SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-22291
Commodore Separation Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-3299195
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3240 Town Point Drive, Suite 200
Kennesaw, Georgia 30144
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (770) 422-1518
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, par value $0.001 per share
10% Senior Convertible Redeemable Preferred Stock, par value $0.001 per share
Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Non-affiliates of the registrant held shares of Common Stock as of March
26, 1999 with an aggregate market value of approximately $112,000 (based upon
the average bid and asked prices of the Common Stock on March 26, 1999 as quoted
by the Nasdaq SmallCap Market).
As of March 26, 1999, 11,515,575 shares of the registrant's Common Stock
were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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COMMODORE SEPARATION TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
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PART I........................................................................1
ITEM 1. BUSINESS.....................................................1
General...................................................1
The SLiM Technology.......................................1
Contracts.................................................3
Markets and Customers.....................................4
Raw Materials.............................................6
Backlog...................................................6
Research and Development..................................6
Intellectual Property.....................................6
Competition...............................................7
Government Regulation.....................................7
Environmental Matters.....................................8
Employees.................................................8
ITEM 2. PROPERTIES...................................................8
ITEM 3. LEGAL PROCEEDINGS............................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........9
PART II......................................................................10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................10
Market Information.......................................10
Dividend Information.....................................10
ITEM 6. SELECTED FINANCIAL DATA.....................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................13
General..................................................13
Results of Operations....................................13
Liquidity and Capital Resources..........................15
Net Operating Losses.....................................16
Year 2000 Considerations.................................16
Forward-Looking Statements...............................16
New Accounting Pronouncements ...........................17
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................17
PART III.....................................................................18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........18
Executive Officers and Directors.........................18
Key Employees............................................20
Board Committees.........................................21
Compensation of Directors................................21
Compliance with Section 16(a) of the Exchange Act........21
ITEM 11. EXECUTIVE COMPENSATION.....................................23
Summary Compensation.....................................23
Stock Options............................................24
Employment Agreements....................................24
Compensation Committee Interlocks and Insider
Participation..........................................25
Report of the Compensation Committee on Executive
Compensation...........................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...............................................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............30
Organization and Capitalization of the Company...........30
Loans Involving Affiliates...............................31
Offices..................................................31
Services Agreement.......................................31
Future Transactions......................................32
PART IV......................................................................33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K..............................................33
SIGNATURES...................................................................36
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PART I
ITEM 1. BUSINESS.
GENERAL
Commodore Separation Technologies, Inc., a Delaware corporation (the
"Company"), has developed and is in the process of commercializing its
separation technology and recovery system known as SLiM(TM) (supported liquid
membrane). Based on its continuing research and development program, the Company
believes that SLiM can separate and recover solubilized metals, radionuclides,
biochemicals and other targeted elements from aqueous and possibly gaseous waste
streams in degrees of concentration and purity which permit both the reuse of
such elements and the ability for the waste water or gas to be disposed of as
non-toxic effluent with little or no further treatment. SLiM utilizes a process
whereby a contaminated aqueous 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 SLiM'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 free of the extractant(s).
In some instances, additional treatment may be required prior to discharge.
In December 1997 and February 1998, the Company was awarded its first two
commercial contracts from Maryland Environmental Service ("MES") to use its SLiM
technology in connection with the removal of chromium in water leaching from
waste sites at Baltimore Harbor and potentially polluting the Chesapeake Bay.
Prior to these awards, the Company had performed a series of on-site
demonstrations of SLiM, in which a SLiM unit, in a single feedstream
passthrough, reduced the contamination level of chromium from more than 630
parts per million (ppm) to less than one ppm. Under a license agreement with
Lockheed Martin Energy Research Corporation, the Company also has received the
exclusive worldwide license (subject to a government use license) to use and
develop its SLiM technology for separating the radionuclides, technetium and
rhenium, from mixed wastes containing radioactive materials. The Company's
business strategy is to pursue these and other opportunities for SLiM and to
seek marketing arrangements with established engineering and environmental
services firms to use SLiM.
To finance the significant growth experienced by the Company, the Company
raised a net amount equal to approximately $11,100,000 from an initial public
offering of its preferred stock, common stock and warrants in April and May 1997
(the "IPO"). As of March 26, 1999, approximately 87% of the Company's common
stock was owned by Commodore Environmental Services, Inc., a Delaware
corporation ("Environmental"). Effective as of September 28, 1998, Commodore
Applied Technologies, Inc., a Delaware Corporation ("Applied"), transferred its
87% interest in the Company to Environmental as part of a debt restructuring
agreement consummated between the two companies following the completion of
fairness opinions.
The Company was incorporated in Delaware in November 1995. The Company's
principal executive offices are located at 3240 Town Point Drive, Suite 200,
Kennesaw, Georgia 30144, and its telephone number at that address is (770)
422-1518.
THE SLiM TECHNOLOGY
Although SLiM uses the same basic principles as other membrane separation
technologies, the Company believes that SLiM represents a significant advance in
membrane separation technology in the treatment of solubilized feedstreams. SLiM
acts by separating and extracting the targeted materials from the feedstream,
rather than trapping the target material as the entire feedstream passes through
the filter mechanism. As a result, for the first time, a single process is
capable of treating a variety of elements and compounds in a variety of
industrial settings, and doing so at great speed and with a high degree of
effectiveness regardless of particle size and volume requirements. The Company
also believes that SLiM 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 SLiM membrane modules can
also be configured in various sizes and numbers and for varying capacities, and
operate at ambient temperatures and pressures.
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SLiM involves passing a contaminated aqueous or gaseous feedstream through
a porous, hollow fiber membrane unit or module. This module is previously loaded
with chemicals whose composition varies depending on the targeted substance in
the feedstream. As the feedstream enters the module, the metal or other
substance to be extracted reacts with the proprietary chemical combination in
the module, 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 discharge, or discharge may need to be made in a regulated manner. The
Company believes that SLiM can be utilized in many instances for the separation
and recovery of solubilized metals (e.g., chromium, cobalt, copper, zinc,
strontium, calcium, nickel, cadmium, silver, mercury, platinum and lead) and,
with refinement, radionuclides, gas, organics and biochemicals.
The typical SLiM module is cylindrical in shape. The module casing is
typically constructed of plastic and contains the fibers through which the
targeted element or compound is separated from the contaminated feedstream.
Pumps and pipes feed the contaminated feedstock from its point of origin (such
as a metal plating tank or bath) into the module. Additional pumps and pipes
recycle the strip solution which concentrates the contaminant that is being
deposited continuously by the Company's proprietary chemicals resident in the
membrane. The Company formulates the chemical mixture for the process in each
customer application, and performs the initial installation of the equipment at
the customer site. The customer will either operate the equipment itself using
computer data links to the Company, which will monitor the equipment and process
while in operation, or the Company will enter into service contracts with the
customer to operate the equipment at the customer's site.
Operational Characteristics
The most common alternative methods for metals separation from solubilized
process streams presently include ion exchange, reverse osmosis, precipitation,
ultrafiltration, nanofiltration 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 that
requires dewatering, drying and disposal in a landfill. Certain of these other
technologies also entail long process times and are relatively expensive. The
Company believes that SLiM is a superior and cost-effective alternative to other
existing forms of membrane filtration technology in that it:
o requires lower initial capital costs and lower operating costs;
o has the capability of treating a variety of elements and compounds in
industrial settings at greater speed and with a higher degree of
effectiveness, with varying contaminant concentrations and volume
requirements;
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 extract metals, organic chemicals and other elements and compounds
in degrees of concentration and purity which permit their reuse; and
o has the capability of selectively removing more than one element from
a mixed process stream by incorporating SLiM systems in series.
Test Results
In more than 100 laboratory and field tests to date, SLiM has demonstrated
the ability to successfully separate a variety of metals and other substances
from aqueous and possibly gaseous process streams. In each instance, the
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process stream was reduced to levels meeting 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:
Chromium 400 ppm 0.05 ppm (field test) Less than 0.05 ppm
(hexavalent)
Zinc 2,700 ppm Less than 2 ppm (after 30 Less than 2 ppm
minutes)
Cobalt 500 ppm Less than 1.1 ppm Less than 1.5 ppm
Copper 150 - 4,500 ppm Less than 0.15 ppm Less than 1.0 ppm
Calcium 85 ppm Less than 0.15 ppm ------
Nickel 2,500 ppm Less than 1.0 ppm (after 30 Less than 2 ppm
minutes)
Radionuclides:
Strontium 5 ppm Less than 0.01 ppm -----
</TABLE>
Some 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, chromium and strontium, no other tests conducted by
the Company have been independently verified.
CONTRACTS
Port of Baltimore Contracts. In November 1997, the Company was awarded its
first commercial project by the State of Maryland and entered into a multi-year,
sole-source contract with MES for the removal of chromium-contaminated leachate
at the Hawkins Point Hazardous Waste Treatment Facility at the Port of
Baltimore. The contract, dated as of November 25, 1997 (the "Hawkins Point
Contract"), provides that the Company will lease a SLiM unit to MES for a
one-time, lump-sum lease payment of $250,000, and will license its proprietary
SLiM technology to MES in exchange for a royalty equal to one-half of any
savings which MES realizes by using the SLiM technology as opposed to
conventional non-proprietary remediation technology. The Company also reserved
the right to market any residual chromium captured by its SLiM technology and
receive 50% of the revenues generated from any commercial sales of such residual
chromium. The SLiM equipment was installed in 1998 and went into commercial
operation in February 1999.
In February 1998, the Company was awarded its second commercial project by
the State of Maryland and entered into another multi-year, sole-source contract
with MES for the removal of chromium-contaminated leachate at Dundalk Marine
Terminal at the Port of Baltimore. The contract, dated as of February 5, 1998
(the "Dundalk Contract"), provides that the Company will lease a SLiM unit to
MES for a one-time, lump-sum lease payment of $350,000, and will license its
proprietary SLiM technology to MES in exchange for a royalty equal to one-half
of any savings which MES realizes by using the SLiM technology as opposed to
conventional non-proprietary remediation technology. As in the case of the
Hawkins Point Contract, the Dundalk Contract provides that the Company shall
have the right to market any residual chromium captured by its SLiM technology
and receive 50% of the revenues generated from any commercial sales of such
residual chromium. The SLiM equipment has been delivered to the site.
