<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 1997
REGISTRATION NO. 333-11813
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
AMENDMENT NO. 7
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)
Delaware 3559 11-3299195
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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
<TABLE>
<CAPTION>
Item
Number Item Caption in Form S-1 Location in Prospectus
------- -------------------------- ------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page of Prospectus; Additional
Prospectus Information; Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting
6. Dilution Dilution
7. Selling Security Holders Not applicable
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to Be Registered Prospectus Summary; Capitalization; Description of
Securities; Certain Federal Income Tax
Considerations
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to the Registrant Outside Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; Use of Proceeds;
Capitalization; Dividend Policy; Dilution; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Executive
Compensation; Principal Stockholders; Certain
Relationships and Related Transactions; Description
of Securities; Shares Eligible for Future Sale;
Financial Statements; Outside Back Cover Page of
Prospectus
12. Disclosure of Commission Position on Not applicable
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MARCH 28, 1997
PROSPECTUS
UNITS CONSISTING OF 600,000 SHARES OF 10% SENIOR
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
600,000 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) 600,000 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 600,000 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
1.67 shares of Common Stock for each share of Convertible Preferred Stock, an
effective conversion price of $6.00 per share or 120% of the initial public
offering price per share of Common Stock (subject to adjustment under certain
circumstances). Commencing April____, 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 $10.00 per share, or, after April
____, 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 $5.50 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 $15.00 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 $5.10 per unit,
respectively, with the Convertible Preferred Stock, Common Stock and Warrants
priced at $10.00 per share, $5.00 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." The
Convertible Preferred Stock, the Common Stock and the Warrants have been
approved for listing on the Nasdaq Small-Cap Market ("Nasdaq") under the symbols
"CXOTP," "CXOT" and "CXOTW," respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 11 AND "DILUTION."
------
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
Underwriting Proceeds to
Price to Public Discount (1) Company (2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Unit ...................... $10.10 $.808 $9.292
- -------------------------------------------------------------------------------------------------------------
Per share of Convertible Preferred Stock $10.00 $ .80 $9.20
- -------------------------------------------------------------------------------------------------------------
Per Warrant ............................ $ .10 $.008 $.092
- -------------------------------------------------------------------------------------------------------------
Per Common Unit ......................... $ 5.10 $.408 $4.692
- -------------------------------------------------------------------------------------------------------------
Per share of Common Stock .............. $ 5.00 $ .40 $4.60
- -------------------------------------------------------------------------------------------------------------
Per Warrant ............................ $ .10 $.008 $.092
- -------------------------------------------------------------------------------------------------------------
Total (3) ............................... $13,710,000 $1,096,800 $12,613,200
=============================================================================================================
(see footnotes on following page)
</TABLE>
The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Securities will be made against payment at the offices of
National Securities Corporation, Seattle, Washington, on or about ______, 1997.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is _______, 1997
<PAGE>
(continued from cover page)
- ------
(1) Does not include additional compensation payable to National Securities
Corporation, the representative of the several Underwriters (the
"Representative"), in the form of a non-accountable expense allowance. In
addition, see "Underwriting" for information concerning indemnification and
contribution arrangements with the Underwriters and other compensation
payable to the Representative.
(2) Before deducting estimated expenses of $533,500 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option exercisable within 45
days after the date of this Prospectus to purchase up to 90,000 additional
shares of Convertible Preferred Stock, up to 225,000 additional shares of
Common Stock and/or up to 315,000 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 $15,766,500,
$1,261,320 and $14,505,180, 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 1,000,000 shares
of Common Stock upon conversion of the Convertible Preferred Stock, (iii) the
issuance of up to 2,100,000 shares of Common Stock upon exercise of the
Warrants, (iv) the issuance of up to 60,000 shares of Convertible Preferred
Stock, 150,000 shares of Common Stock and/or 210,000 Warrants upon exercise of
the Representative's Warrants, (v) the issuance of up to 310,000 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
<TABLE>
<CAPTION>
<S> <C>
Securities Offered .................... 600,000 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 ........................ $5.10 per unit.
Common Stock ....................... $5.00 per share.
Warrants ........................... $.10 per Warrant.
Securities outstanding prior to the
Offering ............................ 10,000,000 shares of Common Stock, no shares of Convertible Preferred Stock,
and no Warrants.
Securities to be outstanding after the
Offering:
Prior to conversion of the
Convertible Preferred Stock and 11,500,000 shares of Common Stock, 600,000 shares of Convertible Preferred
exercise of Warrants ............. Stock, and 2,100,000 Warrants.
Giving effect to full conversion of
the Convertible Preferred Stock
and full exercise of Warrants .... 14,600,000 shares of Common Stock.
Terms of Convertible
Preferred Stock:
Dividend Rate and Payment Dates .....
Cumulative dividends are payable at the rate of $1.00 per share per annum,
quarterly on the last business day of March, June, September and December
of each year, commencing June 30, 1997, when, as and if declared by the Board
of Directors, before any dividends are declared or paid on the Common Stock
or any capital stock ranking junior to the Convertible Preferred Stock. Failure
to pay any quarterly dividend will result in a reduction of the conversion
price. See "Dividend Policy" and "Description of Securities -- Convertible
Preferred Stock."
7
<PAGE>
<S> <C>
Conversion Rights ................... Convertible into Common Stock at any time prior to redemption at a conversion
rate of 1.67 shares of Common Stock for each share of Convertible Preferred
Stock (an effective conversion price of $6.00 per share or 120% 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 April , 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 $10.00
per share or, after April , 2001, at the cash redemption prices set forth
herein, plus accumulated and unpaid dividends. See "Description of Securities
-- Convertible Preferred Stock."
Voting Rights ...................... The holders of Convertible Preferred Stock have the right, voting as a class,
to approve or disapprove of the issuance of any class or series of stock
ranking senior to or on a parity with the Convertible Preferred Stock with
respect to declaration and payment of dividends or the distribution of assets
on liquidation, dissolution or winding-up. In addition, if the Company fails
to pay dividends on the Convertible Preferred Stock for four consecutive
quarterly dividend payment periods, holders of Convertible Preferred Stock
voting separately as a class will be entitled to elect one director; such
voting right will be terminated as of the next annual meeting of stockholders
of the Company following payment of all accrued dividends. See "Description
of Securities -- Convertible Preferred Stock."
Liquidation Preference ............. Upon liquidation, dissolution or winding up of the Company, holders of
Convertible Preferred Stock are entitled to receive liquidation distributions
equivalent to $10.00 per share (plus accumulated and unpaid dividends) before
any distribution to holders of the Common Stock or any capital stock ranking
junior to the Convertible Preferred Stock. See "Description of Securities
-- Convertible Preferred Stock."
