below), to receive dividends when and as declared by the Board of Directors,
and to share ratably in the assets of the Company legally available for
distribution in the event of the liquidation, dissolution or winding up of
the Company. The Board of Directors may not declare dividends payable to
holders of Common Stock unless and until all accrued cash dividends through
the most recent past annual dividend payment date have been paid in full to
holders of the Convertible Preferred Stock. Holders of the Common Stock do
not have subscription, redemption or conversion rights, nor do they have any
preemptive rights. In the event the Company were to elect to sell additional
shares of its Common Stock following this Offering, investors in this
Offering would have no right to purchase such additional shares. As a result,
their percentage equity interest in the Company would be diluted. The shares
of Common Stock offered hereby will be, when issued and paid for, fully-paid
and not liable for further call or assessment. Holders of the Common Stock do
not have cumulative voting rights, which means that the holders of more than
half of the outstanding shares of Common Stock (subject to the rights of the
holders of the Preferred Stock) can elect all of the Company's directors, if
they choose to do so. In such event, the holders of the remaining shares
would not be able to elect any directors. The Board is empowered to fill any
vacancies on the Board. Except as otherwise required by the Delaware Law, all
stockholder action is taken by vote of a majority of the outstanding shares
of Common Stock voting as a single class present at a meeting of stockholders
at which a quorum (consisting of a majority of the outstanding shares of the
Company's Common Stock) is present in person or by proxy.
PREFERRED STOCK
The Company is authorized by its Certificate of Incorporation to issue a
maximum of 5,000,000 shares of Preferred Stock, in one or more series and
containing such rights, privileges and limitations, including voting rights,
conversion privileges and/or redemption rights, as may, from time to time, be
determined by the Board of Directors of the Company. Preferred Stock may be
issued in the future in connection with acquisitions, financings or such
other matters as the Board of Directors deems to be appropriate. In the event
that any such shares of Preferred Stock shall be issued, a Certificate of
Designation, setting forth the series of such Preferred Stock and the
relative rights, privileges and limitations with respect thereto, shall be
filed with the Secretary of State of the State of Delaware. The effect of
such Preferred Stock is that the Company's Board of Directors alone, within
the bounds and subject to the federal securities laws and the Delaware Law,
may be able to authorize the issuance of Preferred Stock which could have the
effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect
the voting and other rights of holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may also adversely affect
the voting power of the holders of Common Stock, including the loss of voting
control to others.
CONVERTIBLE PREFERRED STOCK
The issuance of 1,875,000 shares of Convertible Preferred Stock has been
authorized by resolutions adopted by the Board of Directors and set forth in
a Certificate of Designation, Preferences and Rights of 10% Senior
Convertible Redeemable Preferred Stock filed with the Secretary of State of
the State of Delaware, which contains the designations, rights, powers,
preferences, qualifications and limitations of the Convertible Preferred
Stock. Upon issuance, the shares of Convertible Preferred Stock offered
hereby will be fully paid and non-assessable.
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Dividends. The holders of the Convertible Preferred Stock are entitled to
receive if, when and as declared by the Board of Directors out of funds
legally available therefor, cumulative dividends at the rate of $1.00 per
share per annum, payable quarterly on the last business day of March, June,
September and December of each year, commencing June 30, 1997 (each a
"Dividend Payment Date"), to the holders of record as of a date, not more
than 60 days prior to the Dividend Payment Date, as may be fixed by the Board
of Directors. Dividends accrue from the first day of the year in which such
dividend may be payable, except with respect to the first annual dividend
which shall accrue from the date of issuance of the Convertible Preferred
Stock.
Dividends on the Convertible Preferred Stock will accrue whether or not
the Company has earnings, whether or not there are funds legally available
for the payment of such dividends and whether or not such dividends are
declared. Dividends accumulate to the extent they are not paid on the
Dividend Payment Date to which they relate. Accumulated unpaid dividends will
not bear interest. Under Delaware Law, the Company may declare and pay
dividends or make other distributions on its capital stock only out of
capital surplus, as defined in the Delaware Law. On December 31, 1996, the
Company had available surplus of $981,200 (or $22,071,700 after giving effect
to this Offering). The payment of dividends and any future operating losses
will reduce such surplus of the Company, which may adversely affect the
ability of the Company to continue to pay dividends on the Convertible
Preferred Stock. In addition, no dividends or distributions may be declared,
paid or made if the Company is or would be rendered insolvent by virtue of
such dividend or distribution.
No dividends may be paid on any shares of capital stock ranking junior to
the Convertible Preferred Stock (including the Common Stock) unless and until
all accumulated and unpaid dividends on the Convertible Preferred Stock have
been declared and paid in full.
Conversion. At the election of the holder thereof, each share of
Convertible Preferred Stock will be convertible into Common Stock at any time
on or after the date of issuance and prior to redemption at a conversion rate
of 1.33 shares of Common Stock for each share of Convertible Preferred Stock
(an effective conversion price of $7.50 per share or 125% of the initial
public offering price per share of Common Stock) (the "Conversion Price").
The Conversion Price is subject to adjustment from time to time in the event
of (i) the issuance of Common Stock as a dividend or distribution on any
class of capital stock of the Company; (ii) the combination, subdivision or
reclassification of the Common Stock; (iii) the distribution to all holders
of Common Stock of evidences of the Company's indebtedness or assets
(including securities, but excluding cash dividends or distributions paid out
of earned surplus); (iv) the failure of the Company to pay a dividend on the
Convertible Preferred Stock within 30 days of a Dividend Payment Date, which
will result in each instance in a reduction of $.50 per share in the
Conversion Price but not below $3.75 per share, or 50% of the initial per
share Conversion Price of the shares of Common Stock issuable upon conversion
of the Convertible Preferred Stock; or (v) the sale of Common Stock at a
price, or the issuance of options, warrants or convertible securities with an
exercise or conversion price per share, less than the lower of the then
current Conversion Price or the then current market price of the Common Stock
(except upon exercise of options outstanding on the date of this Prospectus
and options thereafter granted to employees, officers, directors,
stockholders or consultants pursuant to existing stock option plans). No
adjustment in the Conversion Price will be required until cumulative
adjustments require an adjustment of at least 5% in the Conversion Price. No
fractional shares will be issued upon conversion, but any fractions will be
adjusted in cash on the basis of the then current market price of the Common
Stock. Payment of accumulated and unpaid dividends will be made upon
conversion to the extent of legally available funds. The right to convert the
Convertible Preferred Stock terminates on the date fixed for redemption.
In case of any consolidation or merger to which the Company is a party
(other than a consolidation or merger in which the Company is the surviving
party and the Common Stock is not changed or exchanged), or in case of any
sale or conveyance of all or substantially all the property and assets of the
Company, each share of Convertible Preferred Stock then outstanding will be
convertible from and after such merger, consolidation or sale or conveyance
of property and assets into the kind and amount of shares of stock or other
securities and property receivable as a result of such consolidation, merger,
sale or conveyance by a holder of the number of shares of Common Stock into
which such share of Convertible Preferred Stock could have been converted
immediately prior to such merger, consolidation, sale or conveyance.
Optional Cash Redemption. The Company may, at its option, redeem the
Convertible Preferred Stock, in whole but not in part, upon 30 days prior
written notice at any time after March , 2000 at a redemption price
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of $10.00 per share, plus accumulated and unpaid dividends, if the Market
Price of the Common Stock (as defined below) equals or exceeds $11.25 per
share for at least 20 consecutive trading days ending not more than 10
trading days prior to the date of the notice of redemption. The term "Market
Price" means the closing bid price as reported by the principal securities
exchange on which the Common Stock is listed or admitted to trading or by
Nasdaq or, if not traded thereon, the high bid price as reported by Nasdaq
or, if not quoted thereon, the high bid price on the OTC Bulletin Board or in
the National Quotation Bureau sheet listing for the Common Stock, or, if not
listed therein, as determined in good faith by the Board of Directors.
In addition, the Company may, at its option, redeem the Convertible
Preferred Stock in whole but not in part, at any time after March , 2001 at
the redemption prices set forth below, plus accumulated and unpaid dividends:
<TABLE>
<CAPTION>
Redemption Price
Date of Redemption Per Share
---------------------------------- --------------------
<S> <C>
March , 2001 to March , 2002 ...................... $
March , 2002 to March , 2003 ......................
March , 2003 to March , 2004 ......................
March , 2004 and thereafter ........................
</TABLE>
Provisions Relating to Optional Cash Redemption. Notice of redemption must
be mailed to each holder of Convertible Preferred Stock to be redeemed at his
last address as it appears upon the Company's registry books at least 30 days
prior to the date fixed for redemption (the "Redemption Date"). On and after
the Redemption Date, dividends will cease to accumulate on shares of
Convertible Preferred Stock called for redemption.
On or after the Redemption Date, holders of Convertible Preferred Stock
which have been redeemed shall surrender their certificates representing such
shares to the Company at its principal place of business or as otherwise
specified in the notice of redemption or exchange and thereupon either (i)
the redemption price of such shares shall be payable to the order of, or (ii)
the shares of Common Stock shall be issued to, the person whose name appears
on such certificate or certificates as the owner thereof; provided, that a
holder of Convertible Preferred Stock may elect to convert such shares into
Common Stock at any time prior to the Redemption Date.
From and after the Redemption Date, all rights of the holders of redeemed
shares shall cease with respect to such shares and such shares shall not
thereafter be transferred on the books of the Company or be deemed to be
outstanding for any purpose whatsoever.
Voting Rights. The holders of Convertible Preferred Stock are not entitled
to vote, except as set forth below and as provided by applicable law. On
matters subject to a vote by holders of Convertible Preferred Stock, the
holders are entitled to one vote per share.
The affirmative vote of at least a majority of the shares of Convertible
Preferred Stock, voting as a class, shall be required to authorize, effect or
validate the creation and issuance of any class or series of stock ranking
superior to or on parity with the Convertible Preferred Stock with respect to
the declaration and payment of dividends or distribution of assets on
liquidation, dissolution or winding-up. In the event that the Company has the
right to redeem the Convertible Preferred Stock, no such vote is required if,
prior to the time such class is issued, provision is made for the redemption
of all shares of Convertible Preferred Stock and such Convertible Preferred
Stock is redeemed on or prior to the issuance of such class.
In the event that the Company fails to pay any dividends for four
consecutive quarterly dividend payment periods, the holders of the
Convertible Preferred Stock, voting separately as a class, shall be entitled
to elect one director. Such right will be terminated as of the next annual
meeting of stockholders of the Company following payment of all accrued
dividends.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, before any payment or distribution
of the assets of the Company (whether capital or surplus), or the proceeds
thereof, may be made or set apart for the holders of Common Stock or any
stock ranking junior to Convertible Preferred Stock, the holders of
Convertible Preferred Stock will be entitled to receive, out of the assets of
the Company available for distribution to stockholders, a liquidating
distribution of $10.00 per share,
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plus any accumulated and unpaid dividends. If, upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the assets
of the Company are insufficient to make the full payment of $10.00 per share,
plus all accumulated and unpaid dividends on the Convertible Preferred Stock
and similar payments on any other class of stock ranking on a parity with the
Convertible Preferred Stock upon liquidation, then the holders of Convertible
Preferred Stock and such other shares will share ratably in any such
distribution of the Company's assets in proportion to the full respective
distributable amounts to which they are entitled.
A consolidation or merger of the Company with or into another corporation
or sale or conveyance of all or substantially all the property and assets of
the Company will not be deemed to be a liquidation, dissolution or
winding-up, voluntary or involuntary, of the Company for purposes of the
foregoing. See " Conversion."
Miscellaneous. The Company is not subject to any mandatory redemption or
sinking fund provision with respect to the Convertible Preferred Stock. The
holders of the Convertible Preferred Stock are not entitled to preemptive
rights to subscribe for or to purchase any shares or securities of any class
which may at any time be issued, sold or offered for sale by the Company.