Installation is scheduled to begin in April 1999 with startup scheduled for May
1999.
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Lockheed License Agreement. In January 1997, the Company entered into a
license agreement (the "Lockheed License Agreement") with Lockheed Martin Energy
Research Corporation ("Lockheed Martin"), manager of the Oak Ridge National
Laboratory, a United States Department of Energy national laboratory ("Oak
Ridge"). 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 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
patent application filed jointly by the Company and three colleagues of Srinivas
Kilambi, Ph.D., the Company's former Senior Vice President--Technology, who
worked with him at Oak Ridge, covering their inventions related to
radionuclides. 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 or medical
applications or disposed of by government-approved techniques including
long-term storage. The Company believes that this technology may remediate
nuclear waste water 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.
MARKETS AND CUSTOMERS
Overview
Based on market data compiled by the Company, the Company estimates that,
as of December 31, 1998, 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 or more SLiM units, if they adopted the Company's technology. Based
on market data compiled by the Company, the potential market from organic and
inorganic chemical companies is in excess of 4,000 companies in the United
States and Canada. The Company believes that on average each of these companies
could utilize two to four SLiM units, if they adopted the Company's technology.
Additionally, there were more than 1,000 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 SLiM units operating at
substantial volumes. The Company believes that the potential international
market for each of the above applications could be up to two times 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.
Commercialization and Marketing Strategy
During its initial commercialization phase, the Company will be leasing its
equipment 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 will 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 expects to obtain revenues
through servicing the SLiM equipment, including periodic replacement of the
membrane component. In addition to leasing and selling its equipment, the
Company will 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 is focusing its initial marketing efforts on domestic
businesses, the Company is also prepared to pursue
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international opportunities, which may arise from successful presentations to
multinational corporations or from overseas referrals by domestic entities.
Metals Separation and Recovery. The Company's initial marketing efforts are
in the industrial sector, in which the separation and recovery of metal-bearing
aqueous 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 a limited
number of potentially effective technologies are available to effect proper
separation.
In September 1997, the Company installed a demonstration SLiM unit at a
metal plating company. The unit operated in a batch mode for one week, and,
based on operating data results, successfully separated and recovered nickel and
zinc effluent streams with concentrations of up to 2,800 ppm. An independent
testing laboratory verified the results.
Based on management studies and discussions with metals industry
executives, the Company believes that the major competitive technologies in this
area are precipitation and ion exchange. Precipitation generates a metallic
sludge by-product requiring further treatment prior to landfill disposal. Ion
exchange captures anions or cations, but offers no selectivity within a group.
Further, ion exchange is only approximately 90% efficient. By contrast, SLiM
does not generate harmful metallic sludges and, in some cases, enables process
water recycling while also enabling recovery of valuable raw materials to
approximately 99% efficiency. As costs of environmental compliance continue to
mount, the Company expects SLiM to become a preferred alternative to some
existing metals separation methods.
Environmental Remediation and Restoration. The Company believes that SLiM
has significant potential for application to environmental remediation and
restoration. In November 1997 and February 1998, the Company was awarded its
first two commercial contracts for the removal of chromium-contaminated leachate
at Baltimore Harbor. In the case of a project, such as the Baltimore Harbor
project, it is expected that the remediation technology will be applied
continuously over a period of many years, until the subject contamination (in
the case of the Baltimore Harbor, chromium leaching from underlying soil into
the aquifer) has abated for a significant period of time.
In contrast to other remediation technologies, the Company believes that
SLiM has the attributes of lower initial capital costs, lower operating costs
and the ability to recover heavy metals for reuse.
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.
Radionuclide/Mixed Waste Separation. In the United States, there are
numerous sites operated or maintained by the DOE and/or the DOD 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. SLiM may have capabilities
in the separation of radionuclides such as strontium, cesium, technetium and
rhenium. 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. 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.
Gas Separation. The SLiM equipment and technology can possibly be utilized
to separate and recover valuable gases 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, absorption, catalytic removal, and
permselective polymeric membrane separation. However, each of these processes
has disadvantages, which can include high energy usage, high pressure and
temperature requirements, and/or relatively low purity of the recovered gas. The
SLiM process may overcome these disadvantages by yielding relatively pure
nitrogen
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in a low-energy, lower capital cost process conducted at ambient temperature and
pressure. The Company has not developed a strategy or targeted a market for
commercialization of the gas separation application.
Biochemicals Separation and Recovery. SLiM may have capabilities in the
separation and recovery of biochemicals, including phenylalanine (an amino
acid). 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
SLiM in its marketing efforts.
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.
RAW MATERIALS
The Company currently has a limited number of outside sources of supply for
some strategic components used in the SLiM process, 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 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 develops its commercial activities, the Company may 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, it
could experience significant delays in the manufacture of SLiM equipment, which
could result in the loss of orders and customers and could have a material
adverse affect 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 increase to its customers. The use of outside suppliers also entails
risks of quality control and disclosure of proprietary information.
BACKLOG
At December 31, 1998, total backlog for the Company was approximately
$600,000, as compared with a $250,000 backlog at December 31, 1997. All of such
backlog represents work for which the Company has entered into a signed
agreement or purchase order with respect thereto or has received an order to
proceed with work up to a specified dollar amount, and represents work which the
Company expects will be completed in the next 12 months. While the Company
expects that backlog amounts will result in revenue, no assurance can be given
that all amounts included in backlog will ultimately be realized, even if
covered by written contracts or work orders.
RESEARCH AND DEVELOPMENT
Research and development activities are ongoing and utilize internal
technical staff, as well as independent consultants retained by the Company and
its subsidiaries. All such activities are company-sponsored. Research and
development expenditures for the Company were $1,299,000 and $817,000 for the
year ended December 31, 1998 and for the transition period from July 1 to
December 31, 1997 (the "Transition Period"), respectively.
INTELLECTUAL PROPERTY
In September 1997, the Company filed two U.S. patent applications and one
international patent application covering the principal features of its SLiM
technology. One of the patent applications covers the joint inventions of Dr.
Kilambi and Lockheed Martin. The other patent application and the international
patent application cover the sole inventions of Dr. Kilambi. The U.S. Patent
Office has decided to issue a patent for one of the two claims covering the
joint inventions of Dr. Kilambi and Lockhead Martin. The other claim will be
separated from the original application and filed as a separate patent
application. Based on comments provided by the U.S. Patent Office, the Company
has decided to abandon the two patent applications covering the sole inventions
of Dr. Kilambi. In January 1999, the
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Company filed a U.S. patent application for chromium removal and recovery
covering the sole invention of Dr. W.S. Winston Ho, Senior Vice President -
Technology. In February 1999, the Company filed a U.S. Patent Application for
using a strip dispersion technique with SLiM covering the sole invention of Dr.
W.S. Winston Ho.
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
many 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, nanofiltration 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 chromium 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, SLiM is capable of handling a broad range of compounds in a
faster and relatively inexpensive manner. Furthermore, the by-products of the
SLiM 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 SLiM has substantial advantages over many 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
SLiM. To the extent the Company's competitors are able to offer comparable
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 SLiM 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 SLiM is a technologically superior and
cost-effective alternative to other separation technologies on a commercial
scale, the Company may not be able to compete successfully.
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
7
<PAGE>
Conservation and Recovery Act, as amended, and the Occupational Safety and
Health Act of 1970, which may require the Company, its prospective working
partners or its customers to obtain permits or approvals to utilize SLiM and
related equipment on certain job sites. In addition, if the Company begins to
market SLiM 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 SLiM 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 to 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 $1.0
million per occurrence and $2.0 million in the aggregate. Applied maintains, on
behalf of itself and its subsidiaries (including the Company), contractor's
pollution liability insurance with limits of $15.0 million per occurrence and
$15.0 million in the aggregate. 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 an 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.
EMPLOYEES
As of March 26, 1999, the Company had 8 full-time employees, comprising
engineers, chemists and other professionals. None of such employees are covered
by collective bargaining agreements, and the Company's relations with its
employees are believed to be good. In October 1998, the Company reduced its
workforce by two-thirds to better reflect its current human resource needs and
to conserve cash.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in approximately
20,800 square feet of space in Kennesaw, Georgia (near Atlanta) under a lease
expiring in February 2002, which the Company began occupying in March 1997. Such
space also serves as the Company's administrative offices and research and
testing laboratories. The Company pays $116,000 in rent per year under such
lease.
The Company also maintains executive offices located in New York City in
approximately 2,000 square feet of space leased by an affiliate of Bentley J.
Blum, a director and principal stockholder of Environmental and a director of
the Company. Such space also serves as the principal executive offices of
Environmental, Applied and certain of their affiliates.
ITEM 3. LEGAL PROCEEDINGS.
During the year ended December 31, 1998, and as of March 26, 1999, the
Company was not involved in any litigation.
8
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's common stock, par value $0.001 per share ("Common Stock"),
10% Senior Convertible Preferred Stock, par value $0.001 per share ("Convertible
Preferred Stock"), and Redeemable Common Stock Purchase Warrants ("Warrants")
began trading publicly on April 3, 1997 at initial public offering prices of
$5.00 and $10.00 per share, respectively, and $0.10 per Warrant and were traded
and quoted on the Nasdaq SmallCap Market ("Nasdaq") under the symbols CXOT,
CXOTP and CXOTW, respectively, until February 18, 1999. At the close of business
on February 18, 1999, at which time the Company's securities were delisted from
the Nasdaq Stock Market because of the Company's inability to satisfy the
revised maintain standards for continued listing on the Nasdaq Market System.
The Company is currently listed on the OTC Bulletin Board. On March 26, 1999,
there were 178 holders of record of Common Stock, one holder of record of
Convertible Preferred Stock and 13 holders of record of Warrants.