Priority ........................... The Convertible Preferred Stock will be senior to and have priority over
the Common Stock with respect to the payment of dividends and upon liquidation,
dissolution or winding-up of the Company.
8
<PAGE>
<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 $5.50 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 $15.00
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 purchase
CST module systems; conduct ongoing development of its technology; acquire
manufacturing equipment; fund proposed collaborative arrangements; complete
its Atlanta facility; repay an outstanding line of credit; and for working
capital and general corporate purposes. See "Use of Proceeds."
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>
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) $11,533,723
Total assets ............................... 23,327 530,644 12,219,044
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 11,744,860
</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 $5.10 per Common
Unit, consisting of one share of Common Stock at $5.00 per share and one
Warrant at $.10 per Warrant, and the initial application of the estimated
net proceeds therefrom. See "Use of Proceeds."
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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
$600,000 ($690,000 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 up to one-third of its available working capital
(approximately $900,000) to finance a portion of possible acquisitions or
investments. See
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<PAGE>
"Use of Proceeds." In the event any such acquisition or investment opportunity
arises in the future, it is probable that the Company will also be required to
obtain additional financing to complete such transaction. See "Risk Factors --
Potential Need for Additional Financing." 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 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,
13
<PAGE>
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 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 12
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
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<PAGE>
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 24.2% of the net proceeds of this Offering has been allocated
for working capital and general corporate purposes. In addition, approximately
8.6% of the net proceeds of this Offering has been allocated for 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.
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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."
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 Com-
16
<PAGE>
pany, 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 $3.98 per share (based on an assumed
initial public offering price of $5.00 per share of Common Stock in this
Offering), or approximately 79.6%, 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 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 68.5% 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 $1,500,000 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 providing equipment installed
in the Company's new Atlanta facility and 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 $1,500,000 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 $1,830,285) 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
17
<PAGE>
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 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 3,100,000 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.
18
<PAGE>
CERTAIN ANTI-TAKEOVER PROVISIONS AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE
OF SECURITIES FROM ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation and By-Laws contain certain
provisions that could have the effect of delaying or preventing a change of
control of the Company, which could limit the ability of security holders to
dispose of their Convertible Preferred Stock, Common Stock and/or Warrants in
such transactions. The Certificate of Incorporation authorizes the Board of
Directors to issue one or more series of preferred stock without stockholder
approval. Such preferred stock could have voting and conversion rights that
adversely affect the voting power of the holders of Convertible Preferred Stock
and/or Common Stock, or could result in one or more classes of outstanding
securities that would have dividend, liquidation or other rights superior to
those of the Convertible Preferred Stock and/or Common Stock. Issuance of such
preferred stock may have an adverse effect on the then prevailing market price
of the Convertible Preferred Stock, Common Stock and/or Warrants. Additionally,
the Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an 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 4,250,000 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 $5.50 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
19
<PAGE>
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 $15.00 per share for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. If the Warrants are redeemed, holders of the Warrants
will lose their right to exercise the Warrants after the expiration of the
30-day notice period. Upon receipt of a notice of redemption, holders will be
required to: (i) exercise the Warrants and pay the exercise price at a time when
it may be disadvantageous for them to do so, (ii) sell the Warrants at the
then-prevailing market price, if any, when they might otherwise wish to hold the
Warrants, or (iii) accept the redemption price which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. In the event that holders of the Warrants elect not to exercise
their Warrants upon notice of redemption, the 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 April , 2000 and extending through April , 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 April , 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 $5.10 per Common Unit, consisting of one
share of Common Stock at $5.00 per share and one Warrant at $.10 per Warrant),
after deduction of underwriting discounts and other estimated offering expenses,
are estimated to be approximately $11,668,400 (approximately $13,498,685 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>
CST module systems (1) ........................... $ 2,850,000 24.4%
Technology and development costs (2) ............. 2,000,000 17.1
Acquisition of manufacturing equipment (3) ....... 1,000,000 8.6
Funding of proposed collaborative arrangements (4) 1,000,000 8.6
Atlanta facility (5) ............................. 500,000 4.3
Repayment of outstanding line of credit (6) ...... 1,500,000 12.8
Working capital and general corporate purposes (7) 2,818,400 24.2
--------------- ---------------
Total ......................................... $11,668,400 100.0%
=============== ===============
</TABLE>
- ------
(1) 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.
(2) 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."
(3) 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."
(4) 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."
(5) Consists of remaining 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."
(6) 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 $1,500,000 of the net proceeds to repay
such line of credit. The line of credit had been used
21
<PAGE>
by the Company to repay advances made by Applied to the Company since
December 1, 1996 for providing equipment installed in the Company's new
Atlanta facility and for working capital purposes. See "Certain
Relationships and Related Transactions -- Loans Involving Affiliates."
(7) Working capital and general corporate purposes include amounts required to
pay officers' salaries, professional fees, ongoing public reporting costs,
ongoing license fees and royalties, office-related expenses and other
corporate expenses, including interest and overhead. The Company may also
allocate up to one-third of its available working capital (approximately
$900,000) to finance a portion of the purchase price relating to 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. In the event any such acquisition or investment opportunity
arises in the future, it is probable that the Company will also be required
to obtain additional financing to complete such transaction. See "Risk
Factors -- Unspecified Acquisition-Related Risks" and "-- Potential Need for
Additional Financing."
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 $1,830,285) 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 12 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 12 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 $5.10 per Common Unit, consisting of one share of Common Stock at
$5.00 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; 600,000 shares
issued and outstanding, as adjusted ..................... $ -- $ 600
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 12,647,500
Accumulated deficit ....................................... (914,740) (914,740)
----------- -------------
Total stockholders' equity ..................................... $ 76,460 $11,744,860
----------- -------------
Total capitalization ....................................... $ 76,460 $11,744,860
=========== =============
</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 $12,647,500. The payment of dividends and any future
operating losses will reduce such capital surplus, which may adversely affect
the Company's ability to continue to pay dividends on the Convertible Preferred
Stock. The failure to pay quarterly dividends will result in a reduction of the
conversion price on the Convertible Preferred Stock and may give rise to voting
rights to the holders of such Convertible Preferred Stock. See "Risk Factors --
Inadequate Dividend Coverage" and "Description of Securities -- Convertible
Preferred Stock."
24
<PAGE>
DILUTION
At 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 $5.10 per Common Unit, consisting of one share of Common Stock at
$5.00 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
$11,723,704, or $1.02 per share. This represents an increase in net tangible
book value per share of $1.04 to the Company's existing stockholders and an
immediate dilution of $3.98 per share (or 79.6%) 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>
<S> <C> <C>
Assumed initial public offering price per share ......... $5.00
Negative net tangible book value per share before
the Offering ..................................... $(.02)
Increase per share attributable to payments by new
stockholders ..................................... $1.04
--------
Pro forma net tangible book value per share after the
Offering .............................................. $1.02
-------
Dilution per share to new stockholders .................. $3.98
=======
</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 $13,553,989 and
the dilution of net tangible book value per share to new stockholders would have
been approximately $3.84.