Shares of Convertible Preferred Stock redeemed or otherwise reacquired by the
Company shall be retired by the Company and shall be unavailable for
subsequent issuance as any class of the Company's Preferred Stock.
WARRANTS
The following is a brief summary of certain provisions of the Warrants.
Reference is made to the actual text of the Warrant Agreement between the
Company, the Representative and The Bank of New York (the "Warrant Agent"), a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part, for a more complete description of the
Warrants. See "Additional Information."
Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time during the four year period commencing one
year after the date of this Prospectus, one share of Common Stock at a price
of $8.40 per share, subject to adjustment in accordance with the
anti-dilution and other provisions referred to below. The holder of any
Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Warrant Agent, with the subscription form
thereon properly completed and executed, together with payment of the
exercise price. No fractional shares will be issued upon the exercise of the
Warrants.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock, or sale by the Company
of shares of its Common Stock or other securities convertible into Common
Stock (exclusive of options and shares under the Plan, and other limited
exceptions) at a price below the then-applicable exercise price of the
Warrants. Additionally, an adjustment would be made in the case of a
reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation (other than a consolidation or
merger in which the Company is the surviving corporation) or sale of all or
substantially all of the assets of the Company, in order to enable
warrantholders to acquire the kind and number of shares of stock or other
securities or property receivable in such event by a holder of the number of
shares of Common Stock that might have been purchased upon the exercise of
the Warrant.
Redemption Provisions. Commencing 18 months after the date of this
Prospectus, the Warrants are subject to redemption at $.10 per Warrant on 30
days' prior written notice provided that the average closing sale price of
the Common Stock equals or exceeds $18.00 per share (subject to adjustment
for stock dividends, stock splits, combinations or reclassifications of the
Common Stock), for any 20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to the date of the notice
of redemption. In the event the Company exercises the right to redeem the
Warrants, such Warrants will be exercisable until the close of business on
the business day immediately preceding the date for redemption fixed in such
notice. If any Warrant called for redemption is not exercised by such time,
it will cease to be exercisable and the holder will be entitled only to the
redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at
any time on or prior to their expiration date five years from the
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date of this Prospectus, at which time the Warrants become wholly void and of
no value. If a market for the Warrants develops, the holder may sell the
Warrants instead of exercising them. There can be no assurance, however, that
a market for the Warrants will develop or continue.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do
not adversely affect the interests of the warrantholders. The Company may, in
its sole discretion, lower the exercise price of the Warrants for a period of
not less than 30 days on not less than 30 days' prior written notice to the
warrantholders and the Representative. Modification of the number of
securities purchasable upon the exercise of any Warrant, the exercise price
and the expiration date with respect to any Warrant requires the consent of
two-thirds of the warrantholders. No other modifications may be made to the
Warrants, without the consent of two-thirds of the warrantholders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered,
qualified or deemed to be exempt under the securities laws of the state of
residence of the exercising holder of the Warrants. Although the Company will
use its best efforts to have all of the shares of Common Stock issuable upon
exercise of the Warrants registered or qualified on or before the exercise
date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there can be no assurance that it will be able to
do so.
The Warrants are separately transferable immediately upon issuance.
Although the Securities will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise
qualified for sale, purchasers may buy Warrants in the aftermarket or may
move to jurisdictions in which the shares underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable.
In this event, the Company would be unable to issue shares to those persons
desiring to exercise their Warrants, and holders of Warrants would have no
choice but to attempt to sell the Warrants in a jurisdiction where such sale
is permissible or allow them to expire unexercised.
SECTION 203 OF THE DELAWARE LAW
Section 203 of the Delaware Law prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the
date of the business combination, the transaction is approved by the board of
directors of the corporation; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock, or
(iii) on or after such date, the business combination is approved by the
board of directors and by the affirmative vote of at least 66 2/3 % of the
outstanding voting stock that is not owned by the interested stockholder. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person, who, together with affiliates and associates, owns
(or within three years, did own) 15% or more of the corporation's voting
stock.
TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Convertible Preferred Stock and
the Common Stock and the Warrant Agent for the Warrants is The Bank of New
York, 101 Barclay Street, New York, New York 10286.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 11,500,000 shares
of Common Stock outstanding, of which (i) the 1,500,000 shares of Common
Stock offered hereby, (ii) the 1,500,000 shares of Convertible Preferred
Stock, (iii) the 3,000,000 Warrants, (iv) the maximum of 2,000,000 shares of
Common Stock issuable upon conversion of the Convertible Preferred Stock and
(v) the maximum of 3,000,000 shares of Common Stock issuable upon exercise of
the Warrants will be transferable without restriction under the Securities
Act. The other 10,000,000 outstanding shares of Common Stock, all of which
are owned by Applied, are "restricted securities" (as that term is defined in
Rule 144 promulgated under the Securities Act) which may be publicly sold
only if registered under the Securities Act or if sold in accordance with an
applicable exemption from registration, such as Rule 144. In general, under
Rule 144 as currently in effect, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted securities for at least one year, is entitled
to sell (together with any person with whom such individual is required to
aggregate sales), within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or, if the Common Stock is quoted on Nasdaq or another national
securities exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements, and the availability
of current public information regarding the Company. A person who has not
been an affiliate of the Company for at least three months, and who has
beneficially owned restricted securities for at least two years, is entitled
to sell such restricted shares under Rule 144 without regard to any of the
limitations described above.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 generally may be relied upon with
respect to the sale of shares purchased from the Company by its employees,
directors, officers or consultants prior to the date of this Prospectus
pursuant to written compensatory benefit plans such as the Plan and written
contracts such as option agreements. Rule 701 is also available for sales of
shares acquired by persons pursuant to the exercise of options granted prior
to the effective date of this Prospectus, regardless of whether the option
exercise occurs before or after the effective date of this Prospectus.
Securities issued in reliance on Rule 701 are "restricted securities" within
the meaning of Rule 144 and, beginning 90 days after the date of this
Prospectus, may be sold by persons other than affiliates of the Company
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirement.
Options granted under the Plan to purchase a total of 766,689 shares of
Common Stock are currently outstanding, and options to purchase an additional
583,311 shares of Common Stock are reserved for future issuance under the
Plan. Of the options granted under the Plan, 171,563 of such options are
currently exercisable, with the remaining outstanding options to become
exercisable at the rate of 171,563 options in each of December 1997 and 1998,
and 126,000 options in each of December 1999 and 2000. Shares of Common Stock
issued upon the exercise of outstanding options will be "restricted
securities" and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available. Potential
exemptions include those available under Rule 144 and Rule 701.
No prediction can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will
have on the market prices of the Common Stock, the Convertible Preferred
Stock and the Warrants prevailing from time to time. The Company and Applied,
as well as all officers and directors of the Company and all holders of
outstanding securities exercisable for or convertible into Common Stock
(other than the Representative's Warrants), have agreed not to, directly or
indirectly, issue, agree or offer to sell, sell, transfer, assign,
distribute, grant an option for purchase or sale of, pledge, hypothecate or
otherwise encumber or dispose of any beneficial interest in such securities
for a period of 13 months following the date of this Prospectus without the
prior written consent of the Representative. The sale or issuance, or the
potential for sale or issuance, of Common Stock after such 13-month period
could have an adverse impact on the market prices of the Convertible
Preferred Stock, the Common Stock and/or the Warrants. Sales of substantial
amounts of Common Stock or the perception that such sales could occur could
adversely affect prevailing market prices for the Convertible Preferred
Stock, the Common Stock and/or the Warrants. All of the shares of Convertible
Preferred Stock to be outstanding will have been registered under the
Securities Act. See "Underwriting."
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
counsel to the Company, the material federal income tax consequences of
acquiring, owning and disposing of the Convertible Preferred Stock, the
Common Stock and the Warrants are as follows, subject to the qualifications
set forth in the two immediately following paragraphs.
This discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, and Internal Revenue Service (the
"IRS") rulings and judicial decisions now in effect, all of which are subject
to change at any time by legislative, judicial or administrative action; any
such changes could be retroactively applied in a manner that could adversely
affect a holder of the Convertible Preferred Stock, Common Stock and/or
Warrants. The following does not discuss all of the tax consequences that may
be relevant to a purchaser in light of particular circumstances or to
purchasers subject to special rules, such as foreign investors, retirement
trusts, and life insurance companies. No information is provided with respect
to foreign, state or local tax laws, estate or gift tax considerations, or
other tax laws that may be applicable to particular categories of investors.
The discussion assumes that purchasers of the Convertible Preferred Stock,
Common Stock and/or Warrants will hold the Convertible Preferred Stock,
Common Stock and/or Warrants as a "capital asset" within the meaning of Code
Section 1221. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS AS TO
ANY FEDERAL, STATE, LOCAL AND FOREIGN OR OTHER TAX CONSIDERATIONS RELEVANT TO
THEM.
DIVIDENDS
Distributions with respect to the Convertible Preferred Stock and the
Common Stock will be treated as dividends and taxable as ordinary income to
the extent that the distributions are made out of the Company's current or
accumulated earnings and profits. To the extent that a distribution is not
made out of the Company's current or accumulated earnings and profits, the
distribution will constitute a non-taxable return of capital reducing the
holder's adjusted tax basis in the shares of Convertible Preferred Stock or
Common Stock held and, to the extent the distribution exceeds such basis,
will result in capital gain. At December 31, 1996, the Company had a deficit
in accumulated earnings and profits. Accordingly, the treatment of
distributions with respect to the Convertible Preferred Stock will be
determined by the Company's earnings and profits, if any, subsequent to
December 31, 1996.
Dividend income of individuals, certain closely held corporations and
personal service corporations (as defined in Code Section 469(j) may not be
offset by losses or credits from "passive activities," such as losses or
credits incurred in connection with certain rental activities or the
ownership of limited partnership interests.
Corporate stockholders will be eligible to claim a dividends-received
deduction (currently 70% of the amount of the dividend for most corporate
stockholders) with respect to distributions that are treated as dividends on
the Convertible Preferred Stock and Common Stock in calculating their taxable
income.
Under Code Section 246(c), the dividends-received deduction will not be
available with respect to any dividend on the shares of Convertible Preferred
Stock and Common Stock if such shares have been held for 45 days or less (or
90 days or less if the holder of the shares of Convertible Preferred Stock
received dividends with respect to the shares of Convertible Preferred Stock
which are attributable to a period or periods aggregating in excess of 366
days). The holding period of the shares of Convertible Preferred Stock for
this purpose is determined in accordance with certain specific rules set
forth in Code Section 246(c), which reduces the holding period for any period
where the holder's risk of loss, as to such stock, is diminished by certain
arrangements, such as the holding of an option to sell the same, or
substantially identical, securities. Regulations issued on May 26, 1993 also
reduce the holding period for any period in which a holder of Convertible
Preferred Stock has outstanding a short sale of Common Stock.
Code Section 246A provides a further restriction on the availability of
the dividends-received deduction on the shares of Convertible Preferred Stock
and Common Stock if the shares are classified as "debt-financed portfolio
stock." The shares of Convertible Preferred Stock will be classified as
debt-financed portfolio stock when
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<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
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<PAGE>
authorized the Treasury Department to promulgate new regulations regarding
the federal income tax treatment of redemption premiums with respect to
preferred stock. No such regulations have been issued and no assurance can be
given as to the treatment of the redemption premium with respect to the
Convertible Preferred Stock under any such regulations.