The following table sets forth, for the periods shown, the high and low bid
prices of the Common Stock, Convertible Preferred Stock and Warrants (rounded to
the nearest cent) as quoted by Nasdaq. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Convertible
Common Stock Preferred Stock Warrants
---------------------- ----------------------- ----------------------
High Low High Low High Low
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1997: .............................. $ 5.00 $ 2.13 $ 10.00 $ 7.50 $ 1.88 $ 0.88
Fourth Quarter(1)
TRANSITION PERIOD:
July 1 to September 30, 1997 ........... 3.00 1.38 7.50 6.50 1.13 0.50
October 1 to December 31, 1997 ......... 3.75 1.00 7.63 2.75 1.38 0.25
FISCAL YEAR 1998
January 1 to March 31, 1998 ............ 3.50 1.63 7.50 4.13 1.25 0.31
April 1 to June 30, 1998 ............... 2.75 1.19 5.00 2.00 0.56 0.22
July 1 to September 30, 1998 ........... 2.00 0.06 3.00 1.13 0.34 0.02
October 1 to December 31, 1998 ......... 0.25 0.03 0.75 0.03 0.03 0.03
</TABLE>
- ----------
(1) Reflects bid information for the period beginning April 3, 1997 (the date
the Common Stock, Convertible Preferred Stock and Warrants began quoting on
Nasdaq) through June 30, 1997.
DIVIDEND INFORMATION
The holders of the Company's 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, quarterly on the last business day of March, June, September and December
of each year, before any dividends are declared or paid on the Common Stock or
any capital stock ranking junior to the Convertible Preferred Stock. On March 31
and June 30, 1998, the Company paid cash dividends to the holders of the
Convertible Preferred Stock in the aggregate amounts of $150,000 and $150,000,
respectively. While the Company currently intends to retain most of its earnings
to finance the growth and development of its business and to repay outstanding
indebtedness, the Company ceased paying cash dividends to the Holders of the
Convertible Preferred Stock commencing with the Dividend for the quarter ended
September 30, 1998. The Company does not anticipate that it will continue to pay
similar cash dividends on its Convertible Preferred Stock in the foreseeable
future.
10
<PAGE>
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
Any future determination as to the payment of cash dividends on the capital
stock of the Company will depend on the ability of the Company to service its
outstanding indebtedness and future earnings, capital requirements, the
financial condition of the Company and such other factors as the Company's Board
of Directors may consider.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data included in the following table as of June 30,
1996 and 1997, and as of December 31, 1997 and 1998, for the period from
November 15, 1995 (date of inception) to June 30, 1996, for the year ended June
30, 1997, for the six-month period ended December 31, 1997 and for the year
ended December 31, 1998 are derived from the audited Financial Statements of the
Company appearing elsewhere herein. The financial data for the six-month period
ended December 31, 1996 is unaudited and, in the opinion of management, includes
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation. 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>
Six Months Ended
November 15, 1995 December 31, Year Ended
(date of inception) Year Ended ----------------------- December 31,
Statement of Operations Data (1): to June 30, 1996 June 30, 1997 1996 1997 1998
---------------- ------------- ---- ---- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Costs and expenses .................. $ (60,000) $(3,265,000) $ (857,000) $(2,961,000) $(3,749,000)
Revenue ............................. -- 8,000 8,000 -- 19,000
Other income
and (expense) ..................... (1,000) 86,000 (5,000) 195,000 101,000
Net loss ............................ (61,000) (3,171,000) (854,000) (2,766,000) (3,629,000)
Net loss per share--basic
and diluted (2) .................. (.01) (.32) (.09) (.27) (.37)
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: June 30, 1996 June 30, 1997 December 31, 1997 December 31, 1998
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Working capital (deficit) ........... $ (81,000) $ 7,817,000 $ 4,462,000 $ 549,000
Total assets ........................ 23,000 9,850,000 6,660,000 2,665,000
Long-term liabilities ............... -- 18,000 13,000 4,000
Deficit accumulated during
development stage ................ (61,000) (3,232,000) (5,998,000) (9,627,000)
Stockholders' equity (deficit) ...... (61,000) 8,708,000 5,652,000 2,105,000
</TABLE>
- ----------
(1) The Company is a development stage company and has had limited commercial
operations to date. See Note 1 of Notes to Financial Statements.
11
<PAGE>
(2) Net loss per share is calculated on the basis of 10,000,000, 10,375,000,
10,000,000, 11,502,000 and 11,514,000, shares of Common Stock,
respectively, being outstanding for the periods.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company was organized in November 1995, and has not generated material
revenues or any profits through December 31, 1998. Since its inception, the
Company has been engaged principally in organizational activities, including
research and development, developing a strategic operating plan, entering into
contracts, hiring personnel, developing and manufacturing commercial-scale units
and installing and operating units on an extended basis for demonstration or
test purposes. Accordingly, the Company has a limited 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 Company has generated nominal revenues to date, but expects to generate
additional revenues after the Company successfully completes the installation of
SLiM units at the Port of Baltimore. During the period from November 15, 1995
(date of inception) to December 31, 1998, the Company incurred a net loss of
$9,627,000. For the year ended December 31, 1998, the Company incurred a loss of
$3,629,000 and anticipates that it may continue to incur significant 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 the Financial Statements and Notes thereto included elsewhere in
this Annual Report.
On July 28, 1997, the Company changed its fiscal year. Effective January 1,
1998, the Company's new fiscal year will be a twelve-month period ending
December 31. Previously, the Company's fiscal year was a twelve-month period
ending June 30. The Transition Period relates to the six months ended December
31, 1997 and, where applicable, unaudited comparative information for the six
months ended December 31, 1996 has been presented.
RESULTS OF OPERATIONS
Year ended December 31, 1998 compared
to year ended December 31, 1997
Research and development costs were $1,299,000 for the year ended December
31, 1998 as compared to $1,390,000 for the year ended December 31, 1997. During
1998, the Company began to shift its focus to commercializing the technology,
thereby reducing its efforts in the research and development area and focusing
on getting the technology out to potential customers. Research and development
costs include salaries, wages and other related costs of personnel engaged in
research and development activities, as well as contract services and equipment
used in research and development activities. Research and development costs are
expensed when incurred.
General and administrative expenses were $1,096,000 for the year ended
December 31, 1998 as compared to $1,800,000 for the year ended December 31,
1997. In 1998, the Company began an effort to reduce its overhead expenses and
placed more of a focus on developing its technology and getting it out to
customers. In October 1998, the Company reduced the number of employees from
twenty-three down to eight and has reduced its reliance on corporate
infrastructure.
Depreciation and amortization increased from $234,000 in 1997 to $408,000
in 1998 as a result of the purchase and related depreciation of fixed assets.
These fixed assets include SLiM units and modules used in the Company's
technology process.
Corporate overhead expenses decreased from $1,616,000 in 1997 to $529,000
in 1998 as a result of reduced reliance on corporate personnel and a decrease in
other administrative expenses charged by its parent.
Sales and marketing expense increased from $281,000 in 1997 to $417,000 in
1998 as a result of the Company's focus on getting the technology out to
potential customers. In addition, the Company is trying to identify new markets
for applications of its technology.
13
<PAGE>
Interest income was $101,000 in 1998 as compared to $294,000 in 1997. The
Company successfully completed an initial public offering in April 1997 and
through 1998 has generated interest income from the proceeds of the offering.
Six Months ended December 31, 1997 compared
to Six Months ended December 31, 1996
For the six months ended December 31, 1997, the Company incurred $817,000
of research and development costs as compared to $412,000 for the six months
ended December 31, 1996. The increase is due to efforts to commercialize the
Company's technology.
General and administrative expenses for the six months ended December 31,
1997 were $869,000 as compared to $443,000 for the six months ended December 31,
1996. The increase is due to hiring of personnel and acquisition of
infrastructure (e.g., office and lab space) to commercialize the Company's
technology.
For the six months ended December 31, 1997, the Company incurred $230,000
of sales and marketing expense as compared to none for the six months ended
December 31, 1996. This increase is due to the Company's efforts to obtain new
customers and identify markets for applications of its technology.
For the six months ended December 31, 1997, the Company was charged
$911,000 by Applied as a management fee. This fee is a result of allocated wages
and salaries, rent, insurance (including directors' and officers' liability
insurance), and other administrative expenses. The management fees commenced in
April 1997. See "Certain Relationships and Related Transactions--Services
Agreement."
Interest income was $195,000 for the six months ended December 31, 1997, as
compared to no interest income for the six month period ended December 31, 1996.
This increase resulted from the investment of proceeds of the Company's IPO
since April 1997.
Year ended June 30, 1997 compared to Seven Months
(November 15, 1995 - Inception) ended June 30, 1996
For the year ended June 30, 1997, the Company incurred $985,000 of research
and development costs as compared to $50,000 for the seven months ended June 30,
1996. The increase is due to efforts to commercialize the Company's technology.
Research and development costs include salaries, wages and other related costs
of personnel engaged in research and development activities, as well as contract
services and equipment used in research and development activities. Research and
development costs are expensed when incurred.
General and administrative expenses for the year ended June 30, 1997 were
$1,356,000, as compared to $10,000 for the seven months ended June 30, 1996. The
increase is due to hiring of personnel and acquisition of infrastructure (e.g.,
office and lab space) to commercialize the Company's technology.
For the year ended June 30, 1997, the Company was charged $705,000 by
Applied as a management fee. This fee is a result of allocated wages and
salaries, rent, insurance (including directors' and officers' liability
insurance), and other administrative expenses. The management fees commenced in
April 1997. See "Certain Relationships and Related Transactions--Services
Agreement."
Gross revenues for the year ended June 30, 1997 were $8,000, as compared to
no revenues for the seven months ended June 30, 1996. The Company performed a
site demonstration at a client's facility which provided nominal revenues.
Interest income was $99,000 for the year ended June 30, 1997, as compared
to no income for the seven-month period ended June 30, 1996. This increase
resulted from the investment of proceeds of the Company's IPO since April 1997.