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 $5.00 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% $ 7,500,000 88.3% $5.00
Existing stockholder 10,000,000 87.0% 991,200(1) 11.7% $ .10
------------ --------- --------------- ---------
Total ........... 11,500,000 100.0% $ 8,491,200(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 $6,000,000 paid by new investors for 600,000 shares of
Convertible Preferred Stock and $210,000 paid for 2,100,000 Warrants.
25
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data included in the following table as of June 30,
1996 and for the period from November 15, 1995 (date of inception) to June 30,
1996 are derived from the audited Financial Statements appearing elsewhere
herein. The selected financial data as of December 31, 1996, for the six months
then ended and for the period from November 15, 1995 (date of inception) to
December 31, 1996 are unaudited and, in the opinion of management, include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of such data. Financial data for the periods through December
31, 1996 are not necessarily indicative of the results of operations to be
expected for the Company's fiscal year ending June 30, 1997. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
November 15, 1995 Six Months November 15, 1995
(date of 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) $11,533,723
Total assets ............................... 23,327 530,644 12,219,044
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 11,744,860
</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 $5.10 per Common
Unit, consisting of one share of Common Stock at $5.00 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 12
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 $500,000 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 $1,000,000 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 $2,850,000 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 up to one-third of its available working
capital (approximately $900,000) to finance a portion of the purchase price
relating to 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." In
the event any such acquisition or investment opportunity arises in the future,
it is probable that the Company will also be required to obtain additional
financing to complete such transaction. See "Risk Factors -- Potential Need for
Additional Financing."
The Company has allocated $1,000,000 of the net proceeds of this Offering for
the funding of proposed collaborative arrangements. These costs include, but are
not limited to, salaries and benefits of personnel, equipment design and
procurement costs, cost of leasing or otherwise obtaining additional operating
facilities, analytical and other testing costs, professional fees, insurance and
other administrative expenses. As of the date of this Prospectus, the Company
has not determined the amount of net proceeds of this Offering to be applied to
any one particular proposed collaborative arrangement because the Company is
currently in negotiations with a number of companies involving, among other
issues, the level of its proposed funding commitment. The estimated allocation
of the net proceeds for funding of proposed collaborative arrangements is on an
aggregate basis. In addition, in the event a definitive agreement is not entered
into by the Company and Teledyne Brown or Sverdrup, respectively, on or before
August 31, 1997, such memorandum of understanding may be terminated by either
company upon written notice. See "Risk Factors -- No Assurance of Collaborative
Agreements or Project Awards," "Use of Proceeds" and "Business -- Collaborative
Working Arrangements."
In March 1997, the Company entered into a $1,500,000 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 providing equipment installed
in the Company's new Atlanta facility and 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 $1,500,000 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
$1,830,285) to Commodore for its working capital needs. Borrowings under the
agreement will be secured by
28
<PAGE>
Commodore's pledge of 2,000,000 shares of Applied common stock held by it and
will bear interest at the rate of 10% per annum, with interest payable quarterly
on outstanding amounts. The principal balance outstanding will be due on the
second anniversary of the date of such agreement. The Company's obligation to
lend such funds to Commodore is subject to a number of conditions, including
review by the Company of the proposed use of such funds by Commodore. See "Risk
Factors -- Control by Principal Stockholder; 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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Organics Separation and Recovery
As of August 1, 1996, based on market data compiled by the Company, there
were more than 10,000 organic chemical industry companies operating in the
United States. These companies generate significant volumes of waste process
streams, including mixed organic/non-organic streams. CST has been demonstrated
to have significant capabilities in the separation and recovery of a variety of
contaminants, including phenol and nitrophenol (a phenolic derivative), and the
Company believes that such capabilities, although untested, extend to other
organic chemicals such as volatile organic compounds, petrochemicals, other
phenolic derivatives, olefin alkanes and acid gases.
Currently, the primary technology utilized in this area is activated carbon
treatment. Like the other slow biological treatment processes utilized in this
area, the by-products are often more toxic than the original compound. The
Company intends to demonstrate to chemical manufacturers that CST is effective
in dealing with the wide variety of contaminants generated by these businesses,
and that use of CST will substantially reduce the environmental risks and costs
associated with traditional separation methods.
Biochemicals Separation and Recovery
CST has also been demonstrated to have significant capabilities in the
separation and recovery of biochemicals, including phenylalanine (an amino
acid), and the Company believes that such capabilities, although untested,
extend to other biochemicals such as proteins, other amino acids, antibiotics,
glycerides, fatty acids, drug delivery vehicles and other pharmaceuticals. Mixed
wastes containing these materials are generated in both research and development
functions and in manufacturing functions. These materials have substantial
value, and the Company intends to emphasize both the value of the recovered
materials and the enhanced and speedier environmental compliance attributes of
CST.
Currently, the primary competing technology in this area is chromatography,
which requires substantially greater time to treat significant volumes of
material, and is substantially less selective in the types of materials that can
be separated from the liquid feedstream.
Environmental Remediation and Restoration
The Company believes that CST has significant potential for application to
environmental remediation and restoration. The Company is currently involved in
pilot projects for the decontamination of water in the Port of Baltimore, and
for clean-up of trichlorethylene-contaminated groundwater on Cape Cod,
Massachusetts. In the case of a project such as the Port of Baltimore project,
it is expected that the remediating technology will be applied continuously over
a period of many years, until the subject contamination (in the case of
Baltimore, chromium leaching from underlying soil into the aquifer) has been
demonstrated to have been abated for a significant period of time.
In contrast to other remediation technologies, the Company believes that CST
has the attributes of low initial capital costs, low operating costs and the
ability to recover heavy metals, organic chemicals and varied volatile organic
compounds for reuse.
In August 1996, the Company completed an on-site demonstration of CST for the
decontamination of water in the Port of Baltimore. During seven hours of
operation, a single CST unit, in a single pass-through of feedstream, processed
90 gallons of water containing more than 400 ppm of chromium, and reduced the
contamination level to 0.49 ppm. This reduced level of contamination was below
the federal guideline (5 ppm) for the unregulated discharge of water. The
results of this test were verified by Artesian Laboratories, Inc., an
independent testing laboratory. The Company has since completed additional
on-site demonstrations of CST at the Port of Baltimore with similar results. Due
to the success of such demonstrations, in February 1997 the State of Maryland
informed the Company that it will recommend including the CST process as an
eligible technology in the bid specifications to remediate the groundwater at
the Port of Baltimore. The Company believes that compliance with the federal
guideline can be achieved either by refinement of chemical formulation or
process procedure, by dilution of the processed water with a small amount of
uncontaminated water, or by passing the processed water through a larger or
supplemental CST unit. The Company believes that the same process is capable of
achieving comparable results in the same time period on substantially greater
volumes of contaminated water, either by increasing the flow of feedstream into
the membrane, by configuring and utilizing a larger module, or by installing and
operating additional modules. As indicated above, this demonstration was
performed on limited quantities of process streams, and there can be no
assurance that the same or similar results would or could be obtained on a
larger scale.