CONVERSION
Conversion of the Convertible Preferred Stock into Common Stock will not
result in the recognition of gain or loss (except with respect to cash
received in lieu of fractional shares). The holder's adjusted tax basis in
the Common Stock received upon conversion would be equal to the holder's tax
basis in the shares of Convertible Preferred Stock converted, reduced by the
portion of such basis allocable to the fractional share interest exchanged
for cash. The holding period for the Common Stock received upon conversion
would include the holding period of the Convertible Preferred Stock
converted. The tax basis for the Convertible Preferred Stock will equal its
cost, which is $10.00 per share at the initial public offering price,
assuming the allocation of the purchase price between the Convertible
Preferred Stock and the Warrants included in the Preferred Units is
respected. See "-- Warrants" below.
OPTIONAL CASH REDEMPTION
In the event the Company exercises its right to redeem the Convertible
Preferred Stock the surrender of the Convertible Preferred Stock for the
redemption proceeds by the holders will be treated as a sale or exchange and
the surrendering holder will recognize capital gain or loss equal to the
difference between the redemption proceeds (other than proceeds attributable
to declared but unpaid dividends, which will be taxed as dividends as
described above) and the holder's adjusted tax basis in the Convertible
Preferred Stock, provided the redemption (1) results in a "complete
termination" of the holder's stock interest in the Company (inclusive of any
Common Stock owned) under Section 302(b)(3) of the Code, (2) is
"substantially disproportionate" with respect to the holder under Section
302(b)(2) of the Code, (3) is "not essentially equivalent to a dividend" with
respect to the holder under Section 302(b)(1) of the Code, or (4) is from a
noncorporate holder in partial liquidation of the Company under Section
302(b)(4) of the Code. The constructive ownership rules of the Code must be
taken into consideration in determining whether any of these tests has been
met. If a redemption of the Convertible Preferred Stock does not meet any of
these tests, then the gross proceeds received would be treated as a
distribution taxable to the holder in the manner described under "Dividends"
above.
DISPOSITION
Except as described above, the holder of any of the Convertible Preferred
Stock or Common Stock will recognize gain or loss upon the sale, exchange,
redemption, retirement or other disposition of such securities measured by
the difference between (a) the amount of cash and the fair market value of
property received and (b) the holder's adjusted tax basis in the security
disposed of. Any gain or loss on such sale, exchange, redemption, retirement
or other disposition will be capital gain provided the security disposed of
is held as a capital asset and will be long-term capital gain if the holding
period exceeds one year. For corporate taxpayers, long-term capital gains
are taxed at the same rate as ordinary income. For individual taxpayers, net
capital gains (the excess of the taxpayer's net long-term capital gains over
his net short-term capital losses) are subject to a maximum tax rate of 28%.
The deductibility of capital losses are restricted and, in general, may only
be used to reduce capital gains to the extent thereof. However, individual
taxpayers may deduct $3,000 of capital losses in excess of their capital
gains. Capital losses which cannot be utilized because of the aforementioned
limitation are, for corporate taxpayers carried back three years and, in most
circumstances, carried forward for five years; for individual taxpayers,
capital losses may only be carried forward but without a time limitation.
BACKUP WITHHOLDING
A holder of any of the Convertible Preferred Stock or Common Stock may be
subject to backup withholding at the rate of 31% with respect to dividends
thereon unless such holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b) provides
a correct taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A holder who does not provide
the Company with a
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correct taxpayer identification number may be subject to penalties imposed by
the IRS. Any amount paid as backup withholding will be creditable against the
holder's Federal income tax liability. Holders should consult their tax
advisors regarding their qualification for exemption from backup withholding
and the procedure for obtaining any applicable exemption.
WARRANTS
A holder's basis in the Warrants will be equal to the purchase price paid
therefor. However, there can be no assurance that the Internal Revenue
Service will not allocate the aggregate purchase price for such securities in
a different manner than as set forth on the cover page of this Prospectus for
purposes of determining the respective adjusted bases for the Convertible
Preferred Stock, Common Stock and/or Warrants of a purchaser, if any or all
of such securities are purchased.
Upon a sale or exchange of the Warrants (including the receipt of cash in
lieu of a fractional share of Common Stock issuable upon exercise of the
Warrants), a holder of the Warrants will recognize capital gain or loss equal
to the difference between the amount realized upon such sale or exchange and
the holder's basis in the Warrants (as determined above). Such gain or loss
will be long-term if, at the time of the sale or exchange, the Warrants were
held for more than one year. Adjustments to the exercise price or conversion
ratio, or the failure to make adjustments, may result in the receipt of a
constructive dividend by the holder.
Upon exercise of the Warrants, a holder's tax basis in the Common Stock
acquired upon such exercise will be equal to its tax basis in the Warrants
plus the exercise price of the Warrants. The holding period with respect to
such Common Stock will commence on the date of exercise. If the Warrants
expire without being exercised, a holder will have a capital loss equal to
its tax basis in the Warrants as if the Warrants had been sold on such date
for no consideration.
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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.
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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, $7.20 per share of Common Stock and
$.12 per Warrant, for a period of four years, commencing one year after the
date of this Prospectus and are restricted from sale, transfer, assignment or
hypothecation for a period of 12 months from the date of this Prospectus,
except to officers of the Representative. The Representative's Warrants
provide for adjustment in the number of securities issuable upon the exercise
thereof as a result of certain subdivisions and combinations of the Common
Stock. The Representative's Warrants grant to the holders thereof certain
rights of registration for the securities issuable upon exercise thereof.
The Company has agreed for a period of five years after the date of this
Prospectus, if requested by the Representative, to use its best efforts to
nominate for election to the Company's Board of Directors one person
designated by the Representative. In addition, the Representative may also
designate a person to receive all notices of meetings of the Company's Board
of Directors and all other correspondence and communications sent by the
Company to its Board of Directors and to attend all such meetings of the
Company's Board of Directors. The Company has agreed to reimburse designees
of the Representative for their out-of-pocket expenses incurred in connection
with their attendance of meetings of the Company's Board of Directors.
Prior to this Offering, there has been no public market for the
Securities. Consequently, the initial public offering prices of the
Securities and the terms of the Convertible Preferred Stock and Warrants have
been determined by negotiation between the Company and the Representative and
do not necessarily bear any relationship to the Company's asset value, net
worth, or other established criteria of value. The factors considered in such
negotiations (without one factor being materially more important than
another) were prevailing market conditions, the history of and prospects for
the industry in which the Company competes, an assessment of the Company's
management and technology, the prospects of the Company, its capital
structure, Commodore's ownership interest in the Company, the market for
initial public offerings and market prices of similar securities of
comparable publicly-traded companies.
Upon the exercise of any Warrants more than one year after the date of
this Prospectus, which exercise was solicited by the Representative, and to
the extent not inconsistent with the guidelines of the National Association
of Securities Dealers, Inc. and the Rules and Regulations of the Securities
and Exchange Commission (the "Commission"), the Company has agreed to pay the
Representative a commission of 5% of the aggregate exercise price of such
Warrants. However, no compensation will be paid to the Representative in
connection with the exercise of the Warrants if (a) the market price of the
Common Stock is lower than the exercise price, (b) the Warrants are held in a
discretionary account, or (c) the Warrants are exercised in an unsolicited
transaction where the holder of the Warrant has not stated in writing that
the transaction was solicited and has not designated in writing the
Representative as soliciting agent. Unless granted an exemption by the
Commission from Rule 101 under the Securities Act, the Representative and any
soliciting broker-dealers will be prohibited from engaging in any
market-making activities or solicited brokerage activities with regard to the
Company's securities for the periods prescribed by Rule 101 before the
solicitation activity or the termination (by waiver or otherwise) of any
right that the Representative and any soliciting broker-dealers may have to
receive a fee for the exercise of the Warrants following such solicitation.
As a result, the Representative and any soliciting broker-dealers may be
unable to continue to provide a market for the Convertible Preferred Stock,
Common Stock or Warrants during certain periods while the Warrants are
exercisable. If the Representative has engaged in any of the activities
prohibited by Rule 101 during the periods described above, the Representative
has undertaken to waive unconditionally its rights to receive a commission on
the exercise of such Warrants.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Securities.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Convertible Preferred Stock, Common Stock or Warrants for
the purpose of stabilizing their respective market prices. The Underwriters
also may create a short position for the account of the Underwriters by
selling more Securities in connection with the Offering than they are
committed to purchase from the Company, and in such case may purchase
Securities in the open market fol-
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<PAGE>
lowing completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position by exercising the Over-allotment Option referred to above. In
addition, the Representative, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby
it may reclaim from an Underwriter (or dealer participating in the Offering)
for the account of other Underwriters, the selling concession with respect to
Securities that are distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Securities at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above. Reference is made to a copy of each such agreement which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part for a more complete description thereof. See "Additional Information."
In July 1996, the Representative acted as the managing underwriter in
connection with the initial public offering by Applied, the Company's sole
stockholder, pursuant to which Applied sold to the public 5,000,000 shares of
common stock and 5,000,000 redeemable common stock purchase warrants, at a
price of $6.00 per share and $.10 per warrant. In addition, the
Representative exercised an over-allotment option granted to it by Applied to
purchase an additional 750,000 shares and 750,000 warrants.
LEGAL MATTERS
The validity of the issuance of the Securities offered hereby will be
passed upon for the Company by the law firm of Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, New York, New York, as counsel to the Company in
connection with this Offering. Orrick, Herrington & Sutcliffe LLP, New York,
New York, has acted as counsel to the Underwriters in connection with this
Offering. A shareholder of Greenberg, Traurig, Hoffman, Lipoff, Rosen &
Quentel is the holder of 100,000 shares of Commodore common stock and stock
options to purchase 300,000 shares of Commodore common stock, representing
together less than 1% of Commodore's outstanding common stock.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement of which this Prospectus is a part have been audited
by Tanner + Co., independent certified public accountants, to the extent and
for the period set forth in the report of such firm contained herein and in
the Registration Statement of which this Prospectus is a part. All such
financial statements have been included in reliance upon such report given
upon the authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington D.C., a
Registration Statement under the Securities Act with respect to the
Securities offered hereby. This Prospectus, filed as a part of the
Registration Statement, does not contain certain information set forth in or
annexed as exhibits to the Registration Statement. For further information
regarding the Company and the Securities offered hereby, reference is made to
the Registration Statement and to the exhibits filed as a part thereof, which
may be inspected at the office of the Commission without charge or copies of
which may be obtained therefrom upon request to the Commission and payment of
the prescribed fee. With respect to each contract, agreement or other
document referred to in this Prospectus and filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matter involved.
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<PAGE>
The Registration Statement and such exhibits and schedules may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: New York Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048, and Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material may be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Registration Statement may
also be accessed on the World Wide Web through the Commission's Internet
address at "http://www.sec.gov."
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<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Independent Auditors' Report .................................................................... F-2
Balance Sheet as of June 30, 1996 and December 31, 1996 (unaudited) ............................. F-3
Statements of Operations for the period from November 15, 1995 (date of inception) to June 30,
1996, for the period from November 15, 1995 (date of inception) to December 31, 1995
(unaudited), the six months ended December 31, 1996 (unaudited) and November 15, 1995 (date of
inception) to December 31, 1996 (unaudited) .................................................... F-4
Statement of Stockholders' Deficit for the period from November 15, 1995 (date of inception)
through December 31, 1996 (unaudited) .......................................................... F-5
Statement of Cash Flows for the period from November 15, 1995 (date of inception) to June 30,
1996, for the period from November 15, 1995 (date of inception) to December 31, 1995
(unaudited), the six months ended December 31, 1996 (unaudited) and November 15, 1995 (date of
inception) to December 31, 1996 (unaudited) .................................................... F-6
Notes to Financial Statements. .................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Commodore Separation Technologies, Inc.