14
<PAGE>
Interest expense was $13,000 for the year ended June 30, 1997, as compared
to $1,000 for the seven-month period ended June 30, 1996. The increased interest
expense is due to a line of credit extended to the Company to fund the Company's
operations pending completion of its IPO, which occurred in April 1997.
LIQUIDITY AND CAPITAL RESOURCES
Through April 1997, the Company financed its development efforts through
direct equity investments and loans from Commodore Environmental Services, Inc.
("Environmental") and Applied. From November 15, 1995 (date of inception) to
December 31, 1998, the Company purchased or constructed equipment totaling
$1,814,000 and has incurred patent filing and maintenance costs of $196,000. In
December 1996, as part of a corporate restructuring to consolidate all of its
current environmental technology businesses within Applied, Environmental
transferred to Applied all of the then outstanding shares of capital stock of
the Company and another Environmental subsidiary. In addition, Environmental
assigned to Applied outstanding Company notes aggregating $976,200 at December
2, 1996, representing advances previously made by Environmental to the Company.
Such advances have been capitalized by Applied as its capital contribution to
the Company. In consideration for such transfers, Applied paid Environmental
$3,000,000 in cash and issued to Environmental a warrant to purchase 7,500,000
shares of Applied common stock. See "Certain Relationships and Related
Transactions--Organization and Capitalization of the Company."
Effective as of September 28, 1998 Commodore Environmental Services LLC, a
Delaware limited liability company wholly owned by Environmental acquired
10,000,000 shares of common stock, par value $.001 per share (the "Company
Stock"), of the Company, representing approximately 87% of the issued and
outstanding shares of capital stock of the Company, from Applied, as part of a
debt repayment plan between Environmental and Applied. The transaction was
consummated on December 25, 1998. Environmental currently owns approximately 35%
of the outstanding shares of Applied common stock. Bentley J. Blum, a director
of Environmental and the owner of approximately 49% of the outstanding shares of
Environmental common stock, is also a director of Applied and the Company.
By virtue of the foregoing transaction, the Company has become the direct,
87%-owned subsidiary of Environmental. Paul E. Hannesson, the Chairman of the
Board, President and Chief Executive Officer of Applied and the Chairman of the
Board and Chief Executive Officer of the Company, and James M. DeAngelis, the
Vice President--Finance and Treasurer of Applied and the Vice President--Sales &
Marketing of the Company, will maintain their current management positions in
the Company. The acquisition of the Company by Environmental will be accounted
for under the purchase method of accounting.
The Company has sustained losses of $3,629,000, $2,766,000 and $3,171,000
for the year ended December 31, 1998, for the six months ended December 31, 1997
and for the year ended June 30, 1997, respectively. The Company had no
significant revenues during the period from November 15, 1995 (date of
inception) to December 31, 1998. Substantially all of the Company's losses are
attributable to the expenses detailed above. At December 31, 1998 and 1997, and
June 30, 1997, the Company had working capital of $549,000, $4,462,000 and
$7,817,000, respectively, and stockholders' equity of $2,105,000, $5,652,000 and
$8,708,000, respectively. The Company's decrease in working capital and
stockholders' equity from June 30, 1997 to December 31, 1998 is principally due
to the net loss for the period and dividends paid on the Company's Convertible
Preferred Stock.
While the Company believes its capital requirements for the remainder of
1999 will be met through the development of its business, the Company will be
required to obtain financing through external sources. There can be no assurance
that such financing will be available or, if available, that it will be on terms
satisfactory to the Company. In the event such external financing is not
available on terms acceptable to the Company, the Company may be able to obtain
interim financing from Environmental, the owner of 87% of the outstanding shares
of Common Stock. There can be no assurance, however, that the Company will be
able to obtain any financing from Environmental.
15
<PAGE>
Letter of Intent
The Company signed a non-binding letter of intent on February 2, 1999 to
merge with and into American Technologies Group, Inc. ("ATEG"). ATEG is engaged
in the development, commercialization and sale of products and systems using its
patented and proprietary technologies, concentrating in three core areas: (i)
IE(TM) technology, (ii) water purification and (iii) high-energy particle beams.
NET OPERATING LOSSES
At December 31, 1998, the Company had tax loss carryforwards of
approximately $9,627,000. 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 full valuation allowance has been established because of the
uncertainty about whether the Company will realize the benefit of net operating
losses.
YEAR 2000 CONSIDERATIONS
Many existing computer systems and software products are coded to accept
only two digit entries in the date code field. As the year 2000 approaches,
these code fields will need to accept four digit entries to distinguish between
years beginning with "19" from those beginning with "20." As a result, in less
than one year, computer systems and/or software products used by many companies
may need to be upgraded to comply with such year 2000 requirements. If
uncorrected, many computer applications could fail or create erroneous results
by or at the year 2000.
The Company believes that its mainframe database and operating systems are
year 2000 compliant, meaning that they may be able to operate without error in
dates and date-related data, including calculating, comparing, indexing and
sequencing, prior to, on and after January 1, 2000. However, certain of the
Company's software applications utilized to bill customers and maintain finance
and accounting records are coded using two digits rather than four to define the
applicable year. The Company is working with its major software vendor to assure
that proper modifications will be made to such applications and anticipates such
modifications to be completed by June 1999. The Company also relies, directly
and indirectly, on external systems of its customers (primarily U.S. government
agencies and contractors), suppliers, creditors, financial organizations and
governmental entities. Consequently, the Company could be affected through the
disruptions in the operations of the enterprises with which the Company
interacts. Furthermore, the purchasing frequency and volume of customers or
potential customers may be affected by year 2000 issues as companies expend
significant resources to make their current systems year 2000 compliant.
The Company has not quantified the total costs required to become year 2000
compliant, but does not expect that the cost of addressing any year 2000 issue
will be a material event or uncertainty that would cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition, or that the costs or consequences of incomplete or
untimely resolution of any year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition. As of December 31, 1998,
the total costs incurred to address the Company's year 2000 issues have not been
material (approximately $150.00). However, if the Company, its customers or
vendors encounter any unanticipated delays in, or costs associated with, the
resolution of any year 2000 issue, the Company's business, financial condition
and results of operations could be materially adversely affected. Accordingly,
the Company plans to devote the necessary resources to becoming year 2000
compliant in a timely manner and intends to create a contingency plan by July
1999 to handle any year 2000 problems.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These forward-looking statements
can generally be identified as such because the context of the statement will
include words such as the Company "believes," "anticipates," "expects" or
16
<PAGE>
words of similar import. Similarly, statements that describe the Company's
future plans, objectives or goals are also forward-looking statements. Such
statements may address future events and conditions concerning, among other
things, the Company's results of operations and financial condition; the
consummation of acquisition and financing transactions and the effect thereof on
the Company's business; capital expenditures; litigation; regulatory matters;
and the Company's plans and objectives for future operations and expansion. Any
such forward-looking statements would be subject to the risks and uncertainties
that could cause actual results of operations, financial condition,
acquisitions, financing transactions, operations, expenditures, expansion and
other events to differ materially from those expressed or implied in such
forward-looking statements. Any such forward-looking statements would be subject
to a number of assumptions regarding, among other things, future economic,
competitive and market conditions generally. Such assumptions would be based on
facts and conditions as they exist at the time such statements are made as well
as predictions as to future facts and conditions, the accurate prediction of
which may be difficult and involve the assessment of events beyond the Company's
control. Further, the Company's business is subject to a number of risks that
would affect any such forward-looking statements. These risks and uncertainties
include, but are not limited to, the ability of the Company to commercialize its
technology; product demand and industry pricing; the ability of the Company to
obtain patent protection for its technology; developments in environmental
legislation and regulation; the ability of the company to obtain future
financing on favorable terms; and other circumstances affecting anticipated
revenues and costs. These risks and uncertainties could cause actual results of
the Company to differ materially from those projected or implied by such
forward-looking statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that
an entity recognize all derivative instruments as either assets or liabilities
on its balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction, and, if it is, the type of hedge transaction. The Company will
adopt SFAS 133 by the first quarter of 2000. Due to the Company's limited use of
derivative instruments, SFAS 133 is not expected to have a material effect on
the financial position or results of operations of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are included on pages F-1 through
F-20 of this Annual Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the fiscal year ended December 31, 1998, there were no disagreements
between the Company and its independent accountants, PricewaterhouseCoopers LLP,
on any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Tanner + Co., would have caused Tanner + Co. to make
reference to the subject matter of the disagreements in connection with its
report.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the executive officers and directors of the Company,
and their positions with the Company as of March 26, 1999, are as follows:
Name Age Position
- ---- --- --------
Paul E. Hannesson......... 58 Chairman of the Board and
Chief Executive Officer
Carl O. Magnell ......... 56 President and Chief Operating Officer
James M. DeAngelis........ 38 Senior Vice President - Sales & Marketing
W.S. Winston Ho .......... 55 Senior Vice President - Technology
Bentley J. Blum........... 57 Director
Kenneth L. Adelman, Ph.D.. 50 Director
David L. Mitchell......... 77 Director
William R. Toller......... 67 Director
Herbert A. Cohen.......... 65 Director
- ----------
Paul E. Hannesson has been a director of the Company since its inception,
served as its Chairman of the Board from November 1995 to January 1997, and was
re-appointed Chairman of the Board and appointed Chief Executive Officer in May
1997. Mr. Hannesson has been a director of Applied since March 1996 and was
appointed Chairman of the Board in November 1996. Mr. Hannesson also served as
Chief Executive Officer of Applied from March to October 1996 and as President
of Applied from March to September 1996, and was re-appointed Chief Executive
Officer of Applied in November 1996 and President in May 1997. Mr. Hannesson has
been a director of Environmental since February 1993 and was appointed its
Chairman of the Board and Chief Executive Officer in November 1996. Mr.