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To speed its entry in this market, the Company intends to enter into
collaborative joint working and marketing arrangements with established
engineering and environmental service organizations which are expected to
provide technical and professional expertise, market presence and credibility.
Although the Company has entered into memorandums of understanding with several
such companies, the Company has not to date entered into any definitive
agreements or received any firm contract awards. See "-- Collaborative Working
Arrangements."
Radionuclide/Mixed Waste Separation
In the United States, there are numerous sites operated or maintained by the
Department of Energy ("DOE") and/or the Department of Defense at which there are
present "mixed wastes" containing radionuclides intermingled with other
hazardous wastes. These sites are also contaminated with other compounds
associated with nuclear weapons, testing and energy. CST has been demonstrated
to have significant capabilities in the separation of radionuclides such as
cesium, technetium and rhenium, and the Company believes that such capabilities,
although untested, extend to most of the other compounds found at such sites.
The United States government estimates that potential government expenditures in
this market could be between $234 billion and $389 billion over the course of
the next 75 years.
This element of the market is a significant subcategory of the general
environmental remediation that can be undertaken with CST. In addition to low
initial capital costs and low operational costs, CST has the advantage of
cost-effectively separating both dissolved mixed waste and radionuclides, and
allowing separate handling and disposal of both hazardous waste types. The
Company anticipates pursuing this market area in collaboration with established
engineering and environmental service organizations, who can provide technical
and professional expertise, market presence and credibility. Neither the Company
nor any of its collaborative partners have been awarded any contracts to use
CST, and there can be no assurance as to whether or when any such contracts may
be obtained.
In January 1997, the Company entered into a license agreement with Lockheed
Martin, manager of Oak Ridge (the "Lockheed License Agreement"). Under the terms
of the Lockheed License Agreement, the Company received the exclusive worldwide
license, subject to a government use license, to use and develop the technology
related to the separation of the radionuclides technetium and rhenium from mixed
wastes containing radioactive materials. The Company also received under the
Lockheed License Agreement the right to exploit the technology for other
commercial applications. Pursuant to the Lockheed License Agreement, the Company
made an initial cash payment of $50,000 upon the execution of the agreement and
is obligated to pay, commencing in the third year of the Lockheed License
Agreement, a royalty to Lockheed Martin of 2% of net sales (less allowances for
returns, discounts, commissions, freight, and excise or other taxes) up to total
net sales of $4,000,000 and 1% of net sales thereafter. In addition, the Company
has agreed to guarantee Lockheed Martin, during the term of the Lockheed License
Agreement, an annual minimum royalty of $15,000 commencing in the third year of
the Lockheed License Agreement. The Lockheed License Agreement, which may be
terminated at any time solely by the Company, has a term which will last until
the end of the life of all patents or patentable claims described in or
ultimately arising out of the provisional patent recently filed jointly by the
Company and three of Dr. Kilambi's colleagues who worked with him at Oak Ridge,
covering their inventions related to radionuclides. See "-- Intellectual
Property" below.
Based on tests conducted at Oak Ridge since May 1994, the Company believes
that this technology is capable of selectively extracting and recovering
technetium, rhenium and other radioactive isotopes as a concentrated aqueous
solution which can be reused in various scientific applications or disposed of
by government-approved techniques including long-term storage. The Company
believes that this technology can be used to remediate nuclear waste tanks
stored at the DOE's atomic energy plants in Rocky Flats, Colorado, Idaho Falls,
Idaho, Paducah, Kentucky, Weldon Springs, Missouri, Frenchman Flat, Nevada, Los
Alamos, New Mexico, Aiken, South Carolina, Oak Ridge, Tennessee, Pantex, Texas
and Hanford, Washington, and intends to pursue such opportunities. According to
DOE sources, there are approximately 100 million gallons of mixed radioactive
and hazardous chemical waste stored at these plants.
The DOE has reported that better methods of separating radionuclides could
lead to reduced volumes of high-level waste and lower ongoing costs.
Radionuclides in high-level wastes are a small fraction (.001% or less)
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of DOE's waste volume. Each disposal canister for high-level waste is expected
to cost approximately $1,000,000 to build and maintain. The Company believes
that concentrating the radionuclides in these wastes could reduce the number of
canisters needed by at least tenfold, and save significant sums in ongoing
costs. The Company currently does not have, nor can there be any assurance that
it will be awarded, any contract with the DOE to use its separation technology
at DOE plants.
PROPOSED MANUFACTURING OPERATIONS
The Company currently has a limited number of outside sources of supply for
some strategic components used in CST, including chemicals, fibers and membrane
casings. Business disruptions or financial difficulties of such suppliers, or
raw material shortages or other causes beyond the Company's control, could
adversely affect the Company by increasing their cost of goods sold or reducing
the availability of such components. The use of outside suppliers also entails
risks of quality control and disclosure of proprietary information.
The Company has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which it began occupying in March 1997 and will comprise
the Company's administrative offices, research and testing laboratories and CST
manufacturing plant. It is anticipated that approximately $500,000 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 $1,000,000 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
$2,850,000 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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CFC SERVICES AGREEMENT
Effective upon completion of this Offering, the Company will enter into a
services agreement (the "Services Agreement") with Commodore CFC Technologies,
Inc., a wholly-owned subsidiary of Applied ("CFC Technologies"), which has
developed and patented a process which, based on test applications of limited
quantities of chlorofluorocarbons ("CFCs"), may be able to separate mixtures of
refrigerants so that they can be returned to productive use at purity levels
meeting industry standards. Pursuant to the Services Agreement, the Company will
provide advice, assistance and guidance, and, where necessary, personnel to
implement the same, in connection with, among others, administrative, financial
and related matters, product design, development and promotion, and marketing,
sales and related operations to CFC Technologies in connection with its business
and operations in exchange for which the Company will be paid an annual fee
equal to 75% of the net income of CFC Technologies, if any, and reimbursement of
expenses incurred in furnishing such services. The Services Agreement may be
terminated by either party at any time upon not less than 90 days' prior notice.
GOVERNMENT REGULATION
The Company and its customers are required to comply with a number of
federal, state and local laws and regulations in the areas of safety, health and
environmental controls including, without limitation, RCRA and OSHA, which may
require the Company, its prospective working partners or its customers to obtain
permits or approvals to utilize CST and related equipment on certain job sites.