We have audited the accompanying balance sheet of Commodore Separation
Technologies, Inc. (a development stage company) as of June 30, 1996, and the
related statements of operations, stockholders' deficit, and cash flows for
the period from November 15, 1995 (date of inception) to June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Commodore Separation
Technologies, Inc. (a development stage company) as of June 30, 1996, and the
results of its operations and its cash flows for the period from November 15,
1995 (date of inception) to June 30, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 4, the
Company's significant operating losses and deficits in working capital and
stockholders' equity raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in note 4. The accompanying financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
August 1, 1996 except notes 2 and 3
which are dated October 14, 1996 and
notes 1, 4, 5 and 7, which are dated February 4, 1997
F-2
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1996 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1996
---------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash ............................................................................ $ 2,533 $ 99,285
Accounts receivable ............................................................. -- 758
Deferred offering costs ......................................................... -- 219,464
---------- --------------
Total current assets ....................................................... 2,533 319,507
---------- --------------
Property and equipment:
Technical equipment ............................................................. 7,498 201,109
Office equipment ................................................................ 3,142 7,205
---------- --------------
10,640 208,314
Less accumulated depreciation ................................................ 52 18,333
---------- --------------
Net property and equipment ................................................... 10,588 189,981
---------- --------------
Intangible assets, net of accumulated amortization of $101 and $1,300 ............. 10,206 21,156
---------- --------------
$ 23,327 $ 530,644
========== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................................................ $ 18,254 $ 59,849
Accrued liabilities ............................................................. 12,276 116,536
Due to related party ............................................................ 1,033 4,199
Note payable to stockholder ..................................................... 52,600 273,600
---------- --------------
Total current liabilities .................................................. 84,163 454,184
---------- --------------
Commitments and contingencies: .................................................... -- --
Stockholders' deficit;
Preferred stock, $.001 par value, 5,000,000 shares authorized, and no shares
issued ....................................................................... -- --
Common stock, $.001 par value, 50,000,000 shares authorized, 10,000,000 shares
issued and outstanding ....................................................... 10,000 10,000
Additional paid in capital ...................................................... 5,000 981,200
Subscription receivable ......................................................... (14,900) --
Deficit accumulated during the development stage ................................ (60,936) (914,740)
---------- --------------
Total stockholders' deficit ................................................ (60,836) 76,460
---------- --------------
$ 23,327 $ 530,644
========== ==============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
Period from Period from Amounts Since
November 15, November 15, November 15,
1995 1995 Six 1995
(Date of (Date of Months (Date of
inception) to Inception) to Ended Inception) to
June 30, December 31, December 31, December 31,
1996 1995 1996 1996
-------------- -------------- -------------- ---------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue ..................... $ -- $ -- $ 7,758 $ 7,758
-------------- -------------- -------------- ---------------
Costs and expenses:
Research and development .. 50,080 -- 412,340 462,420
Amortization .............. 101 -- 1,199 1,300
General and administrative 9,720 -- 443,423 453,143
-------------- -------------- -------------- ---------------
Total costs and expenses 59,901 -- 856,962 916,863
-------------- -------------- -------------- ---------------
Loss from operations ........ (59,901) -- (849,204) (909,105)
Interest expense ............ (1,035) -- (4,600) (5,635)
-------------- -------------- -------------- ---------------
Net loss before income
taxes ................ (60,936) -- (853,804) (914,740)
Provision for income taxes .. -- -- -- --
-------------- -------------- -------------- ---------------
--
Net loss ............... $(60,936) $ $(853,804) $(914,740)
============== ============== ============== ===============
--
Net loss per share ..... $ (.01) $ $ (.08) $ (.09)
============== ============== ============== ===============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM NOVEMBER 15, 1995 (DATE OF
INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Additional During the Stockholders'
-------------------------- Subscription Paid in Development Equity
Shares Amount Receivable Capital Stage (Deficit)
------------- --------- -------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 15, 1995 ....... -- $ -- $ -- $ -- $ --
Common stock issued for cash on
November 15, 1995 at $1 per share 100 100 -- -- 100
Forward stock split of 150,000
shares for one share on September
5, 1996 ......................... 14,999,900 14,900 (14,900) -- --
Reverse stock split of 1.50 shares
for one share on November 26,
1996 ............................ (5,000,000) (5,000) -- $ 5,000 -- --
Net loss ......................... -- -- -- -- (60,936) (60,936)
------------- --------- -------------- ------------ ------------- ---------------
Balance, June 30, 1996 ........... 10,000,000 $10,000 $(14,900) $ 5,000 $ (60,936) $ (60,836)
============= ========= ============== ============ ============= ===============
Payment of subscription receivable
(unaudited) ..................... -- -- 14,900 -- -- 14,900
Contributed capital (unaudited) .. -- -- -- 976,200 -- 976,200
Net loss (unaudited) ............. -- -- -- -- (853,804) (853,804)
------------- --------- -------------- ------------ ------------- ---------------
Balance, December 31, 1996
(unaudited) ..................... 10,000,000 $10,000 $ -- $981,200 $(914,740) $ 76,460
============= ========= ============== ============ ============= ===============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Period from Period from
November 15, November 15, November 15,
1995 1995 Six 1995
(Date of (Date of Months (Date of
Inception) to Inception) to Ended Inception) to
June 30, December 31, December 31, December 31,
1996 1995 1996 1996
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................. $(60,936) $ -- $(853,804) $ (914,740)
Adjustments to reconcile net loss to net
cash (used in) operating activities:
Depreciation and amortization .......... 153 -- 19,480 19,633
(Increase) decrease in:
Accounts receivable .................. -- -- (758) (758)
Increase (decrease) in:
Accounts payable ..................... 18,254 -- 41,595 59,849
Accrued liabilities .................. 12,276 -- 104,260 116,536
Due to related party ................. 1,033 -- 3,166 4,199
-------------- -------------- -------------- --------------
Net cash used in operating
activities ...................... (29,220) -- (686,061) (715,281)
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Acquisition of intangible assets .......... (10,307) -- (12,149) (22,456)
Purchase of property and equipment ........ (3,142) -- (4,063) (7,205)
Construction of technical equipment ....... (7,498) -- (193,611) (201,109)
-------------- -------------- -------------- --------------
Net cash used in investing
activities ...................... (20,947) -- (209,823) (230,770)
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock ........ 100 -- 14,900 15,000
Note payable to stockholder ............... 52,600 -- 221,000 273,600
Contributed capital ....................... -- -- 976,200 976,200
Increase in deferred offering costs ....... -- -- (219,464) (219,464)
-------------- -------------- -------------- --------------
Net cash provided by financing
activities ...................... 52,700 -- 992,636 1,045,336
-------------- -------------- -------------- --------------
Increase in cash .................. 2,533 -- 96,752 99,285
Cash, beginning of period ................... -- -- 2,533 --
-------------- -------------- -------------- --------------
Cash, end of period ......................... $ 2,533 $ -- $ 99,285 $ 99,285
============== ============== ============== ==============
Supplemental disclosure of cash flow
information
Cash paid during the period for:
Interest ............................... $ -- $ -- $ -- $ --
============== ============== ============== ==============
Income taxes ........................... $ -- $ -- $ -- $ --
============== ============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
JUNE 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Development Stage Company
Commodore Separation Technologies, Inc. (a development stage company) (the
"Company") was incorporated on November 15, 1995, under the laws of the state
of Delaware. As part of the capitalization of the Company, Commodore
Environmental Services, Inc. ("Commodore") contributed to the Company
Commodore's rights to the separation technology and assigned to the Company a
royalty payable to Srinivas Kilambi, Ph.D., an officer of the Company, equal
to 2% of future technology revenue that the Company may realize, except for
applications related to the radionuclides technetium and rhenium, for which
Dr. Kilambi is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight and excise or other
taxes). See Note 5.
Effective December 2, 1996, Commodore transferred 100% of the capital
stock of the Company and Company notes aggregating $976,200 to its 69.3%
subsidiary, Commodore Applied Technologies, Inc. ("Applied"), together with
the stock of another Commodore subsidiary. Applied paid Commodore $3,000,000
and, subject to any applicable stockholder approval and notification
requirements, shall issue Commodore a warrant to purchase 7,500,000 shares of
Applied common stock for such stock and note. Applied capitalized the
$976,200 of Company notes.
The Company is a process technology company which has developed and
intends to commercialize its separation technology and recovery system, known
as CST. The Company believes that CST is capable of effectively separating
and extracting various solubilized materials, including metals, organic
chemicals, biochemicals, radionuclides and other targeted substances, from
liquid and gaseous process streams. The Company has not commenced planned
principal operations. As such, the Company is considered a development stage
company as defined in SFAS No.7.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Financial
instruments subject to possible material market variations from the recorded
book value are a note payable to a stockholder and a note due to a related
party. There are no material differences in instruments from the recorded
book value as of June 30, 1996.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LOSS PER SHARE
Loss per share is computed based on the average number of shares
outstanding of 10,000,000 shares for the period November 15, 1995 (date of
inception) to June 30, 1996, for the period November 15, 1995 to December 31,
1995 (unaudited), the six months ended December 31, 1996 (unaudited) and
cumulative amounts since November 15, 1995 through December 31, 1996
(unaudited).
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major additions and
improvements are capitalized while minor replacements, maintenance and
repairs which do not increase the useful lives of the assets are expensed as
F-7
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(1) Summary of Significant Accounting Policies - (Continued)
incurred. Depreciation and amortization have been provided using a
straight-line method over estimated useful lives of the assets, which vary
from three to seven years. Research equipment has been constructed by the
Company and management anticipates it will be placed in service in 1996. In
connection with the construction, the Company has not capitalized interest as
part of the asset cost as it is not material.
INTANGIBLE ASSETS
The Company has incurred costs associated with applying for certain
patents. These costs are amortized over 17 years. Accumulated amortization
was $101 and $1,300 at June 30, 1996 and December 31, 1996 (unaudited),
respectively.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are charged to operations as
incurred except for those costs relating to the design or construction of an
asset having an economic useful life which are then capitalized and
depreciated over the estimated life.
INCOME TAXES
Deferred income taxes are provided, when material, in amounts sufficient
to give effect to timing differences between financial and tax reporting.
DEFERRED OFFERING COSTS
The Company is currently in the process of drafting and preparing a
Securities and Exchange Commission registration statement for a public
offering. Costs related to the public offering including legal, accounting,
printing, travel and other related costs are capitalized. Upon completion of
the offering these costs will be netted against the offering proceeds. Should
the offering be aborted or terminated those costs will be charged to
operations.
UNAUDITED FINANCIAL INFORMATION
The unaudited financial statements include the accounts of the Company and
include all adjustments (consisting of normal recurring items) which are, in
the opinion of management, necessary to present fairly the financial position
as of December 31, 1996 and the results of operations and cash flows for the
period from November 15, 1995 (date of inception) to December 31, 1995, for
the six months ended December 31, 1996 and the period from November 15, 1995
to December 31, 1996. The results of operations for the six months ended
December 31, 1996 are not necessarily indicative of the results to be
expected for the entire year.
(2) RELATED PARTY TRANSACTIONS
The Company owes unsecured advances of $52,600 as of June 30, 1996 to its
then sole stockholder, Commodore, and $273,600 to its current sole
stockholder, Applied, as of December 31, 1996. The Company owes interest on
the advances at the rate of 8 percent per annum. Accrued interest payable at
June 30, 1996 and December 31, 1996 is $1,035 and $0, respectively.
Effective December 2, 1996, Commodore transferred 100% of the capital
stock of the Company and Company notes aggregating $976,200 to its 69.3%
subsidiary, Applied, together with the stock of another Commodore subsidiary.
Applied paid Commodore $3,000,000 and, subject to any applicable stockholder
approval and notification requirements, shall issue Commodore a warrant to
purchase 7,500,000 shares of Applied common stock for such stock and note.
Applied capitalized the $976,200 of Company notes.