Hannesson also served as President of Environmental from February 1993 to July
1996 and was re-appointed President in May 1997. Mr. Hannesson also currently
serves as the Chairman of the Board and Chief Executive Officer of Commodore
Solution Technologies, Inc., a wholly owned, subsidiary of Applied ("Solution"),
and Commodore CFC Technologies, Inc., a wholly-owned subsidiary of Applied ("CFC
Technologies"). Mr. Hannesson was a private investor and business consultant,
from 1990 to 1993, and was also an officer and director of Specialty Retail
Services, Inc., from 1989 to August 1991. He also served as Chairman of the
Board of Lanxide Corporation, a company which specializes in the manufacture of
ceramic bonding and refractory materials. ("Lanxide"), from 1983 to February
1998. Mr. Hannesson is the brother-in-law of Bentley J. Blum, a director of the
Company.
Carl O. Magnell, P.E. has served as President of the Company since May
1998, succeeding Kenneth J. Houle, former President and Chief Operating Officer,
upon Mr. Houle's death in May 1998. Mr. Magnell also served as Vice President of
Applied from June 1996, was appointed Vice President - Technology & Business
Development of Applied in June 1997 and from February 1998 until April 1998
served as Vice President - Technology and Sales & Sales of Applied. Mr. Magnell
also served as Vice President of Environmental from September 1995 to June 1996.
From 1992 to 1995, Mr. Magnell served as Director of Research for Civil
Engineering Research Foundation (an industry-sponsored engineering research
group), and from 1964 to 1992 Mr. Magnell served in various engineering
capacities with the U.S. Army Corps of Engineers. Mr. Magnell holds a B.S.
degree from the United States Military Academy, and an M.S. in civil engineering
and political science from the Massachusetts Institute of Technology.
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<PAGE>
James M. DeAngelis was appointed Senior Vice President--Sales & Marketing
of the Company in July 1996, after having served as its Vice
President--Marketing since November 1995. Mr. DeAngelis has also served as the
President of CFC Technologies since September 1994, and served as Vice
President--Marketing of Environmental from September 1992 to September 1995.
Prior to September 1992, 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.
W.S. Winston Ho was appointed Senior Vice President--Technology of
Separation in May 1998. Dr. Ho is considered one of the world's foremost experts
in the development and commercialization of membrane technology, with over 27
years of research and development experience. Prior to joining Separation, Dr.
Ho served in various positions with Exxon Research and Engineering Company from
1997 to 1984, and from 1984 to April 1998 he served as its Senior Engineering
Associate. Dr. Ho served as Chairman of the Separations Division of the American
Institute of Chemical Engineers ("AIChE") in 1997 and currently serves as its
Meeting Program Chairman for the AIChE 2000 Spring National Meeting in Atlanta,
Georgia. A New Jersey Inventor of the Year in 1991, Dr. Ho holds more than 40
United States patents in membrane and separation processes. He is co-author and
editor of Membrane Handbook, the preeminent book on membranes, for which he and
his co-author received the Professional and Scholarly Publishing Award for the
most outstanding engineering work in 1993. A native of Taiwan, Dr. Ho holds an
undergraduate degree from National Taiwan University and a Masters degree and
Ph.D. in chemical engineering from the University of Illinois at
Urbana-Champaign.
Bentley J. Blum has been a director of the Company since August 1996. Mr.
Blum has served as a director of Applied since March 1996 and served as its
Chairman of the Board from March to November 1996. Mr. Blum has served as a
director of Environmental since 1984 and served as its Chairman of the Board
from 1984 to November 1996. Mr. Blum also currently serves as a director of
Solution and CFC Technologies. For more than 15 years, Mr. Blum has been
actively engaged in real estate acquisitions 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
also a director of 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 a principal stockholder of Environmental and is
the brother-in-law of Paul E. Hannesson, the Chairman of the Board and Chief
Executive Officer of the Company.
Kenneth L. Adelman, Ph.D. joined the Board of Directors of the Company in
April 1997. Dr. Adelman has been a member of the Board of Directors of Applied
and Environmental since July 1996 and was appointed Executive Vice
President--Marketing and International Development of Applied in May 1997. Dr.
Adelman was appointed President and Chief Operating Officer of Solution in
November 1997. Since 1987, Dr. Adelman has been an independent consultant on
international issues to various corporations, including Lockheed Martin
Corporation and Loral Corporation. 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 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 joined the Board of Directors of the Company in April
1997. Mr. Mitchell has been a member of the Board of Directors of Applied and
Environmental since July 1996. Mr. Mitchell has also served as a consultant to
Applied since July 1997. For the past thirteen 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.
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<PAGE>
William R. Toller joined the Board of Directors of the Company in April
1997. Mr. Toller also joined the Board of Directors of Applied in March 1998 and
has served as a consultant to Environmental since July 1997. Mr. Toller served
as Vice Chairman of Lanxide from July 1997 to February 1998. Mr. Toller also
currently serves as Chairman and Chief Executive Officer of Titan Consultants,
Inc. Mr. Toller had been the Chairman and Chief Executive Officer of Witco since
October 1990 and 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. Mr. Toller serves
on the board of directors of Chase Industries, Inc., Fuseplus, Inc., where he is
also Chairman of the Organization and Compensation Committee, and the United
States Chamber of Commerce, where he is also a member of the Labor Relations and
International Policy Committees. Mr. Toller is also a member of the Board of
Trustees and the Executive and Finance Committees of the International Center
for the Disabled, a member of the Board of Associates of the Whitehead Institute
for Biomedical Research, a member of the National Advisory Board of First
Commercial Bank in Arkansas, a member of the Dean's Executive Advisory Board and
the International Business Committee at the University of Arkansas, College of
Business Administration, and a member of the Board of Presidents of the Stamford
Symphony Orchestra.
Herbert A. Cohen joined the Board of Directors of the Company in March
1998. Mr. Cohen has served as a director of Applied and Environmental since July
1996. Mr. Cohen has been a practicing negotiator for the past three decades
acting in an advisory capacity in hostage negotiations and crisis management. He
has been an advisor to Presidents Carter and Reagan in the Iranian hostage
crisis, the government's response to the skyjacking of TWA Flight 847 and the
seizure of the Achille Lauro. Mr. Cohen's clients have included large
corporations and government agencies such as the Department of State, the
Federal Bureau of Investigation, the Conference of Mayors, the Bureau of Land
Management, Lands and Natural Resources Division in conjunction with the EPA,
and the United States Department of Justice. In addition, Mr. Cohen was an
advisor and consultant to the Strategic Arms Reduction Talks negotiating team.
Mr. Cohen holds a law degree from New York University School of Law, and has
lectured at numerous academic institutions.
Each director is elected to serve for a term of one year or until his
successor is duly elected and qualified. The Company's officers are elected by,
and serve at the pleasure of, the Board of Directors, subject to the terms of
any employment agreements. Messrs. Hannesson and Blum are brothers-in-law. No
family relationship exists among any other directors or executive officers of
the Company.
KEY EMPLOYEES
The names and ages of the key employees of the Company, and their positions
with the Company as of March 26, 1999, are as follows:
Name Age Position
- ---- --- --------
Michael D. Kiehnau, P.E...... 37 Vice President--Finance & Operations
Andrew P. Oddi............... 37 Vice President and Treasurer
- ----------
Michael D. Kiehnau, P.E. was appointed Vice President--Finance & Operations
of the Company in April 1997, after having served as the Company's Chief
Financial Officer from September 1996 to January 1997, and as its Vice
President--Operations from January to March 1997. From August 1992 to August
1996, Mr. Kiehnau served as a project 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.
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<PAGE>
Andrew P. Oddi was appointed Vice President and Treasurer of the Company in
June 1997, after having served as its Vice President--Finance since September
1996. Mr. Oddi was also appointed Vice President and Treasurer of Applied,
Environmental, Solution and CFC Technologies in June 1997. Mr. Oddi has also
served as a director of Specialty Retail Services, Inc., a former distributor of
professional beauty products, since December 1997. Mr. Oddi served as the Vice
President of Finance, Chief Financial Officer and Secretary of Applied from
March to November 1996. Mr. Oddi also served as Vice President of Finance &
Administration and Chief Financial Officer of Environmental from 1987 to May
1997 and as a director of Environmental from December 1990 to July 1996. From
1982 to 1987, Mr. Oddi was employed by Ernst & Young, independent accountants,
and held the position of audit manager in 1986 and 1987. Mr. Oddi is a Certified
Public Accountant.
BOARD COMMITTEES
The Company's Board of Directors has (i) an Audit Committee, (ii) a
Compensation, Stock Option and Benefits Committee and (iii) an Executive and
Finance Committee. The responsibilities of the Audit Committee, which, as of
March 26, 1999, was composed of David L. Mitchell (Chairman), Herbert A. Cohen
and William R. 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,
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, supervising
the Company's policies relating to business conduct and dealing with conflicts
of interest relating to officers and directors of the Company. The Compensation,
Stock Option and Benefits Committee, which, as of March 26, 1999, was composed
of William R. Toller (Chairman), David L. Mitchell and Herbert A. Cohen, has
responsibility for establishing and reviewing employee and consultant/advisor
compensation, bonuses and incentive compensation awards, administering and
interpreting the Company's 1996 Stock Option Plan, and determining the
recipients, amounts and other terms (subject to the requirements of the 1996
Stock Option Plan) of options which may be granted under the 1996 Stock Option
Plan from time to time and providing guidance to management in connection with
establishing additional benefit plans. The Executive and Finance Committee was
composed of Paul E. Hannesson, Bentley J. Blum and William R. Toller as of March
26, 1999, and has the authority and responsibility of the full Board of
Directors to supervise and oversee the financial practices and policies of the
Company, to oversee the adoption of significant accounting policies, and to
manage the Company between meetings of the Board of Directors, subject to
certain limitations. The Executive and Finance Committee also has the authority
and responsibility for making recommendations to the Board of Directors
regarding nominees to serve as directors of the Company.