In addition, if the Company begins to market CST internationally, the Company
will be required to comply with laws and regulations and, when applicable,
obtain permits or approvals in those other countries. There is no assurance that
such required permits and approvals will be obtained. Furthermore, particularly
in the environmental remediation market, the Company may be required to conduct
performance and operating studies to assure government agencies that CST and its
by-products do not pose environmental risks. There is no assurance that such
studies, if successful, will not be more costly or time-consuming than
anticipated. Further, if new environmental legislation or regulations are
enacted or existing legislation or regulations are amended, or are interpreted
or enforced differently, the Company, its prospective working partners and/or
its customers may be required to meet stricter standards of operation and/or
obtain additional operating permits or approvals.
ENVIRONMENTAL MATTERS
The Company's operations, as well as the use of specialized technical
equipment by its customers, are subject to numerous federal, state and local
regulations relating to the storage, handling and transportation of certain
regulated materials. Although the Company's role is generally limited to the
leasing of its specialized technical equipment for use by its customers, there
is always the risk of the mishandling of such materials or technological or
equipment failures, which could result in significant claims against the
Company. Any such claims against the Company could materially adversely affect
the Company's business, financial condition and results of operations.
The Company maintains environmental liability insurance with limits of
$1,000,000 per occurrence and $1,000,000 in the aggregate. The Company may be
required to obtain environmental liability insurance in greater amounts in the
future as CST is commercialized. There can be no assurance that such insurance
will provide coverage against all claims, and claims may be made against the
Company (even if covered by the Company's insurance policy) for amounts
substantially in excess of applicable policy limits. Any such event could have a
material adverse effect on the Company's business, financial condition and
results of operations.
INTELLECTUAL PROPERTY
The basic principles underlying the CST technology were developed by Srinivas
Kilambi, Ph.D., the Company's Vice President - Technology. Effective February
29, 1996, pursuant to an assignment of technology agreement between the Company
and Dr. Kilambi, the Company acquired rights to the CST technology from Dr.
Kilambi, together with associated patent rights, confidential know-how and other
property rights created or obtained by Dr. Kilambi, whether then existing or
thereafter created, relating to the construction, design, development and
exploitation of the processes, equipment and technology related to CST and any
other product or development resulting from the acquired patent rights.
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In consideration for his assignment of the CST technology, the Company
transferred to Dr. Kilambi 200,000 shares of common stock of Commodore, which
had been contributed to the Company by Commodore to effect the transaction, and
the Company agreed to pay Dr. Kilambi a royalty through December 3, 2002 equal
to 2% of its revenues actually received and attributed to the commercial
application of the acquired technology, except for applications related to the
radionuclides technetium and rhenium, for which Dr. Kilambi is entitled to
receive a royalty of .66% of net sales (less allowances for returns, discounts,
commissions, freight and excise or other taxes). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Certain Relationships and Related Transactions --
Organization and Capitalization of the Company."
The Company has filed one United States utility patent application and two
United States provisional patent applications covering the principal features of
its CST technology. One provisional patent application covers the joint
inventions of Dr. Kilambi and Lockheed Martin, and a corresponding utility
patent application containing the specific patent claims is expected to be filed
in the near future. The Company may also pursue foreign patent protection where
it deems appropriate.
The Company's liquid membrane technology patent applications are based on the
selective combination of different known solvents, supports, diluents, carriers
and other components to separate a variety of metals, chemicals and other
targeted substances. While the Company believes that its technology covers all
separation applications, third parties may have developed, or may subsequently
assert claims to, certain of these solvents, supports, diluents, carriers or
other components for one or more specific applications. In such event, the
Company may need to acquire licenses to, or to contest the validity of, issued
or pending patents or claims of third parties.
To protect its trade secrets and the unpatented proprietary information in
its development activities, the Company requires its employees, consultants and
contractors to enter into agreements providing for the confidentiality and the
Company's ownership of such trade secrets and other unpatented proprietary
information originated by such persons while in the employ of the Company. The
Company also requires potential collaborative partners to enter into
confidentiality and non-disclosure agreements.
There can be no assurance that any patents which may hereafter be obtained,
or any of the Company's confidentiality and non-disclosure agreements, will
provide meaningful protection of the Company's confidential or proprietary
information in the case of unauthorized use or disclosure. In addition, there
can be no assurance that the Company will not incur significant costs and
expenses, including the costs of any future litigation, to defend its rights in
respect of any such intellectual property.
COMPETITION
The most common alternative methods for metals separation from solubilized
process streams presently include ion exchange, reverse osmosis, precipitation,
ultrafiltration and chromatography. The Company believes that most of these
methods have certain drawbacks, including lack of selectivity in the separation
process, inability to handle certain metals in the process streams, and the
creation of sludges and other harmful by-products which require further
post-treatment prior to disposal. For example, reverse osmosis and
ultrafiltration are incapable of separating chrome and chromium materials from
wastewater streams, and precipitation results in the production of sludge which
requires dewatering, drying and disposal in a landfill. Certain of these other
technologies also entail long process times, and are relatively expensive.
By contrast, CST is capable of handling a broad range of compounds in a
faster and relatively inexpensive manner. Furthermore, the by-products of the
CST process consist primarily of wastewater, which can be discharged as normal
wastewater effluent, and to a substantially lesser extent and in only rare
circumstances, materials requiring landfill disposal.
Separation technologies are currently utilized by a wide variety of domestic
and international companies, including several large companies having
substantially greater financial and other resources than the Company. Although
the Company believes that CST has substantial advantages over all other known
separation technologies, any one or more of the Company's competitors, or other
enterprises not presently known, may develop technologies which are superior to
CST. To the extent the Company's competitors are able to offer comparable
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services at lower prices or of higher quality, or more cost-effective
alternatives, the Company's ability to compete effectively could be materially
adversely affected. The Company believes that its ability to compete in both the
commercial and governmental sectors is dependent upon CST being a superior, more
cost-effective method to achieve separation and/or recovery of a variety of
materials in varying amounts and configurations. In the event that the Company
is unable to demonstrate that CST is a technical and cost-effective alternative
to other separation technologies on a commercial scale, the Company may not be
able to successfully compete.
RESEARCH AND DEVELOPMENT
The Company continues to perform research and development activities with
respect to CST, utilizing its internal technical staff as well as independent
consultants. Such activities have to date been entirely Company-sponsored.
Research and development expenditures were $412,340 and $462,420 for the six
month period ended December 31, 1996 and the period from November 15, 1995 (date
of inception) to December 31, 1996, respectively.
The Company intends to expand its research and development efforts following
this Offering. In addition to conducting ongoing tests, demonstrations and
enhancements of CST, the Company's efforts are expected to focus on the
optimization of performance and design for module manufacturing, development of
new carriers and diluents, and investigation of additional process applications.