F-8
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(2) Related Party Transactions - (Continued)
The Company has unsecured non-interest bearing advances from a related
entity that has the same principal stockholder as the Company. The amount
owed to the related party at June 30, 1996 and December 31, 1996 is $1,033
and $4,199, respectively.
Through June 30, 1996, the Company had an unwritten agreement in which its
sole stockholder provided space for the Company's New York offices at no
cost, and another company under common control provided the Ohio facility
space to the Company at no cost. Subsequent to June 30, 1996, the Company is
paying a monthly rent of $750 for the Ohio space. Rent expense for the six
month period ended December 31, 1996 was $4,500.
(3) INCOME TAXES
The difference between the income tax benefit at statutory rates for the
periods ended June 30, 1996 and December 31, 1996, respectively, and the
amount presented in the financial statements are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1996
----------- --------------
(unaudited)
<S> <C> <C>
Tax benefit at statutory rates $(21,000) $(290,000)
Valuation allowance 21,000 290,000
------------ --------------
$ -- $ --
============ ==============
Deferred tax asset at June 30, 1996 and December 31,
1996 are as follows:
Net operating loss carryforward $(21,000) $(311,000)
Valuation allowance 21,000 311,000
------------ --------------
Net deferred tax asset $ -- $ --
============= ==============
</TABLE>
At June 30, 1996 and December 31, 1996, the Company had tax loss
carryforwards of approximately $61,000 and $914,000, respectively. The amount
of and ultimate realization of benefit from the net operating loss for income
tax purposes is dependent, in part, upon the tax laws in effect, future
earnings of the Company, and other future events, the effects of which cannot
be determined. A change in ownership of the Company may reduce the amount of
loss allowable. These net operating carryforwards begin to expire in 2011.
A valuation allowance has been established to reduce any potential tax
benefit as it is not known when or if the Company will realize the benefit of
net operating losses.
(4) GOING CONCERN
The Company has sustained significant operating losses. In addition, the
Company has significant deficits in working capital and stockholders' equity.
These factors create an uncertainty about the Company's ability to continue
as a going concern. The Company has received advances in working capital from
its parent company to fund operations to date. There can be no assurance that
it will continue to receive such assistance.
The Company commenced drafting and preparing a Securities and Exchange
Commission registration statement for a public offering of (i) 1,500,000
Preferred Units, each unit consisting of one share of 10% Senior Convertible
Redeemable Preferred Stock and one Redeemable Common Stock Purchase Warrant,
and (ii) 1,500,000 Common Units, each unit consisting of one share of Common
Stock and one Redeemable Common Stock Purchase Warrant. If the proposed
public offering is consummated, it will provide funds for continuing
operations. There is no assurance that the Company will be successful in
raising the needed working capital and equity through the proposed public
offering. The ability of the Company to continue as a going concern is
dependent on the Company obtaining external funding and attaining future
profitable operations. The financial statements do not include any adjustment
that might be necessary if the Company is unable to continue as a going
concern.
F-9
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(5) ROYALTY AGREEMENTS
The Company has an agreement with an officer of the Company whereby the
officer is to receive a royalty of 2% of collected revenues from the
Company's membrane separation technology through December 3, 2002, except for
applications related to the radionuclides technetium and rhenium, for which
the officer is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight and excise or other
taxes).
The Company also has a license agreement with Lockheed Martin Energy
Research Corporation, manager of the Oak Ridge National Laboratory, a U.S.
Department of Energy national laboratory, whereby Lockheed Martin is to
receive a royalty of 2% of net sales of the Company's products or processes
covered under the agreement (less allowances for returns, discounts,
commissions, freight, and excise or other taxes) up to total net sales of
$4,000,000 and 1% of net sales thereafter. In addition, the Company has
agreed to guarantee Lockheed Martin, commencing in the third year of the
agreement, an annual minimum royalty of $15,000.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standard Statement No. 121, "Accounting for Long Lived
Assets" and No. 123, "Accounting and Disclosure of Stock-Based Compensation."
Statement No. 121 is effective for years beginning after December 15, 1995.
The effect of adoption of Statement No. 121 will not have a material effect
on the Company's financial statements. Statement No. 123 is effective for
awards granted after December 31, 1994, and has required financial
presentation for years beginning after December 15, 1995. The effect of
adoption of Statement 123 is not expected to have a material effect on the
Company's financial statements.
(7) SUBSEQUENT EVENTS
Public Stock Offering
Subsequent to June 30, 1996, the Company commenced drafting and preparing
a Securities and Exchange Commission registration statement for a public
offering of (i) 1,500,000 Preferred Units, each unit consisting of one share
of 10% Senior Convertible Redeemable Preferred Stock and one Redeemable
Common Stock Purchase Warrant, and (ii) 1,500,000 Common Units, each unit
consisting of one share of Common Stock and one Redeemable Common Stock
Purchase Warrant.
EMPLOYMENT AGREEMENTS
On August 1 and September 1, 1996, and January 27, 1997, the Company
entered into employment agreements with certain officers of the Company.
Commitments under the employment agreements are as follows:
<TABLE>
<CAPTION>
Annual
Year Compensation
------ --------------
<S> <C>
1997 $ 676,000
1998 898,000
1999 898,000
2000 449,000
--------------
$2,921,000
==============
</TABLE>
Stock Option Plan
On September 5, 1996, Commodore (as sole stockholder of the Company)
approved the Company's 1996 Stock Option Plan, as previously adopted by the
Company's Board of Directors (the "Plan"), pursuant to which officers,
directors, and/or key employees and/or consultants of the Company can receive
incentive stock options and non-qualified stock options to purchase up to an
aggregate of 1,350,000 shares of the Company's Common Stock (of which no more
than 1,147,500 shares may be issued pursuant to non-qualified stock options).
On
F-10
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(7) Subsequent Events - (Continued)
September 5, 1996, December 18, 1996, and January 27, 1997, the Company's
Board of Directors awarded, effective upon completion of this Offering,
non-qualified stock options under the Plan to certain key executive officers
entitling them to purchase an aggregate of 630,000 shares of Common Stock,
all of which provide for an exercise price equal to the initial public
offering price of the Common Stock, are exercisable at the rate of 20% of the
number of options granted in each of calendar 1996 (1997 in the case of one
executive officer) through 2000, inclusive, beginning on the closing date of
this Offering and, unless exercised, expire on December 31, 2001 (subject to
prior termination in accordance with the applicable stock option agreements).
In addition, non-qualified options to purchase an aggregate of 136,689 shares
of Common Stock were awarded, effective upon completion of this Offering, to
members of the Board of Directors who are not employed or otherwise
affiliated with the Company, all of which are exercisable at an exercise
price equal to the initial public offering price of the Common Stock, are
exercisable at the rate of 33 1/3% of the number of options granted in each
of calendar 1996 through 1998, inclusive, beginning on the closing date of
this Offering, and, unless exercised, expire on December 31, 2001 (subject to
prior termination in accordance with the applicable stock option agreements).
The exercise price applicable to all outstanding stock options represents not
less than 100% of the fair market value of the underlying Common Stock as of
the date that such options were granted, as determined by the Board of
Directors of the Company on the date that such options were granted. In
December 1996 and January 1997, Applied, as purchaser of 100% of the capital
stock of the Company, ratified the Plan and all issuances thereunder.
As of January 27, 1997, the Company had granted options for 766,689
shares, of which none had been exercised.
BASIS OF PRESENTATION
On September 5, 1996, the Company amended its Certificate of Incorporation
which changed the preferred and common stock to the following:
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, $.001 par value.
Common Stock
The Company is authorized to issue up to 50,000,000 shares of common
stock, $.001 par value.
The Company also effected a forward stock split of 150,000 shares for one
share. This increased the total number of shares of Common Stock issued and
outstanding to 15,000,000 shares, which were all held by Commodore. On
November 26, 1996, the outstanding shares were reduced to 10,000,000 based on
a 1-for-1.50 reverse stock split.
The financial statements have been prepared as though the above changes in
stockholders' equity had occurred at November 15, 1995.
CAPITAL CONTRIBUTION
As of December 31, 1996, the Company had received $976,200 of advances
from Commodore, which have been reflected in the financial statements as a
contribution to equity. See Note 1.
OWNERSHIP CHANGE
Effective December 2, 1996, Commodore sold the shares of the Company to
its 69.3%-owned subsidiary, Applied. See Note 1.
F-11
<PAGE>
=============================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or any
Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the date hereof or
that the information contained herein is correct as of any date subsequent to
the date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities offered hereby by anyone in
any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so
or to any person to whom it is unlawful to make such offer or solicitation.
------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary ............................... 5
Risk Factors ..................................... 11
Use of Proceeds .................................. 21
Capitalization ................................... 23
Dividend Policy .................................. 24
Dilution ......................................... 25
Selected Financial Data .......................... 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............. 27
Business ......................................... 30
Management ....................................... 43
Executive Compensation ........................... 46
Principal Stockholders ........................... 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 Form of Certificate of Designation, Preferences and Rights of 10% Senior Convertible Redeemable
Preferred Stock of the Company.
4.1 Specimen Common Stock Certificate.
4.2 Form of Warrant Agreement among the Company, the Representative and the Bank of New York.
4.3 Specimen Warrant Certificate.
4.4 Form of Representative's Warrant Agreement between the Company and the Representative, including
form of Representative's Warrant therein.
4.5 Specimen Convertible Preferred Stock Certificate.
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel as to the legality of the Securities
being offered.
10.1 Employment Agreement, dated as of August 1, 1996, between the Company and Alan R. Burkart.
10.2 Employment Agreement, dated as of September 1, 1996, between the Company and Carl O. Magnell.
10.3 Employment Agreement, dated as of September 1, 1996, between the Company and James M. DeAngelis.
10.4 Employment Agreement, dated as of September 1, 1996, between the Company and Srinivas Kilambi,
Ph.D.
10.5 Employment Agreement, dated as of September 1, 1996, between the Company and Michael D. Kiehnau.
10.6 1996 Stock Option Plan of the Company.
10.7 Executive Bonus Plan of the Company.
10.8 Memorandum of Understanding, dated August 30, 1996, between the Company and Teledyne Brown Engineering,
a Division of Teledyne Industries, Inc., as amended.
10.9 Memorandum of Understanding, dated August 29, 1996, between the Company and Sverdrup Environmental,
Inc., as amended.
10.10 Services Agreement, dated August 31, 1996, between the Company and Commodore CFC Technologies,
Inc.
10.11 Assignment of Technology Agreement, dated as of December 4, 1995, by and between the Company (formerly
Commodore Membrane Technologies, Inc.) and Srinivas Kilambi, Ph.D.
10.12 Employment Agreement, dated as of October 31, 1996, between Commodore and Edwin L. Harper, Ph.D.
10.13 Undivided Rights (Sole Commercial) License Agreement, dated January 5, 1997, between Lockheed
Martin Energy Research Corporation and the Company.
10.14 Stock Purchase Agreement, dated as of December 2, 1996, by and between Commodore and Applied.
10.15 Form of Revolving Credit Agreement between the Company and Commodore.
10.16 Employment Agreement, dated as of January 27, 1997, between the Company and Kenneth J. Houle.
22.1 Subsidiaries of the Company.
*23.1 Consent of Tanner + Co.
23.2 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel (included in the opinion filed
as Exhibit 5.1).
23.5 Consent of DLZ Laboratories Inc.
23.6 Consent of Artesian Laboratories, Inc.
23.7 Consent of Kenneth L. Adelman, Ph.D.
23.8 Consent of David L. Mitchell.
23.9 Consent of William R. Toller.
25.1 Power of Attorney (set forth on signature page of the Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------
Unless otherwise indicated, exhibits were previously filed.
* Filed herewith.