COMPENSATION OF DIRECTORS
Each non-management director of the Company receives a director's fee of
$500 per meeting for attendance at Board of Directors meetings, and is
reimbursed for actual expenses incurred in respect of such attendance. The
Company does not separately compensate employees for serving as directors.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of the outstanding shares
of Common Stock of the Company, to file initial reports of beneficial ownership
and reports of changes in beneficial ownership of shares of Common Stock with
the Securities and Exchange Commission (the "Commission") and Nasdaq. Such
persons are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the year ended December 31, 1998, and upon a
review of Forms 5 and amendments thereto furnished to the Company with respect
to the year ended December 31, 1999, or upon written representations received by
the Company from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that no director, executive
21
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officer or holder of more than 10% of the shares of Common Stock of the Company
failed to file on a timely basis the reports required by Section 16(a) of the
Exchange Act during, or with respect to, the year ended December 31, 1998.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION
The following table sets forth the amount of all compensation paid by the
Company and/or its affiliates and allocated to the Company's operations for
services rendered during the fiscal year ended December 31, 1998, the Transition
Period and for the fiscal year ended June 30, 1997 to the person serving as the
Company's current Chief Executive Officer, to each of the Company's most highly
compensated executive officers other than the Chief Executive Offer whose total
salary and bonus compensation exceeded $100,000 during any such period.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying LTIP Compen-
Name and Principal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------------ ---- ------ ----- ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul E. Hannesson 1998 94,504(3) -0- 2,610(5) -0- 280,000 -0- -0-
Chief Executive Officer 1997(1) 80,067(3) 20,270(4) 4,865(5) -0- -0- -0- -0-
1997(2) 49,375(3) 12,500(4) 3,000(5) -0- 175,000 -0- -0-
James M. DeAngelis 1998 107,005 -0- -0- -0- 187,500 -0- -0-
Senior Vice President 1997(1) 72,500 20,500 -0- -0- -0- -0- -0-
1997(2) 120,833 20,500 -0- -0- 101,250 -0- -0-
Kenneth J. Houle(7) 1998 100,243 -0- -0- -0- -0- -0- -0-
Former President & Chief 1997(1) 90,000 27,000 -0- -0- -0- -0- -0-
Operating Officer 1997(2) 77,596(6) 27,000 -0- -0- 100,000 -0- -0-
</TABLE>
- ----------
(1) On July 28, 1997, the Company changed its fiscal year-end from June 30 to
December 31. Information is for the Transition Period from July 1 to
December 31, 1997.
(2) Information is presented for the Company's fiscal year ending on June 30,
1997.
(3) Represents the amount of Mr. Hannesson's base salary allocated to the
Company for such period. Mr. Hannesson's total base salary for calendar
years 1998 and 1997 were $434,500 and $395,000, respectively. Certain
portions of such base salary were also allocated to Applied and
Environmental. See "Certain Relationships and Related
Transactions--Services Agreement."
(4) Represents the amount of Mr. Hannesson's annual incentive bonus allocated
to the Company for such period. Mr. Hannesson's total annual incentive
bonus for calendar year 1997 was $100,000. Certain portions of such annual
incentive bonus were also allocated to Applied and Environmental.
(5) Represents the amount of Mr. Hannesson's automobile allowance allocated to
the Company for such period. Mr. Hannesson's total automobile allowance for
calendar years 1998 and 1997 was $12,000 and $24,000, respectively. Certain
portions of such automobile allowance were also allocated to Applied and
Environmental.
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<PAGE>
(6) Represents the amount of salary paid to Mr. Houle from January 27, 1997
(the date on which Mr. Houle was elected President and Chief Operating
Officer) to June 30, 1997.
(7) Mr. Houle passed away in May 1998.
STOCK OPTIONS
The following table sets forth certain information concerning options
granted during the year ended December 31, 1998 to the individuals listed in the
Summary Compensation Table pursuant to the Company's 1998 Stock Option Plan (the
"Plan"). The Company has no outstanding stock appreciation rights and granted no
stock appreciation rights during the year ended December 31, 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------
Percent of Potential Realizable Value at
Number of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation for
Underlying Granted Exercise of Option Term
Options To Employees Base Price Expiration -------------------------------
Name Granted (#) In Fiscal Year(2) ($/Sh) Date 5% ($) 10% ($)
---- ----------- ----------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Paul E. Hannesson 280,000(1) 19.2% 0.9375 12/15/08 16,492 41,804
James M. DeAngelis 187,500(1) 12.8% 0.9375 12/15/08 11,044 27,994
</TABLE>
- ----------
(1) Options to purchase 280,000 and 187,500 shares of Common Stock were granted
to Mr. Hannesson and Mr. DeAngelis, respectively, on December 15, 1998
pursuant to the Plan. The foregoing options were granted to Messrs.
Hannesson and DeAngelis in partial consideration of the surrender and
cancellation, as of December 15, 1998, of 175,000 options and 101,250
options granted to Mr. Hannesson and Mr. DeAngelis, respectively, under the
Company's 1996 Stock Option Plan which was terminated. The options granted
on December 15, 1998 are exercisable by Messrs. Hannesson and Mr. DeAngelis
each at the rate of 60% on the date of grant and 40% on December 15, 1999
and, unless exercised, expire on December 15, 2008 (subject to prior
termination in accordance with the applicable stock option agreements).
Upon announcement of a Change in Control (pursuant to and as defined in the
Plan), options not previously vested will become immediately exercisable.
Upon consummation of a Change in Control, all unexercised options will
terminate.
(2) Percentages based on 1,461,950 stock options granted during the year ended
December 31, 1998.
EMPLOYMENT AGREEMENTS
Paul E. Hannesson, the Company's Chairman of the Board and Chief Executive
Officer, entered into an employment agreement with Environmental as of November
18, 1996 for a term expiring on December 31, 1999. Pursuant to such employment
agreement, Mr. Hannesson agreed to devote his business and professional time and
efforts to the business of Environmental as a senior executive officer, and to
serve in senior executive positions with one or more of Environmental's
affiliates, including the Company. The employment agreement provides that Mr.
Hannesson shall receive, among other things, a base salary at an annual rate of
$395,000 through December 31, 1997, and will receive not less than $434,500
through December 31, 1998 and not less than $477,950 through December 31, 1999,
for services rendered to Environmental and its affiliates, including the
Company. Pursuant to the employment
24
<PAGE>
agreement, Mr. Hannesson received, among other things: (i) a signing bonus of
(a) $150,000 cash and (b) stock options to purchase 950,000 shares of common
stock of Environmental, which options vested on the date of his employment
agreement; and (ii) options to purchase an aggregate of 2,500,000 shares of
Environmental common stock, exercisable in installments over a period of five
years commencing on the date of his employment agreement. Mr. Hannesson also
received options to purchase common stock of the Company and Applied in the
amount of 1.0% of each company's total outstanding shares of common stock on the
date of grant, and is eligible to receive incentive compensation of up to
$225,000 per year for achieving certain goals.
In June 1998, Mr. Hannesson's Employment Agreement was assigned from
Environmental to Applied. On September 28, 1998, the Company was sold by Applied
to Environmental and effective as of that date the costs associated with Mr.
Hannesson's employment agreement ceased being allocated to the Company.
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 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. See "Certain
Relationships and Related Transactions--Services Agreement."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The individuals who served as members of the Compensation, Stock Option and
Benefits Committee (the "Compensation Committee") during the year ended December
31, 1998 were William R. Toller (Chairman), David L. Mitchell and Herbert A.
Cohen. Mr. Mitchell and Mr. Cohen constituted two-thirds of the Compensation,
Stock Option and Benefits Committees of Applied at December 31, 1998. Mr.
Mitchell has served as a consultant to Applied from July 15, 1997 through August
14, 1998 and received compensation in the amount of $10,000 per month for
services rendered to Applied in such capacity.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee was established in June 1997 and is responsible
for, among other things, establishing the compensation policies applicable to
executive officers of the Company. The Compensation Committee was composed of
William R. Toller (Chairman), David L. Mitchell and Herbert A. Cohen at December
31, 1998, all of whom were non-employee directors of the Company. Mr. Mitchell
and Mr. Cohen also constituted two-thirds of the Compensation, Stock Option and
Benefits Committee of Applied at December 31, 1998. Decisions on compensation of
the executive officers of Applied were made by such individuals in their
capacities as members of the Compensation, Stock Option and Benefits Committee.
All decisions of the Compensation Committee relating to the compensation of the
Company's executive officers are reviewed by, and are subject to the final
approval of, the full Board of Directors of the Company. Set forth below is a
report prepared by Messrs. Toller, Mitchell and Cohen in their capacities as
members of the Compensation Committee at December 31, 1998, addressing the
Company's compensation policies for 1998 as they affected the Company's
executive officers.
Overview and Philosophy
The Company's executive compensation program is designed to be linked to
corporate performance and returns to stockholders. Of particular importance to
the Company is its ability to grow and enhance its competitiveness for the rest
of the decade and beyond. Shorter-term performance, although scrutinized by the
Compensation Committee, stands behind the issue of furthering the Company's
strategic goals. To this end, the
25
<PAGE>
Company has developed an overall compensation strategy and specific compensation
plans that tie a significant portion of executive compensation to the Company's
success in meeting specified performance goals.
The objectives of the Company's executive compensation program are to:
o attract, motivate and retain the highest quality executives;
o motivate them to achieve tactical and strategic objectives in a manner
consistent with the Company's corporate values; and
o link executive and stockholder interest through equity-based plans and
provide a compensation package that recognizes individual
contributions as well as overall business results.
To achieve these objectives, the Company's executive compensation program
is designed to:
o focus participants on high priority goals to increase stockholder
value;
o encourage behavior that exemplifies the Company's values relating to
customers, quality of performance, employees, integrity, teamwork and
good citizenship;
o assess performance based on results and pre-set goals that link the
business activities of each individual to the goals of the Company;
and
o increase stock ownership to promote a proprietary interest in the
success of the Company.
Executive Officer Compensation
Each year the Compensation Committee conducts a full review of the
Company's executive compensation program. This review includes a comprehensive
evaluation of the competitiveness of the Company's compensation program and a
comparison of the Company's executive compensation to certain other public
companies which, in the view of the Compensation Committee, represent the
Company's most direct competitors for executive talent. It is the Compensation
Committee's policy to target overall compensation for executive officers of the
Company taking into account the levels of compensation paid for such positions
by such other public companies. A variety of other factors, however, including
position and time in position, experience, and both Company performance and
individual performance, will have an impact on individual compensation amounts.