The Company will use a portion of the net proceeds of this Offering for such
ongoing development costs, which will include the hiring of additional
personnel. See "Use of Proceeds."
EMPLOYEES
As of December 31, 1996, the Company had 12 full-time employees, including
five with advanced scientific degrees. The Company believes that it has been
successful in attracting experienced and capable personnel. All of the Company's
employees have entered into agreements with the Company requiring them not to
disclose the Company's proprietary information, assigning to the Company all
rights to inventions made during their employment, and prohibiting them from
competing with the Company. The Company's employees are not represented by any
labor union. The Company believes that relations with its employees are
satisfactory.
PROPERTIES
The Company currently leases approximately 7,000 square feet of space in
Columbus, Ohio from an unaffiliated third party under a lease expiring on June
30, 1997, which the Company uses as its laboratory and administrative offices.
The Company shares such space with Commodore and certain of its other
subsidiaries. As of July 1, 1996, the Company pays an allocable share of the
rent equal to $750 per month for such space.
The Company's principal executive offices are located in approximately 1,000
square feet of office space in Vienna, Virginia under a lease expiring in
December 1997. The Company pays approximately $5,000 per month for rent and
related office support services. Such office also serves as the principal
executive offices of Applied. The Company also maintains offices located in
approximately 2,000 square feet of office space in New York, New York, which
also serves as 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:
Name Age Position
---- ----- --------
Edwin L. Harper, Ph.D .... 55 Chairman of the Board
and Chief Executive Officer
Kenneth J. Houle ......... 57 President and Chief Operating Officer
James M. DeAngelis ....... 36 Senior Vice President
Srinivas Kilambi, Ph.D. .. 32 Vice President -- Technology
Michael D. Kiehnau, P.E. . 35 Vice President -- Operations
Andrew P. Oddi ........... 35 Vice President -- Finance
Bentley J. Blum .......... 55 Director
Paul E. Hannesson ........ 56 Director
Kenneth L. Adelman, Ph.D. 49 Director(1)
David L. Mitchell ........ 75 Director(1)
William R. Toller ........ 66 Director(1)
- ------
(1) Positions will be assumed upon completion of this Offering.
Edwin L. Harper, Ph.D. was appointed Chairman of the Board and Chief
Executive Officer of the Company effective January 1, 1997, and also served as
President of the Company for an 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.
45
<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
Number of Shares Common Stock
of Common Stock Beneficially Owned
Name and Address of Beneficially -------------------------------------
Beneficial Owner(1) Owned(2) Before Offering After 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
68.5% and by Mr. Hannesson would be 6.5%.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
The Company was organized in November 1995 as a wholly-owned subsidiary of
Commodore. Effective February 29, 1996, pursuant to an assignment of technology
agreement between the Company and Srinivas Kilambi, Ph.D., the Company's Vice
President--Technology, the Company acquired rights to the CST technology from
Dr. Kilambi. In consideration for such technology, the Company transferred to
Dr. Kilambi 200,000 shares of common stock of Commodore, which had been
contributed to the Company by Commodore to effect the transaction, and the
Company agreed to pay Dr. Kilambi a royalty through December 3, 2002 equal to 2%
of the Company's revenues actually received and attributed to the commercial
application of the acquired technology, except for applications related to the
radionuclides technetium and rhenium, for which Dr. Kilambi is entitled to
receive a royalty of .66% of net sales (less allowances for returns, discounts,
commissions, freight, and excise or other taxes). In exchange for Commodore's
issuance of such shares to the Company, as well as Commodore's funding and
support of the Company, the Company issued to Commodore 10,000,000 shares of
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Business --
Intellectual Property."
Since the Company's inception, Commodore has financed the research and
development activities of the Company through direct equity investments and
loans to the Company. As of September 30, 1996, the Company's aggregate
indebtedness to Commodore was approximately $408,000. As of December 2, 1996,
$568,000 in additional funds had been advanced by Commodore to the Company.
Commodore has agreed to contribute the entire amount of such intercompany debt
to the Company's equity, without requirement of the issuance of any additional
shares of capital stock.
Effective as of December 2, 1996, as part of a corporate restructuring to
consolidate all of its current environmental technology businesses within
Applied (its 69.3%-owned, publicly-traded subsidiary), Commodore transferred to
Applied 100% of the capital stock of the Company and 100% of the capital stock
of CFC Technologies, another subsidiary of Commodore.
In addition, Commodore assigned to Applied outstanding Company notes
aggregating $976,200 at December 2, 1996, representing advances previously made
by Commodore to the Company. Such advances have been capitalized by Applied
prior to the date of this Offering as its capital contribution to the Company.
In consideration for such transfers, Applied paid Commodore $3,000,000 in cash
and, subject to any applicable stockholder approval and notification
requirements, shall issue to Commodore a warrant expiring December 1, 2003 to
purchase 7,500,000 shares of Applied common stock at an exercise price of $15.00
per share.
LOANS INVOLVING AFFILIATES
In March 1997, the Company entered into a $1,500,000 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 providing equipment installed
in the Company's new Atlanta facility and 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 $1,500,000 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
$1,830,285) 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 750,000 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 $12,647,500 after giving effect to this Offering). The payment of
dividends and any future operating losses will reduce such surplus of the
Company, which may adversely affect the ability of the Company to continue to
pay dividends on the Convertible Preferred Stock. In addition, no dividends or
distributions may be declared, paid or made if the Company is or would be
rendered insolvent by virtue of such dividend or distribution.
No dividends may be paid on any shares of capital stock ranking junior to the
Convertible Preferred Stock (including the Common Stock) unless and until all
accumulated and unpaid dividends on the Convertible Preferred Stock have been
declared and paid in full.