(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. 6 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in New
York, New York on March 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. 6 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
-------------------------- ---------------------------------- -----------------
<S> <C> <C>
/s/ Edwin L. Harper Chairman of the Board and Chief March 24, 1997
------------------------- Executive Officer
Edwin L. Harper, Ph.D. (principal executive officer)
/s/ Paul E. Hannesson Director March 24, 1997
-------------------------
Paul E. Hannesson
/s/ Andrew P. Oddi Vice President -- Finance March 24, 1997
------------------------- (principal financial and
Andrew P. Oddi accounting officer)
/s/ Bentley J. Blum Director March 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 Form of Certificate of Designation, Preferences and Rights of 10% Senior Convertible Redeemable
Preferred Stock of the Company.
4.1 Specimen Common Stock Certificate.
4.2 Form of Warrant Agreement among the Company, the Representative and the Bank of New York.
4.3 Specimen Warrant Certificate.
4.4 Form of Representative's Warrant Agreement between the Company and the Representative, including
form of Representative's Warrant therein.
4.5 Specimen Convertible Preferred Stock Certificate.
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel as to the legality of the Securities
being offered.
10.1 Employment Agreement, dated as of August 1, 1996, between the Company and Alan R. Burkart.
10.2 Employment Agreement, dated as of September 1, 1996, between the Company and Carl O. Magnell.
10.3 Employment Agreement, dated as of September 1, 1996, between the Company and James M. DeAngelis.
10.4 Employment Agreement, dated as of September 1, 1996, between the Company and Srinivas Kilambi,
Ph.D.
10.5 Employment Agreement, dated as of September 1, 1996, between the Company and Michael D. Kiehnau.
10.6 1996 Stock Option Plan of the Company.
10.7 Executive Bonus Plan of the Company.
10.8 Memorandum of Understanding, dated August 30, 1996, between the Company and Teledyne Brown Engineering,
a Division of Teledyne Industries, Inc., as amended.
10.9 Memorandum of Understanding, dated August 29, 1996, between the Company and Sverdrup Environmental,
Inc., as amended.
10.10 Services Agreement, dated August 31, 1996, between the Company and Commodore CFC Technologies,
Inc.
10.11 Assignment of Technology Agreement, dated as of December 4, 1995, by and between the Company (formerly
Commodore Membrane Technologies, Inc.) and Srinivas Kilambi, Ph.D.
10.12 Employment Agreement, dated as of October 31, 1996, between Commodore and Edwin L. Harper, Ph.D.
10.13 Undivided Rights (Sole Commercial) License Agreement, dated January 5, 1997, between Lockheed
Martin Energy Research Corporation and the Company.
10.14 Stock Purchase Agreement, dated as of December 2, 1996, by and between Commodore and Applied.
10.15 Form of Revolving Credit Agreement between the Company and Commodore.
10.16 Employment Agreement, dated as of January 27, 1997, between the Company and Kenneth J. Houle.
22.1 Subsidiaries of the Company.
*23.1 Consent of Tanner + Co.
23.2 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel (included in the opinion filed
as Exhibit 5.1).
23.5 Consent of DLZ Laboratories Inc.
23.6 Consent of Artesian Laboratories, Inc.
23.7 Consent of Kenneth L. Adelman, Ph.D.
23.8 Consent of David L. Mitchell.
23.9 Consent of William R. Toller.
25.1 Power of Attorney (set forth on signature page of the Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------
Unless otherwise indicated, exhibits were previously filed.
* Filed herewith.
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
10% SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF
COMMODORE SEPARATION TECHNOLOGIES, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
I, Kenneth J. Houle, President and Chief Operating Officer of
Commodore Separation Technologies, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware, in accordance with
the provisions of Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the said Corporation, the said
Board of Directors on March ___, 1997, adopted the following resolution creating
a series of 1,897,500 shares of 10% Senior Convertible Redeemable Preferred
Stock, par value $.001 per share, designated as Convertible Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board
of Directors of this Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock of the Corporation be
and it hereby is created, and that the designation and amount thereof and the
voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
1. Designation and Number. The designation of the series of
preferred stock fixed by this resolution shall be "10% Senior Convertible
Redeemable Preferred Stock" (hereinafter referred to as the "Convertible
Preferred Stock") and the number of shares constituting such series shall be
1,897,500.
2. Rank. The Convertible Preferred Stock shall rank: (i) prior
to all of the Corporation's Common Stock, par value $.001 per share ("Common
Stock"), (ii) prior to any class or series of capital stock of the Corporation
hereafter created either specifically ranking by its terms junior to the
Convertible Preferred or not specifically ranking by its terms senior to or on
parity with the Convertible Preferred Stock (collectively with the Common Stock,
"Junior Securities"); (iii) subject to the provisions of subparagraph 4(ii)
hereof, on parity with any class or series of capital stock of the Corporation
hereafter created specifically ranking by its terms on parity with the
Convertible Preferred Stock ("Parity Securities"); and (iv) subject to the
provisions of subparagraph 4(ii) hereof, junior to any class or series of
capital stock of the Corporation hereafter created specifically ranking by its
terms senior to the Convertible Preferred Stock ("Senior
<PAGE>
Securities"), in each case, as to payment of dividends or as to distributions of
assets upon liquidation, dissolution or winding-up of the Corporation, whether
voluntary or involuntary (all such distributions being referred to collectively
as "Distributions").
3. Dividends.
(i) The dividend rate of the Convertible Preferred Stock shall
be computed at a rate of $1.00 per share per annum from the date of the issuance
of the Convertible Preferred Stock. Dividends shall be payable quarterly in
arrears out of funds legally available therefor on the last business day of
March, June, September and December of each year, commencing June 30, 1997 (each
a "Convertible Dividend Payment Date"). Dividends on shares of Convertible
Preferred Stock shall be cumulative and shall accrue (whether or not declared),
without interest, from the first day of the quarterly period in which such
dividend may be payable as herein provided, except with respect to the first
quarterly payment which shall accrue from the date of issuance. On each
Convertible Dividend Payment Date all dividends which shall have accrued on each
share of Convertible Preferred Stock outstanding on the applicable record date
shall accumulate and be deemed to become "due." Any dividend which shall not be
paid on the Convertible Dividend Payment Date on which it shall become due shall
be deemed to be "past due" (a "Cumulated Convertible Dividend") until such
Cumulated Convertible Dividend shall have been paid.
(ii) The Board of Directors shall declare and pay current
dividends out of funds legally available therefor (after giving effect to the
payment of all requisite dividends on Senior Securities).
(iii) In order to determine the holders of the Convertible
Preferred Stock entitled to receive dividends, the Corporation shall fix a
record date not more than 60 days prior to any Convertible Dividend Payment
Date. If any such Convertible Dividend Payment Date should fall on a day that is
not a Business Day, then the Corporation shall pay the applicable dividend on
the next succeeding Business Day. "Business Day" shall mean a day other than a
Saturday, Sunday on other day on which any national securities exchange or
quotation system on which the Common Stock of the Corporation is traded or
quoted is authorized or required by law to close.
(iv) The Corporation shall not: (A) pay or declare and set
apart for payment any dividends or Distributions on the Corporation's Junior
Securities, other than dividends payable in the form of additional shares of the
same Junior Security as that on which such dividend is declared, or (B) redeem,
purchase, or otherwise acquire any shares of Junior Securities or any right,
warrant or option to acquire any Junior Securities, unless full Cumulated
Convertible Dividends have been, or contemporaneously are, paid or declared and
set apart for such payment on the Convertible Preferred Stock.
(v) No full dividends shall be paid or declared and set apart
for payments on any class or series of Parity Securities for any period unless
full Cumulated Convertible Dividends have been, or contemporaneously are, paid
or declared and set apart for such payment on the Convertible Preferred Stock
for all dividend periods terminating on or prior to the date of payment of such
full Cumulated Convertible Dividends. No full dividends shall be paid or
declared and set apart for
2
<PAGE>
payment on the Convertible Preferred Stock for any period unless full cumulative
dividends have been, or contemporaneously are, paid or declared and set apart
for payment on the Parity Securities, for all dividend periods terminating on or
prior to the date of payment of such full Cumulated Convertible Dividends. When
dividends are not paid in full upon the Convertible Preferred Stock and the
Parity Securities, all dividends paid or declared and set apart for payment upon
shares of Convertible Preferred Stock and the Parity Securities shall be paid or
declared and set apart for payment pro rata, so that the amount of dividends
paid or declared and set apart for payment per share on the Convertible
Preferred Stock and the Parity Securities shall in all cases bear to each other
the same ratio that accrued and unpaid dividends per share on the shares of
Convertible Preferred Stock and the Parity Securities bear to each other
(without taking into account the dividends so paid and those so declared and set
apart for payment).
4. Voting Rights
(i) Except as may otherwise be provided herein or required by
law, the holders of the shares of Convertible Preferred Stock ("Convertible
Holders") shall not be entitled to any vote in respect of such shares.
(ii) The affirmation vote, in person or by proxy, of the
Convertible Holders of the majority of the outstanding shares of the Convertible
Preferred Stock, voting as a single class, on a one-vote-per-share of
Convertible Preferred Stock basis, shall be necessary for the Corporation to
authorize: (x) any class or series of Senior Securities; or (y) any class or
series of Parity Securities; provided, however, that no such vote shall be
required pursuant to clause (x) or (y) in the event the Corporation shall then
have the right to redeem the Convertible Preferred Stock and, prior to the date
of issuance or such new class or series of Senior Securities or Parity
Securities provision shall have been made for the redemption of all the
outstanding shares of the Convertible Preferred Stock and such redemption occurs
on or prior to the date of issuance of such new series or class of Senior
Securities or Parity Securities.
(iii) On all matters on which the Convertible Preferred Stock
is entitled to vote by law, the Convertible Holders shall be entitled to one
vote per share of Convertible Preferred Stock, voting separately as a single
class, and the presence, in person or by proxy, of the Convertible Holders of a
majority of the outstanding shares of the Convertible Preferred Stock shall
constitute a quorum.
5. Conversion Rights.
(i) Each share of Convertible Preferred Stock may be
converted, at the option of each Convertible Holder, at any time and from time
to time, into fully-paid and non-assessable shares of Common Stock; provided,
however, a Convertible Holder's right to so convert shares of Convertible
Preferred Stock shall terminate as to shares thereof that are redeemed by the
Corporation on the Redemption Date (as hereinafter defined) therefor as provided
in and subject to the terms and conditions of subparagraph 7(iii) hereof. The
number of shares of Common Stock to which the Convertible Holder of each share
of Convertible Preferred Stock shall be entitled upon conversion shall be the
product obtained by multiplying the number of shares of Convertible
3
<PAGE>
Preferred Stock to be converted by the Conversion Rate; in addition, the
Convertible Holder shall be entitled upon conversion to receive cash in an
amount equal to all Cumulated Convertible Dividends on each share of Convertible
Preferred Stock so converted, provided there are funds legally available
therefor. To the extent the Corporation shall not have funds legally available
to pay all such Cumulated Convertible Dividends, the Corporation's obligation to
make such payment shall be deferred until the first date on which the
Corporation shall have funds legally available for all or a portion of such
payment, which shall then be made in whole or in part, as the case may be, until
such Cumulated Convertible Dividends shall have been paid in full. The
"Conversion Rate," that is, the number of shares of Common Stock for which each
share of Convertible Preferred Stock may be converted, shall be determined by
dividing $10.00 by $______ ("Conversion Price"). The Conversion Price shall be
adjusted from time to time as set forth in subsection (ii) hereof. The
Corporation shall not issue fractional shares of Common Stock upon conversion of
Convertible Preferred Stock but, in lieu thereof, shall pay to a Convertible
Holder cash in an amount equal to such fraction multiplied by the Last Sale
Price of the Common Stock on the trading day prior to the date on which the
shares are converted. "Last Sale Price" shall mean the reported last sale price
regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, on the Nasdaq SmallCap Market or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted on such SmallCap Market, the average of the closing bid and asked
prices in the over-the-counter market as furnished by any New York Stock
Exchange member firm selected from time to time by the Board of Directors for
that purpose.