The key elements of the Company's executive compensation program in 1998
consisted of base salary, annual incentive compensation and long-term incentive
compensation in the form of stock options. The Compensation Committee's policies
with respect to each of these elements, including the basis for the compensation
awarded to the Company's Chief Executive Officer, are discussed below.
Base Salaries. Base salaries for executive officers are established by
evaluating, on an annual basis, the performance of such individuals (which
evaluation involves management's consideration of such factors as
responsibilities of the positions held, contribution toward achievement of the
Company's strategic plans, attainment of specific individual objectives and
interpersonal managerial skills), and by reference to the marketplace for
executive talent, including a comparison to base salaries for comparable
positions at other similar public companies.
In 1998, total compensation was paid to executives primarily based upon the
terms of their employment agreements with the Company, if any, and upon
individual performance and the extent to which the business plans for their
areas of responsibility were achieved or exceeded. On balance, performance goals
were substantially met or exceeded and therefore compensation was paid
accordingly.
Mr. Hannesson, the Chairman of the Board and Chief Executive Officer of the
Company, Solution and CFC Technologies, and the Chairman of the Board, President
and Chief Executive Officer of Applied, receives annual compensation based upon,
among other things, the terms of his employment agreement with Applied.
26
<PAGE>
Pursuant to the terms of his employment agreement, Mr. Hannesson is entitled to
receive a base salary at an annual rate of not less than $395,000 through
December 31, 1997, not less than $434,500 through December 31, 1998 and not less
than $477,950 through December 31, 1999 for services rendered to Applied and
certain of its affiliates, including the Company.
The amount actually received by Mr. Hannesson each year as base salary for
services rendered to Applied and its affiliates, including the Company, is
established by the members of the Compensation, Stock Option and Benefits
Committee of Applied (the "Applied Compensation Committee"). As set forth above,
one of the two members of the Applied Compensation Committee constituted
one-half of the Compensation Committee of the Company's Board of Directors at
December 31, 1998. In establishing Mr. Hannesson's base salary for 1998, the
Applied Compensation Committee took into account the salaries of chief executive
officers at other similar public companies, future objectives and challenges,
and Mr. Hannesson's individual performance, contributions and leadership. The
Applied Compensation Committee reviewed in detail Mr. Hannesson's achievement of
his 1997 goals and his individual contributions to the Company and its
affiliates. The Applied Compensation Committee concluded that he had achieved
his 1997 goals and had provided a leadership role in achieving the Company's and
its affiliates' strategic priorities for 1997. The Applied Compensation
Committee also considered Mr. Hannesson's decisive management of operational and
strategic issues, his drive to reinforce a culture of innovation and his ability
and dedication to enhance the long-term value of the Company and its affiliates
for their respective stockholders. In making its salary decisions with respect
to Mr. Hannesson, the Applied Compensation Committee exercised its discretion
and judgment based on the above factors, and no specific formula was applied to
determine the weight of each factor. The salary decisions of the Applied
Compensation Committee with respect to Mr. Hannesson as they specifically
related to the Company were then presented to the full Compensation Committee
which reviewed such decisions.
Mr. Hannesson's base salary increased from $395,000 for calendar year 1997
to $434,500 for calendar year 1998, representing an increase of approximately
10%. Such base salary was allocated among the Company, Applied and Environmental
based upon the amount of time and effort devoted by Mr. Hannesson to the
respective businesses of such companies. Consequently, the Company, Applied and
Environmental paid $94,504, $250,526 and $58,658, respectively, of such salary.
Mr. Hannesson also received an automobile allowance of $12,000 for the 1998
calendar year, and the Company, Applied and Environmental paid $2,610, $7,770
and $1,620, respectively, of such allowance.
Annual Incentive Bonus. Annual incentive bonuses for executive officers are
intended to reflect the Compensation Committee's belief that a significant
portion of the annual compensation of each executive officer should be
contingent upon the performance of the Company.
For 1998, no incentive bonuses were paid to any officers or employees.
For 1997, annual incentive bonuses were paid to the individuals named in
the Summary Compensation Table and certain other officers and employees of the
Company in part based upon recommendations of senior executive officers of the
Company as to appropriate levels of incentive compensation. The Compensation
Committee exercised its discretion to determine the final value of each 1997
incentive award, which values were then reviewed and approved by the full Board
of Directors. The Compensation Committee assessed performance against goals and
leadership performance, with each of these two categories weighted equally. The
goal category included an evaluation of performance areas such as increase in
stockholder value, operations development and employee satisfaction. The
leadership category was evaluated based upon the Compensation Committee's
judgment of leadership performance, including factors such as innovation,
strategic vision, marketplace orientation, customer focus, collaboration and
managing change.
Pursuant to his employment agreement with Environmental, Mr. Hannesson is
eligible to receive incentive compensation of up to $225,000 per year for
achieving certain of the performance goals set forth above. For the year ended
December 1998, no bonuses were awarded. For the 1997 calendar year, Mr.
Hannesson was awarded an incentive bonus of $100,000. Such bonus was allocated
among the Company, Applied and Environmental based upon the amount of time and
effort devoted by Mr. Hannesson to the respective businesses of such companies.
27
<PAGE>
Consequently, the Company, Applied and Environmental paid $32,770, $63,356 and
$3,874, respectively, of such bonus.
Stock Options. The Compensation Committee has the power to grant stock
options under the Plan. With respect to executive officers, it has been the
Compensation Committee's practice to grant, on an annual basis, stock options
that vest at the rate of 20% upon grant and 20% in each calendar year thereafter
for four years, and that are exercisable over a ten-year period at exercise
prices per share set at the fair market value per share on the date of grant.
Generally, the executives must be employed by the Company at the time the
options vest in order to exercise the options and, upon announcement of a Change
in Control (pursuant to and as defined in the Plan), such options become
immediately exercisable. The Compensation Committee believes that stock option
grants provide an incentive that focuses the executives' attention on managing
the Company from the perspective of an owner with an equity stake in the
business. The Company's stock options are tied to the future performance of the
Company's stock and will provide value to the recipient only when the price of
the Company's stock increases above the option grant price.
A total of 1,461,950 stock options were granted in 1998 pursuant to the
Plan, 280,000 of which were granted to Mr. Hannesson and 187,500 of which were
granted to Mr. DeAngelis. The number of stock options granted in 1998 were
determined by reference to the long-term compensation for comparable positions
at other similar public companies and based upon an assessment of individual
performance.
Impact of Section 162(m) of the Internal Revenue Code
The Compensation Committee's policy is to structure compensation awards for
executive officers that will be consistent with the requirements of Section
162(m) of the U.S. Internal Revenue Code of 1986 (the "Code"). Section 162(m)
limits the Company's tax deduction to $1.0 million per year for certain
compensation paid in a given year to the Chief Executive Officer and the four
highest compensated executives other than the Chief Executive Officer named in
the Summary Compensation Table. According to the Code and corresponding
regulations, compensation that is based on attainment of pre-established,
objective performance goals and complies with certain other requirements will be
excluded from the $1.0 million deduction limitation. The Company's policy is to
structure compensation awards for covered executives that will be fully
deductible where doing so will further the purposes of the Company's executive
compensation program. However, the Compensation Committee also considers it
important to retain flexibility to design compensation programs that recognize a
full range of performance criteria important to the Company's success, even
where compensation payable under such programs may not be fully deductible. The
Company expects that all compensation payments in 1997 to the individuals listed
in the Summary Compensation Table will be fully deductible by the Company.
Conclusion
The Compensation Committee believes that the quality of executive
leadership significantly affects the long-term performance of the Company and
that it is in the best interest of the stockholders to compensate fairly
executive leadership for achievement meeting or exceeding the high standards set
by the Compensation Committee, so long as there is a corresponding risk when
performance falls short of such standards. A primary goal of the Compensation
Committee is to relate compensation to corporate performance. Based on the
Company's performance in 1997, the Compensation Committee believes that the
Company's current executive compensation program meets such standards and has
contributed, and will continue to contribute, to the Company's and its
stockholders' long-term success.
COMPENSATION, STOCK OPTION AND BENEFITS COMMITTEE
William R. Toller (Chairman)
David L. Mitchell
Herbert A. Cohen
The Report of the Compensation Committee on Executive Compensation shall
not be deemed incorporated by reference by any general statement incorporating
by reference this Annual Report into any filing under the Securities
28
<PAGE>
Act, or under the Exchange Act, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such acts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of March 26, 1999 by (i)
each person known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of the Company's common stock, (ii) each director of the
Company, (iii) each executive officer of the Company, and (iv) all executive
officers and directors of the Company as a group, as reported by such persons.
Unless otherwise indicated, the owners have sole voting and investment power
with respect to their respective shares.
<TABLE>
<CAPTION>
Number of Shares of Percentage of Outstanding
Name and Address Common Stock Beneficially Common Stock
of Beneficial Owner(1) Owned(2) Beneficially Owned
- ---------------------- -------- ------------------
<S> <C> <C>
Commodore Environmental Services, Inc. ......... 10,000,000 86.8%
Bentley J. Blum(3) ............................. 10,050,000 86.9%
Paul E. Hannesson(4) ........................... 1,166,971 10.0%
James M. DeAngelis(5) .......................... 206,862 1.8%
Kenneth L. Adelman(6) .......................... 80,450 *
David L. Mitchell(7) ........................... 50,000 *
William R. Toller(8) ........................... 50,000 *
Herbert A. Cohen(9) ............................ 50,000 *
W. S. Winston Ho(10) ........................... 37,500 *
All executive officers and directors
as a group (8 persons) ......................... 11,691,783 87.7%
</TABLE>
- ----------
* Percentage ownership is less than 1%.
(1) The address of each of Commodore Environmental Services, Inc., Bentley J.