Conversion. At the election of the holder thereof, each share of Convertible
Preferred Stock will be convertible into Common Stock at any time on or after
the date of issuance and prior to redemption at a conversion rate of 1.67 shares
of Common Stock for each share of Convertible Preferred Stock (an effective
conversion price of $6.00 per share or 120% 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 April , 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 $10.00 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 April , 2001 at the redemption
prices set forth below, plus accumulated and unpaid dividends:
Redemption Price
Date of Redemption Per Share
---------------------------- ----------------
April , 2001 to April ,2002 .............................. $12.50
April , 2002 to April ,2003 .............................. 12.00
April , 2003 to April , 2004 ............................. 11.50
April , 2004 and thereafter ............................. 10.00
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 $5.50 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 $15.00 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 600,000 shares of Convertible Preferred Stock, (iii)
the 2,100,000 Warrants, (iv) the maximum of 1,000,000 shares of Common Stock
issuable upon conversion of the Convertible Preferred Stock and (v) the maximum
of 2,100,000 shares of Common Stock issuable upon exercise of the Warrants will
be transferable without restriction under the Securities Act. The other
10,000,000 outstanding shares of Common Stock, all of which are owned by
Applied, are "restricted securities" (as that term is defined in Rule 144
promulgated under the Securities Act) which may be publicly sold only if
registered under the Securities Act or if sold in accordance with an applicable
exemption from registration, such as Rule 144. In general, under Rule 144 as
currently in effect, subject to the satisfaction of certain other conditions, a
person, including an affiliate of the Company, who has beneficially owned
restricted securities for at least one year, is entitled to sell (together with
any person with whom such individual is required to aggregate sales), within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or, if the Common
Stock is quoted on Nasdaq or another national securities exchange, the average
weekly trading volume during the four calendar weeks preceding the sale. Sales
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements, and the availability of current public information regarding the
Company. A person who has not been an affiliate of the Company for at least
three months, and who has beneficially owned restricted securities for at least
two years, is entitled to sell such restricted shares under Rule 144 without
regard to any of the limitations described above.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 generally may be relied upon with
respect to the sale of shares purchased from the Company by its employees,
directors, officers or consultants prior to the date of this Prospectus pursuant
to written compensatory benefit plans such as the Plan and written contracts
such as option agreements. Rule 701 is also available for sales of shares
acquired by persons pursuant to the exercise of options granted prior to the
effective date of this Prospectus, regardless of whether the option exercise
occurs before or after the effective date of this Prospectus. Securities issued
in reliance on Rule 701 are "restricted securities" within the meaning of Rule
144 and, beginning 90 days after the date of this Prospectus, may be sold by
persons other than affiliates of the Company subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its one-year minimum holding period requirement.
Options granted under the Plan to purchase a total of 766,689 shares of
Common Stock are currently outstanding, and options to purchase an additional
583,311 shares of Common Stock are reserved for future issuance under the Plan.
Of the options granted under the Plan, 171,563 of such options are currently
exercisable, with the remaining outstanding options to become exercisable at the
rate of 171,563 options in each of December 1997 and 1998, and 126,000 options
in each of December 1999 and 2000. Shares of Common Stock issued upon the
exercise of outstanding options will be "restricted securities" and may not be
sold in the absence of registration under the Securities Act unless an exemption
from registration is available. Potential exemptions include those available
under Rule 144 and Rule 701.
No prediction can be made as to the effect that future sales of Common Stock,
or the availability of shares of Common Stock for future sale, will have on the
market prices of the Common Stock, the Convertible Preferred Stock and the
Warrants prevailing from time to time. The Company and Applied, as well as all
officers and directors of the Company and all holders of outstanding securities
exercisable for or convertible into Common Stock (other than the
Representative's Warrants), have agreed not to, directly or indirectly, issue,
agree or offer to sell, sell, transfer, assign, distribute, grant an option for
purchase or sale of, pledge, hypothecate or otherwise encumber or dispose of any
beneficial interest in such securities for a period of 13 months following the
date of this Prospectus without the prior written consent of the Representative.
The sale or issuance, or the potential for sale or issuance, of Common Stock
after such 13-month period could have an adverse impact on the market prices of
the Convertible Preferred Stock, the Common Stock and/or the Warrants. Sales of
substantial amounts of Common Stock or the perception that such sales could
occur could adversely affect prevailing market prices for the Convertible
Preferred Stock, the Common Stock and/or the Warrants. All of the shares of
Convertible Preferred Stock to be outstanding will have been registered under
the Securities Act. See "Underwriting."
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
counsel to the Company, the material federal income tax consequences of
acquiring, owning and disposing of the Convertible Preferred Stock, the Common
Stock and the Warrants are as follows, subject to the qualifications set forth
in the two immediately following paragraphs.
This discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, and Internal Revenue Service (the "IRS")
rulings and judicial decisions now in effect, all of which are subject to change
at any time by legislative, judicial or administrative action; any such changes
could be retroactively applied in a manner that could adversely affect a holder
of the Convertible Preferred Stock, Common Stock and/or Warrants. The following
does not discuss all of the tax consequences that may be relevant to a purchaser
in light of particular circumstances or to purchasers subject to special rules,
such as foreign investors, retirement trusts, and life insurance companies. No
information is provided with respect to foreign, state or local tax laws, estate
or gift tax considerations, or other tax laws that may be applicable to
particular categories of investors.
The discussion assumes that purchasers of the Convertible Preferred Stock,
Common Stock and/or Warrants will hold the Convertible Preferred Stock, Common
Stock and/or Warrants as a "capital asset" within the meaning of Code Section
1221. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS AS TO ANY
FEDERAL, STATE, LOCAL AND FOREIGN OR OTHER TAX CONSIDERATIONS RELEVANT TO THEM.
DIVIDENDS
Distributions with respect to the Convertible Preferred Stock and the Common
Stock will be treated as dividends and taxable as ordinary income to the extent
that the distributions are made out of the Company's current or accumulated
earnings and profits. To the extent that a distribution is not made out of the
Company's current or accumulated earnings and profits, the distribution will
constitute a non-taxable return of capital reducing the holder's adjusted tax
basis in the shares of Convertible Preferred Stock or Common Stock held and, to
the extent the distribution exceeds such basis, will result in capital gain. At
December 31, 1996, the Company had a deficit in accumulated earnings and
profits. Accordingly, the treatment of distributions with respect to the
Convertible Preferred Stock will be determined by the Company's earnings and
profits, if any, subsequent to December 31, 1996.
Dividend income of individuals, certain closely held corporations and
personal service corporations (as defined in Code Section 469(j) may not be
offset by losses or credits from "passive activities," such as losses or credits
incurred in connection with certain rental activities or the ownership of
limited partnership interests.
Corporate stockholders will be eligible to claim a dividends-received
deduction (currently 70% of the amount of the dividend for most corporate
stockholders) with respect to distributions that are treated as dividends on the
Convertible Preferred Stock and Common Stock in calculating their taxable
income.
Under Code Section 246(c), the dividends-received deduction will not be
available with respect to any dividend on the shares of Convertible Preferred
Stock and Common Stock if such shares have been held for 45 days or less (or 90
days or less if the holder of the shares of Convertible Preferred Stock received
dividends with respect to the shares of Convertible Preferred Stock which are
attributable to a period or periods aggregating in excess of 366 days). The
holding period of the shares of Convertible Preferred Stock for this purpose is
determined in accordance with certain specific rules set forth in Code Section
246(c), which reduces the holding period for any period where the holder's risk
of loss, as to such stock, is diminished by certain arrangements, such as the
holding of an option to sell the same, or substantially identical, securities.
Regulations issued on May 26, 1993 also reduce the holding period for any period
in which a holder of Convertible Preferred Stock has outstanding a short sale of
Common Stock.
Code Section 246A provides a further restriction on the availability of the
dividends-received deduction on the shares of Convertible Preferred Stock and
Common Stock if the shares are classified as "debt-financed portfolio stock."