(ii) The Convertible Preferred Stock shall be converted into Common
Stock in the following manner:
(A) Shares of Convertible Preferred Stock received by the
Corporation in exchange for Common Stock shall be retired and canceled and shall
no longer be available for issuance as Convertible Preferred Stock.
(B) A Convertible Holder shall give written notice to the
Corporation of its desire to convert all or a portion of the shares of
Convertible Preferred Stock owned by such Convertible Holder. Such notice shall
be accompanied by certificates, duly endorsed for conversion, evidencing the
number of shares of Convertible Preferred Stock such Convertible Holder desires
to convert, together with cash, if any required by subparagraph 5(ii) (C)
hereof. The Corporation will, as soon as practicable thereafter, deliver to such
Convertible Holder or to such Convertible Holder's nominee or nominees, a
certificate or certificates for the appropriate number of shares of Common
Stock, together with cash, as provided in subparagraph 5(i), with respect to any
fractional shares otherwise issuable upon conversion, and cash in an amount
equal to all Cumulated Convertible Dividends on each share of Convertible
Preferred Stock so converted, provided there are funds legally available
therefor, and, in the event of a partial conversion, a certificate representing
the balance, it any, of the shares of Convertible Preferred Stock represented by
the surrendered certificate or certificates but not converted to Common Stock.
To the extent the Corporation shall not have funds legally available to pay all
such Cumulated Convertible Dividends, the Corporation's
4
<PAGE>
obligation to make such payment shall be deferred until the first date on which
the Corporation shall have funds legally available for all or a portion of such
payment, which shall then be made in whole or in part, as the case may be, until
such Cumulated Convertible Dividends shall have been paid in full.
(C) In the event that shares of Convertible Preferred Stock
are surrendered for conversion on any date during the period from the close of
business on a record date fixed for determining the Convertible Holders entitled
to receive dividends to the opening of business on the corresponding Convertible
Dividend Payment Date, the Convertible Holder must also deliver to the
Corporation an amount equal to the dividend payable with respect to such shares
of Convertible Preferred Stock on such Convertible Dividend Payment Date and
shall continue to be entitled to receive such dividend on such Convertible
Dividend Payment Date. In the event that the date on which the shares are
converted is the Convertible Dividend Payment Date, such Convertible Holder will
be entitled to receive the dividend payable with respect to such Convertible
Preferred Stock and shall not be required to include any payment in the amount
of the dividend payable with respect to such converted shares of Convertible
Preferred Stock.
(D) If, prior to the date on which all shares of Convertible
Preferred Stock are converted, the Corporation shall (1) pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock, (2)
subdivide its outstanding Common Stock, (3) combine its outstanding Common Stock
into a smaller number of shares of Common Stock or (4) issue by reclassification
of its Common Stock other securities of the Corporation, the Conversion Price in
effect on the opening of business on the record date for determining
stockholders entitled to participate in such transaction shall thereupon be
adjusted, or, if necessary, the right to convert shall be amended, such that the
number of shares of Common Stock receivable upon conversion of the shares of
Convertible Preferred Stock immediately prior thereto shall be adjusted so that
the Convertible Holder shall be entitled to receive, upon the conversion of such
shares of Convertible Preferred Stock, the kind and number of shares of Common
Stock or other securities of the Corporation which it would have owned or would
have been entitled to receive after the happening of any of the events described
above had the Convertible Preferred Stock been converted immediately prior to
the happening of such event or any record date with respect thereto. Any
adjustment made pursuant to this subparagraph 5(ii)(D) shall become effective
immediately after the effective date of such event and such adjustment shall be
retroactive to the record date, if any, for such event. No adjustment with
respect to any ordinary cash dividends (made out of current earnings) on shares
of Common Stock shall be made.
(E) Except in respect of transactions described in
subparagraph 5(ii)(D) above, if, prior to the date on which all shares of
Convertible Preferred Stock are converted, the Corporation shall sell or issue
Common Stock or rights, options, warrants or convertible securities (or rights,
options or warrants to purchase convertible securities) containing the right to
subscribe for or purchase shares of Common Stock (collectively, "Rights"), and
the sale or issuance price per share of Common Stock (or in the case of Rights,
the sum of the consideration paid or payable for any such Right entitling the
holder thereof to acquire one share of Common Stock and such additional
consideration paid or payable upon exercise or conversion of any such Right to
acquire one share of Common Stock) is less than the lower of the then current
Conversion Price or the then
5
<PAGE>
current Market Price of the Common Stock (as defined in subparagraph 7(i) below)
for the trading day immediately preceding the dates of such sale or issuance
(the "Current Common Stock Price"), the Conversion Price shall thereupon be
adjusted such that the number of shares of Common Stock receivable upon
conversion of the Convertible Preferred Stock shall be the number determined by
multiplying (1) the number of shares of Common Stock receivable upon conversion
of the shares of Convertible Preferred Stock immediately prior to such issuance
or sale by (2) a fraction (not to be less than one) with a numerator equal to
the product of the number of shares of Common Stock outstanding after giving
effect to such sale or issuance (and assuming, in the case of Rights that such
Rights had been fully exercised or converted, as the case may be) and the
Current Common Stock Price and a denominator equal to the sum of (x) the product
of the number of shares of Common Stock outstanding immediately before the
issuance or sale or the record date, as the case may be, multiplied by the
Current Common Stock Price and (y) the aggregate consideration received or
deemed to be received by the Corporation for the shares of Common Stock to be
issued or sold or to be purchased or subscribed for upon exercise of such
Rights. For the purposes of such adjustments, the Common Stock which the holders
of any such Rights shall be entitled to subscribe for or purchase shall be
deemed to be issued and outstanding as of the date of such issuance or sale or
the record date, as the case may be.
(F) Except in respect of transitions described in subparagraph
5(ii)(D) above, if, prior to the date on which all shares of Convertible
Preferred Stock are converted, the Corporation shall declare, order, pay or make
a dividend or other distribution (including without limitation any distribution
of cash, other or additional stock or other securities or property or options,
by way of dividend or spin-off, reclassification, recapitalization or similar
corporate rearrangement or otherwise, but excluding dividends described in
paragraph 3 or in the last sentence of subparagraph 5(ii)(D)), then, in each
case, the Conversion Price shall thereupon be adjusted such that the number of
shares of Common Stock thereafter receivable upon the conversion of shares of
Convertible Preferred Stock shall be determined by multiplying (1) the number of
shares of Common Stock theretofore receivable upon conversion of the shares of
the Convertible Preferred Stock by (2) a fraction of which the numerator shall
be the then Conversion Price on the record date for the determination of
stockholders entitled to receive such dividend or other distribution, and of
which the denominator shall be such Conversion Price on such date minus the
amount of such dividend or distribution applicable to one share of Common Stock.
The Board of Directors of the Corporation shall determine the amount of such
dividend or distribution allocable to one share of Common Stock and such
determination, if reasonable and based upon the Board of Directors' good faith
business judgment, shall be binding upon the Convertible Holder. Such adjustment
shall be made whenever any such distribution is made and shall become effective
on the date of distribution retroactive to the record date for the determination
of stockholders entitled to receive such distribution.
(G) Upon the expiration of any Rights if such shall not have
been exercised, the Conversion Price, to the extent that shares of Convertible
Preferred Stock have not been converted, shall, upon such expiration, be
readjusted and shall thereafter be such as they would have been had they been
originally adjusted (or had the original adjustment not been required, as the
case may be) on the basis of (1) the fact that the only shares of Common Stock
so issued were the shares of Common Stock, if any, actually issued or sold upon
the exercise of such Rights and (2) such shares
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of Common Stock, if any, were issued or sold for the consideration actually
received by the Corporation (including for purposes hereof, any underwriting
discounts or selling commissions paid by the Corporation) for the issuance, sale
or grant of all such Rights, whether or not exercised; provided, however, that
no such readjustment shall have the effect of increasing the Conversion Price by
a proportion (relative to the Conversion Price in effect immediately prior to
such readjustment) in excess of the inverse of the aggregate proportional
adjustment thereof made in respect of the issue, sale, grant or assumption of
such Rights.
If the consideration provided for in any Right or the
additional consideration, if any, payable upon the conversion or exchange of any
right shall be reduced, or the rate at which any Right is exercisable or
convertible into or exchangeable for shares of Common Stock shall be increased,
at any time under or by reason of provisions with respect thereto designed to
protect against dilution, then, effective concurrently with each such change,
the Conversion Price then in effect shall first be adjusted to eliminate the
effects (if any) of the issuance (or deemed issuance) of such Right on the
Conversion Price and then readjusted as if such Right had been issued on the
date of such change with the terms in effect after such change, but only if as a
result of such readjustment the Conversion Price then in effect hereunder is
thereby reduced.
(H) If, prior to the date on which all shares of Convertible
Preferred Stock are converted, the Corporation shall (1) consolidate with or
merge with or into another person resulting in a reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock or (2) sell or
otherwise transfer all or substantially all of the assets of the Corporation,
then a Convertible Holder shall thereafter have the right to convert such shares
of Convertible Preferred Stock into the kind and amount of stock, securities or
assets, if any, such Convertible Holder would have been entitled to receive upon
such consolidation, merger, sale or transfer had such Convertible Holder
converted its shares of Convertible Preferred Stock into Common Stock
immediately prior to such transaction.
(I) For the purposes of this paragraph 5: (x) the
consideration for the issue or sale of any additional shares of Common Stock
shall, irrespective of the accounting treatment of such consideration, be deemed
to be the consideration actually received by the Corporation and (1) insofar as
it consists of cash, be computed at the net amount of cash received by the
Corporation, plus any expense paid or incurred by the Corporation and any
commissions or compensation paid or concessions or discounts allowed to
underwriters, dealers or others performing similar services in connection with
such issue or sale, (2) insofar as it consists of property (including
securities) other than cash, be computed at the fair value thereof at the time
of such issue or sale, as determined in good faith by the Board of Directors of
the Corporation, and (3) in case additional shares of Common Stock are issued or
sold together with other stock or securities or other assets of the Corporation
for a consideration which covers both, be the portion of such consideration so
received, computed as provided in clauses (1) and (2) above, allocable to such
additional shares of Common Stock, all as determined in good faith by the Board
of Directors of the Corporation; (y) additional shares of Common Stock deemed to
have been issued pursuant to subparagraph 5(ii)(G) relating to Rights, shall be
deemed to have been issued for a consideration per share determined by dividing
(1) the total amount, if any, received by the Corporation as consideration for
the issue, sale or grant of the Rights in question, less the value of the Rights
not actually received by the
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Corporation as consideration therefor, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provisions contained therein for a subsequent adjustment
of such consideration to protect against dilution) payable to the Corporation
upon the exercise in or the conversion or exchange of such Rights or, in the
case of Rights which are rights, options or warrants for convertible securities,
the exercise of such Rights for convertible securities and the conversion or
exchange of such convertible securities, in each case computing such
consideration as provided in the foregoing clause (x) of this subparagraph
5(ii)(I), by (2) the maximum number of shares of Common Stock (as set forth in
the instruments relating thereto, without regard to any provision contained
therein for subsequent adjustment of such number to protect against dilution)
issuable upon the exercise, conversion or exchange of such Rights; and, (z)
additional shares of Common Stock deemed to have been issued pursuant to
subparagraph 5(ii)(D) and (F), relating to stock dividends, stock splits, etc.,
shall be deemed to, have been issued for no consideration. For the purposes of
this paragraph 5, the term "Common Stock" shall mean (i) the class of stock
designated as Common Stock in the Certificate of Incorporation of the
Corporation as may be amended as of the date hereof, or (ii) any other class of
stock resulting from successive changes or reclassification of such Common Stock
consisting solely of changes in par value or from par value to no par value, or
from no par value to par value.
(J) No adjustment in the Conversion Price shall be required
unless explicitly provided for in this paragraph 5 and unless such adjustment
(plus any adjustments not previously made by reason of this subparagraph
5(ii)(J)), would require an increase or decrease of at least five percent (5%)
in such price; provided, however, that any adjustments which by reason of this
subparagraph 5(ii)(J) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
subparagraph 5(ii)(J) shall be made to the nearest cent.
(K) No adjustment shall be made (1) upon conversion of the
Convertible Preferred Stock, (2) upon exercise of options and/or warrants of the
Corporation outstanding on the date hereof, and (3) with respect to options
thereafter granted to employees, officers, directors or stockholders of or
consultants to the Corporation, pursuant to existing stock option plans.
(L) Whenever the Conversion Price is adjusted pursuant to any
of the foregoing provisions of this paragraph 5, the Corporation shall forthwith
prepare a written statement signed by the president or any vice president and
the treasurer or any assistant treasurer or the secretary or any assistant
secretary of the Corporation, setting forth the adjusted Conversion Rate
determine as provided in the paragraph 5, and in reasonable detail the facts
requiring such adjustment. Such statement shall be filed among the permanent
records of the Corporation and a copy thereof shall be furnished to any
Convertible Holder requesting the same, and shall at all reasonable times during
business hours be open to inspection by the Convertible Holders. Within 10 days
of the event requiring an adjustment, the Corporation shall also cause a notice,
stating that such an adjustment has been made and setting forth the adjusted
Conversion Rate, to be mailed, first-class, postage prepaid, to all then
Convertible Holders of record at their addresses as the same appear on the stock
records of the Corporation.
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(M) If a Convertible Holder has delivered notice to the
Corporation of its desire to convert all or a portion, of its shares of
Convertible Preferred Stock, and certificates, duly endorsed for conversion in
respect of such shares and cash, if any, required by subparagraph 5(ii)(C)
hereof, then all shares of Convertible Preferred Stock so tendered to the
Corporation shall be deemed to be no longer outstanding and, notwithstanding the
failure of the Corporation to issue the Common Stock, such Convertible Holder
shall be deemed, for all purposes (except as set forth in the next sentence of
this subparagraph 5(ii)(M)), to be a holder of the number of shares of Common
Stock into which the shares of Convertible Preferred Stock such Convertible
Holder is entitled to receive pursuant to the terms of this paragraph 5 in each
case as of the close of business on the date on which such conversion notice is
delivered. In the event such Convertible Holder has delivered notice to the
Corporation of his desire to convert all or a portion of his shares of
Convertible Stock, such Convertible Holder shall retain the right to receive all
Cumulated Convertible Dividends payable on the shares so converted, as provided
in this paragraph 5, notwithstanding such conversion.
(iii) The Corporation shall not, by amendment of its Certificate of
Incorporation as amended as of the date hereof, or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation but shall at all times in good faith assist in the carrying out of
all the provisions of this paragraph 5. The Corporation shall at all times
reserve and keep available out of its authorized but unissued Common Stock the
full number or shares of Common Stock deliverable upon the conversions of all
the then outstanding shares of Convertible Preferred Stock and shall take all
such action and obtain all such permits or orders as may be necessary to enable
the Corporation to validly and legally issue fully paid and non-assessable
shares of Common Stock upon the conversion of Convertible Preferred Stock. The
Corporation shall obtain, prior to or concurrently with the first issuance of
the Convertible Preferred Stock, the authorization for the listing of shares of
Common Stock issuable upon conversion of the Convertible Preferred Stock on the
Nasdaq National Market and shall use its best efforts to maintain for as long as
any share of Convertible Preferred Stock shall be outstanding such authorization
or authorization for the listing of such shares on a national securities
exchange on which the Common Stock may hereafter be listed. The Corporation
shall pay any and all transfer, stamp and other like taxes that may be payable
in respect of tho issuance or delivery to a Convertible Holder of shares of
Common Stock or conversion of the Convertible Preferred Stock by such holder.
6. Liquidation Price. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the amount that shall be paid to a Convertible Holder of each share
of Convertible Preferred Stock shall be $10.00 and an additional sum equal to
all Cumulated Convertible Dividends on a share of Convertible Preferred Stock
(hereinafter called the "Liquidation Price"), and no more. Upon any liquidation,
dissolution or winding-up of the Corporation, the Convertible Holders will be
entitled to be paid, after payment or provision for payment of the debts and
other liabilities of the Corporation and after payment or provision for payment
is made upon any Senior Securities, but before any Distribution or payment is
made upon any Junior Securities, an amount in cash equal to the aggregate
Liquidation Price of all shares outstanding, and the Convertible Holders will
not be entitled to any further payment. If,
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upon any such liquidation, dissolution or winding-up of the Corporation, the
Corporation's assets to be distributed among the Convertible Holders and the
holders of Parity Securities (the "Parity Holders") are insufficient to permit
payment in full to such Convertible Holders and the Parity Holders of the
aggregate amount which they are entitled to be paid, then the available assets
to be distributed will be distributed ratably among such Convertible Holders and
Parity Holders based upon the aggregate Liquidation Price of the Convertible
Preferred Stock and the aggregate liquidation preference of any Parity
Securities held by each such Convertible Holder and Parity Holder, respectively.
The Corporation will mail written notice of such liquidation, dissolution or
winding-up, not less than 30 days prior to the payment date stated therein, to
each Convertible Holder of record. Neither the consolidation or merger of the
Corporation into or with any other corporation or any other person, nor the sale
or transfer by the Corporation of all or any part of its assets, nor the
reduction of the capital stock of the Corporation will be deemed to be a
liquidation, dissolution or winding-up of the Corporation within the meaning of
paragraphs 2 and 6.
7. Redemption.
(i) Time of Redemption. The Corporation may, at its option, redeem
shares of the Convertible Preferred Stock, in whole or in part, out of funds
legally available therefor, by action of the Board of Directors, at any time
after March __, 2000, at a redemption price of $10.00 per share, plus all
Cumulated Convertible Dividends on a share, plus all Cumulated Convertible
Dividends on a share of Convertible Preferred Stock, upon notice and in the
manner set forth in, and subject to the conditions of, this paragraph 7;
provided the current market price of the Common Stock (the closing sale price as
reported by the principal securities exchange on which the Common Stock is
listed or admitted to trading or by the Nasdaq SmallCap Market, 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 of the Corporation) (the
"Market Price") equals or exceeds $_____ per share for at least 20 consecutive
trading days ending no more than 10 trading days prior to the date of notice of
redemption. In addition, the Corporation may, at its option, redeem the
Convertible Preferred Stock, in whole or in part, out of funds legally available
therefor, by action of the Board of Directors, at any time on or after March __,
2001 at the per share redemption prices set forth below plus all Cumulated
Convertible Dividends on a share of Convertible Preferred Stock, upon notice and
in the manner set forth in, and subject to the conditions of this paragraph 7:
Redemption Price
Date of Redemption Per Share
------------------ ---------
March , 2001 to March , 2002 ................... $
March , 2003 to March , 2004 ................... $
March , 2005 to March , 2006 ................... $
March , 2007 and thereafter ...................... $
(ii) Priority of Redemption. None of the shares of any class or series
of Parity Securities or Junior Securities shall be redeemed, repurchased or
otherwise acquired unless full Cumulated
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Convertible Dividends have been, or contemporaneously are, paid or declared and
set apart for such payment on the Convertible Preferred Stock for all dividend
periods terminating on or prior to the date of payment of such full Cumulated
Convertible Dividends. None of the shares of Convertible Preferred Stock shall
be redeemed, repurchased or otherwise acquired unless full cumulative dividends
have been, or contemporaneously are, paid or declared and set apart for payment
on the Parity Securities or Senior Securities, for all dividend periods
terminating on or prior to the Redemption Date of Convertible Preferred Stock.
8. Procedures for Redemption. The Convertible Preferred Stock shall be
redeemed pursuant to subparagraph 7(i) in the following manner:
(A) Shares of the Convertible Preferred Stock redeemed,
repurchased or otherwise acquired by the Corporation shall be retired and
canceled and shall no longer be available for issuance as Convertible Preferred
Stock.
(B) In the event of a redemption of shares of Convertible
Preferred Stock pursuant to subparagraph 7(i), notice of redemption of shares of
Convertible Preferred Stock shall be given by the Corporation, not less than 30
nor more than 60 days prior to the Business Day designated in such notice (the
"Redemption Date"), by first class mail to Convertible Holders at their
respective addresses then appearing on the records of the Corporation, and shall
also be published, on or about the date of such mailing, in the National Edition
of the Wall Street Journal. Such notice of redemption shall specify the
Redemption Date, the redemption price plus the Cumulated Convertible Dividends
on a shares of Convertible Preferred Stock, if any (the "Redemption Price"), the
total number of shares of Convertible Preferred Stock to be redeemed and, if
fewer than all the shares held by such Convertible Holder, the number of shares
to be redeemed from such holder, and the place or places of payment. The
conversion rights of the Convertible Holders shall continue until the Redemption
Date (provided no default by the Corporation in the payment of the redemption
price shall have occurred and be continuing, and in the event of any such
default the Convertible Holders' conversion rights shall continue until such
shares are actually redeemed, exchanged or converted, and such notice shall
state the then effective Conversion Price and that the right of Convertible
Holders to exercise their conversion rights shall terminate at the close of
business on the Redemption Date (provided no default by the Corporation in the
payment of the redemption price shall have occurred and be continuing). On or
before the Redemption Date, each Convertible Holder shall surrender to the
Corporation or its designated agent, at such place as it may designate in the
redemption notice, certificates, duly endorsed for transfer, evidencing the
number of shares of Convertible Preferred Stock held by such Convertible Holder
and being redeemed. Upon such surrender, the Convertible Holder shall be
entitled to receive payment of the Redemption Price without interest.
(C) If, on the Redemption Date, (1) notice of redemption has
been mailed or delivered as provided herein, (2) the Corporation has deposited
with an independent paying agent funds necessary to pay the amount due for all
shares of Convertible Preferred Stock subject to such redemption, and (3) all
such funds are available for the sole purpose of paying such amount, then,
unless the Corporation defaults on the payment of the Redemption Price, all
shares of Convertible Preferred Stock subject to redemption shall, whether or
not certificates for such shares have been
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surrendered for cancellation, be deemed to be no longer outstanding for any
purpose and all rights with respect to such shares shall cease, except the right
of the Convertible Holder to receive the redemption price, without interest;
provided, however, that the Corporation shall not have to so redeem any shares
of Convertible Preferred Stock which have been converted to Common Stock prior
to the date of such redemption. If the Corporation shall not have funds legally
available for redemption of shares to be redeemed pursuant to subparagraph 7(i)
on the Redemption Date, the notice of redemption shall be null and void and at
such time as the Corporation shall have funds legally available for redemption
of such shares and shall determine to redeem the Convertible Preferred Stock on
the terms and conditions set forth in subparagraph 7(i), a new notice of
redemption to Convertible Holders shall be required to effect such redemption.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by Kenneth J. Houle, its President and Chief Operating
Officer, and attested to by its Secretary this ____ day of March 1997.
COMMODORE SEPARATION TECHNOLOGIES, INC.
By: __________________________________________
Kenneth J. Houle
President and Chief Operating Officer
ATTEST:
_________________________
Secretary
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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 February 4, 1997 relating to
the financial statements of Commodore Separation Technologies, Inc. (a
development stage company), and to the reference to our Firm under the
caption "Experts" in the prospectus.
TANNER + CO.
Salt Lake City, Utah
March 24, 1997