The shares of Convertible Preferred Stock will be classified as debt-financed
portfolio stock when
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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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<PAGE>
correct taxpayer identification number may be subject to penalties imposed by
the IRS. Any amount paid as backup withholding will be creditable against the
holder's Federal income tax liability. Holders should consult their tax advisors
regarding their qualification for exemption from backup withholding and the
procedure for obtaining any applicable exemption.
WARRANTS
A holder's basis in the Warrants will be equal to the purchase price paid
therefor. However, there can be no assurance that the Internal Revenue Service
will not allocate the aggregate purchase price for such securities in a
different manner than as set forth on the cover page of this Prospectus for
purposes of determining the respective adjusted bases for the Convertible
Preferred Stock, Common Stock and/or Warrants of a purchaser, if any or all of
such securities are purchased.
Upon a sale or exchange of the Warrants (including the receipt of cash in
lieu of a fractional share of Common Stock issuable upon exercise of the
Warrants), a holder of the Warrants will recognize capital gain or loss equal to
the difference between the amount realized upon such sale or exchange and the
holder's basis in the Warrants (as determined above). Such gain or loss will be
long-term if, at the time of the sale or exchange, the Warrants were held for
more than one year. Adjustments to the exercise price or conversion ratio, or
the failure to make adjustments, may result in the receipt of a constructive
dividend by the holder.
Upon exercise of the Warrants, a holder's tax basis in the Common Stock
acquired upon such exercise will be equal to its tax basis in the Warrants plus
the exercise price of the Warrants. The holding period with respect to such
Common Stock will commence on the date of exercise. If the Warrants expire
without being exercised, a holder will have a capital loss equal to its tax
basis in the Warrants as if the Warrants had been sold on such date for no
consideration.
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<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the "Underwriting Agreement"), to purchase from the
Company and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective number of shares of Convertible Preferred
Stock, shares of Common Stock and Warrants set forth opposite their names:
<TABLE>
<CAPTION>
Number of Shares Number of Number
of Convertible Shares of
Underwriters Preferred Stock of Common Stock Warrants
----------------------------------- -------------------- ------------------- -------------
<S> <C> <C> <C>
National Securities
Corporation ................
-------------------- ------------------- -------------
Total. ....................... 600,000 1,500,000 2,100,000
==================== =================== =============
</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 90,000 additional shares of Convertible
Preferred Stock, up to 225,000 additional shares of Common Stock and/or up to
315,000 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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<PAGE>
In connection with this Offering, the Company has agreed to sell to the
Representative, for $.0001 per warrant, warrants to purchase from the Company up
to 60,000 shares of Convertible Preferred Stock, 150,000 shares of Common Stock
and/or 210,000 Warrants (the "Representative's Warrants"). The Representative's
Warrants are initially exercisable at a price of $12.00 per share of Convertible
Preferred Stock, $6.00 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-
65
<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.
66
<PAGE>
The Registration Statement and such exhibits and schedules may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048, and Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Registration Statement may also be accessed on the World Wide Web
through the Commission's Internet address at "http://www.sec.gov."
67
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Independent Auditors' Report .................................................................... F-2
Balance Sheet as of June 30, 1996 and December 31, 1996 (unaudited) ............................. F-3
Statements of Operations for the period from November 15, 1995 (date of inception) to June 30,
1996, for the period from November 15, 1995 (date of inception) to December 31, 1995
(unaudited), the six months ended December 31, 1996 (unaudited) and November 15, 1995 (date of
inception) to December 31, 1996 (unaudited) .................................................... F-4
Statement of Stockholders' Deficit for the period from November 15, 1995 (date of inception)
through December 31, 1996 (unaudited) .......................................................... F-5
Statement of Cash Flows for the period from November 15, 1995 (date of inception) to June 30,
1996, for the period from November 15, 1995 (date of inception) to December 31, 1995
(unaudited), the six months ended December 31, 1996 (unaudited) and November 15, 1995 (date of
inception) to December 31, 1996 (unaudited) .................................................... F-6
Notes to Financial Statements. .................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Commodore Separation Technologies, Inc.
We have audited the accompanying balance sheet of Commodore Separation
Technologies, Inc. (a development stage company) as of June 30, 1996, and the
related statements of operations, stockholders' deficit, and cash flows for the
period from November 15, 1995 (date of inception) to June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commodore Separation
Technologies, Inc. (a development stage company) as of June 30, 1996, and the
results of its operations and its cash flows for the period from November 15,
1995 (date of inception) to June 30, 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 4, the Company's
significant operating losses and deficits in working capital and stockholders'
equity raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 4. The
accompanying financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
August 1, 1996 except notes 2 and 3
which are dated October 14, 1996 and
notes 1, 4, 5 and 7, which are dated March 26, 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:
June 30, December 31,
1996 1996
------ ------
(unaudited)
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 $ -- $ --
======== ==========
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) 600,000 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) 600,000 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:
Annual
Year Compensation
------ --------------
1997 $ 676,000
1998 898,000
1999 898,000
2000 449,000
--------------
$2,921,000
==============
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.
LINE OF CREDIT
In March 1997, the Company entered into a $1,500,000 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. As of March 26, 1997, the Company has utilized $1,250,000.
The line of credit is guaranteed by Applied and secured by cash collateral
provided by Applied.
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
Page
--------
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
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 600,000 SHARES OF
10% SENIOR CONVERTIBLE
REDEEMABLE PREFERRED STOCK AND
600,000 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.
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
========
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. 7 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in New York, New
York on March 28, 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. 7 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
----------- ------- ------
/s/ Edwin L. Harper Chairman of the Board and Chief March 28, 1997
- ------------------------- Executive Officer
Edwin L. Harper, Ph.D. (principal executive officer)
/s/ Paul E. Hannesson Director March 28, 1997
- -------------------------
Paul E. Hannesson
/s/ Andrew P. Oddi Vice President -- Finance March 28, 1997
- ------------------------- (principal financial and
Andrew P. Oddi accounting officer)
/s/ Bentley J. Blum Director March 28, 1997
- -------------------------
Bentley J. Blum
II-4
<PAGE>
REGISTRATION NO. 333-11813
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
EXHIBITS
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------
COMMODORE SEPARATION TECHNOLOGIES, INC.
=============================================================================
<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>
LOGO
CERTIFIED PUBLIC ACCOUNTANTS
------------------------------
675 East 500 South, Suite 640
Salt Lake City, Utah 84102
Telephone (801) 532-7444
Fax (801) 532-4911
A PROFESSIONAL CORPORATION
CONSENT AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement of our report
dated August 1, 1996, except for notes 2 and 3, which are dated October 14, 1996
and notes 1, 4, 5 and 7, which are dated March 26, 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 28, 1997