Blum, Paul E. Hannesson, Kenneth L. Adelman, Ph.D., David L. Mitchell,
William R. Toller and Herbert A. Cohen is 150 East 58th Street, Suite 3400,
New York, New York 10155. The address of James M. DeAngelis is 3240 Town
Point Drive, Suite 200, Kennesaw, Georgia 30144. The address of Andrew P.
Oddi is 40 Cutter Mill Road, Suite 201, Great Neck, New York 11021. 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) Consists of: (a) 50,000 shares of the Company's Common Stock underlying
currently exercisable options granted to Mr. Blum by the Company under the
Plan; and (b) Mr. Blum's indirect beneficial ownership of the Company's
common stock based upon Mr. Blum's beneficial ownership of (i) 28,479,737
shares and his spouse's ownership of 2,000,000 shares of common stock of
Environmental, and (ii) 4,500,000 shares of common stock of Environmental
underlying currently exercisable stock options, representing together 52.0%
of the outstanding shares of Environmental common stock. Does not include
450,400 shares of Environmental common stock owned by Simone Blum, the
mother of Mr. Blum, and 385,000 shares of Environmental common stock owned
by Samuel Blum, the father of Mr. Blum. Mr. Blum disclaims any beneficial
interest in the shares of Environmental common stock owned by his spouse,
mother and father.
(4) Consists of: (a) 168,000 shares of Common Stock underlying currently
exercisable stock options granted to Mr. Hannesson by the Company under the
Plan and (b) Mr. Hannesson's indirect beneficial ownership of Common Stock
based upon his beneficial ownership of an aggregate of (i) 2,650,000 shares
of Environmental common stock owned by Suzanne Hannesson, the spouse of Mr.
Hannesson, (ii)
29
<PAGE>
2,650,000 shares of Environmental common stock owned by the Hannesson
Family Trust (Suzanne Hannesson and John D. Hannesson, trustees) for the
benefit of Mr. Hannesson's spouse, (iii) 500,000 shares of Environmental
common stock issued to the Hannesson Family Trust in exchange for the
surrender of options to purchase 950,000 shares of Environmental common
stock (iv) currently exercisable options to purchase 525,705 shares of
Environmental common stock, representing in the aggregate 11.1% of the
outstanding shares of Environmental common stock. Does not include
1,000,000 shares of Environmental common stock owned by each of Jon Paul
and Krista Hannesson, the adult children of Mr. Hannesson. Mr. Hannesson
disclaims any beneficial interest in the shares of Environmental common
stock owned by or for the benefit of his spouse and children.
(5) Consists of: (a) 1,000 shares of Common Stock; (b) 1,000 shares of Common
Stock underlying currently exercisable warrants; (c) 112,500 shares of
Common Stock underlying currently exercisable stock options granted to Mr.
DeAngelis by the Company under the Plan; and (d) Mr. DeAngelis' indirect
beneficial ownership of Common Stock based upon his beneficial ownership of
580,000 shares of Environmental common stock.
(6) Represents shares of Common Stock underlying currently exercisable stock
options granted to Dr. Adelman by the Company under the Plan.
(7) Represents shares of Common Stock underlying currently exercisable stock
options granted to Mr. Mitchell by the Company under the Plan.
(8) Represents shares of Common Stock underlying currently exercisable stock
options granted to Mr. Toller by the Company under the Plan.
(9) Represents shares of Common Stock underlying currently exercisable stock
options granted to Mr. Cohen by the Company under the Plan.
(10) Represents shares of Common Stock underlying currently exercisable stock
options granted to Dr. Ho by the Company under the Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
The Company was organized in November 1995 as a wholly-owned subsidiary of
Environmental. In February 1996, pursuant to an assignment of technology
agreement between the Company and Srinivas Kilambi, Ph.D., the Company's former
Senior Vice President--Technology, the Company acquired rights to the SLiM
technology from Dr. Kilambi. In consideration for such technology, the Company
caused Environmental to transfer to Dr. Kilambi 200,000 shares of Environmental
common stock and 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 0.66% of net sales (less allowances for
returns, discounts, commissions, freight, and excise or other taxes). In
exchange for Environmental's issuance of such shares to Dr. Kilambi, as well as
Environmental's funding and support of the Company, the Company issued to
Environmental 10,000,000 shares of Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
From the Company's inception to December 1996, Environmental financed the
research and development activities of the Company through direct equity
investments and loans to the Company. In December 1996, as part of a corporate
restructuring to consolidate all of its environmental technology businesses
within Applied, Environmental transferred to Applied all of the outstanding
shares of capital stock of the Company and CFC Technologies. In addition,
Environmental assigned to Applied outstanding Company notes aggregating $976,200
at December 2, 1996, representing advances previously made by Environmental to
the Company. Such advances have been capitalized by Applied as its capital
contribution to the Company. In consideration for such transfers, Applied paid
Environmental $3,000,000 in cash and issued to Environmental a warrant expiring
December 2, 2003 to purchase 7,500,000 shares of Applied common stock at an
exercise price of $15.00 per share. Such warrant was subsequently amended to,
among other things, reduce the exercise price thereof from $15.00 per share to
$10.00 per share. Such warrant is valued at $2.4 million and contains provisions
granting certain registration rights with respect to the warrant shares. As a
result of the IPO, Applied currently owns 87% of the outstanding shares of
Common Stock of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
30
<PAGE>
Effective September 28, 1998, Commodore Environmental Services LLC, a
Delaware limited liability company wholly owned by Environmental, acquired
10,000,000 shares of common stock, par value $.001 per share (the "Company
Stock"), of the Company, representing approximately 87% of the issued and
outstanding shares of capital stock of the Company, from Applied, as part of a
debt repayment plan between Environmental and Applied. The acquisition was
consummated on December 25, 1998. Environmental currently owns approximately 35%
of the outstanding shares of Applied common stock. Bentley J. Blum, a director
of COES and the owner of approximately 49% of the outstanding shares of
Environmental common stock, is also a director of Applied and the Company.
By virtue of the foregoing transaction, the Company has become the direct,
87%-owned subsidiary of Environmental. Paul E. Hannesson, the Chairman of the
Board, President and Chief Executive Officer of Applied and the Chairman of the
Board and Chief Executive Officer of the Company, and James M. DeAngelis, the
Vice President--Finance and Treasurer of Applied and the Vice President--Sales &
Marketing of the Company, will maintain their current management positions in
the Company. The acquisition of the Company by Environmental will be accounted
for under the purchase method of accounting.
LOANS INVOLVING AFFILIATES
In March 1997, the Company entered into a $1,500,000 line of credit with a
commercial bank. The entire line of credit was borrowed prior to the completion
of the Company's IPO 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 was guaranteed by
Applied and secured by cash collateral provided by Applied. Upon completion of
the IPO, the Company applied $1,500,000 of the net proceeds to repay such line
of credit, and such guarantee and cash collateral was released to Applied.
OFFICES
The Company maintains approximately 2,000 square feet of office space in
New York, New York, which also serves as offices of Environmental, Applied,
certain of their affiliates, and Messrs. Bentley J. Blum and Paul E. Hannesson.
In addition, prior to the Company's occupation of its Kennesaw, Georgia
facility in March 1997, the Company shared facilities in Columbus, Ohio with
Applied and certain of its other subsidiaries. The Company paid an allocable
share of rent equal to $750 per month for such space. The Company terminated the
existing lease in Columbus, Ohio on March 31, 1997.
SERVICES AGREEMENT
In September 1997, the Company, Applied, Environmental, Advanced Sciences,
and certain other affiliates of the Company (the "Affiliated Parties") entered
into a services agreement, dated as of September 1, 1997 (the "Services
Agreement"), whereby the Company and the Affiliated Parties agreed to cooperate
in sharing, where appropriate, costs related to accounting services, financial
management, human resources and personnel management and administration,
information systems, executive management, sales and marketing, research and
development, engineering, technical assistance, patenting, and other areas of
service as are appropriately and necessarily required in the operations of the
Company and the Affiliated Parties (collectively, the "Services"). Pursuant to
the Services Agreement, services provided by professional employees of the
Company and the Affiliated Parties to one another are charged on the basis of
time actually worked as a percentage of salary (including cost of benefits)
attributable to that professional. In addition, charges for rent, utilities,
office services and other routine charges regularly incurred in the normal
course of business are apportioned to the professionals working in the office on
the basis of salary, and then charged to any party in respect of whom the
professional devoted such time based upon time actually worked. Furthermore,
charges from third parties, including, without limitation, consultants,
attorneys and accountants, are levied against the party actually receiving the
benefit of such services. Pursuant to the Services Agreement, Applied acts as
the coordinator of billings and payments for Services on behalf of itself, the
Company and the other Affiliated Parties.
31
<PAGE>
FUTURE TRANSACTIONS
In connection with the IPO, the Company's Board of Directors 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.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this Annual Report:
<TABLE>
<CAPTION>
Financial Statements. Page No.
- --------------------- --------
<S> <C>
Report of Independent Accountants........................................................... F-1
Independent Auditor's Report................................................................ F-1A
Balance Sheets as of December 31, 1998 and 1997............................................. F-2
Statements of Operations for the year ended December 31, 1998,
for the six months ended December 31, 1997,
for the year ended June 30, 1997,
and for the period from November 15, 1995 to December 31, 1998......................... F-3
Statements of Stockholders' Equity for the year ended December 31, 1998,
for the six months ended December 31, 1997,
for the year ended June 30, 1997
and for the period from November 15, 1995 to December 31, 1998......................... F-4
Statements of Cash Flows for the year ended December 31, 1998,
for the six months ended December 31, 1997,
for the year ended June 30, 1997
and for the period from November 15, 1995 to December 31, 1998......................... F-5
Notes to Financial Statements............................................................... F-6
</TABLE>
All financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and, therefore,
have been omitted.
Exhibits.
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement between the Company and National
Securities Corporation, as Representative of the several
Underwriters listed therein (the "Representative").(5)
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 By-Laws of the Company.(1)
4.1 Specimen Common Stock Certificate.(2)
4.2 Form of Warrant Agreement among the Company, the Representative
and the Bank of New York.(5)
33
<PAGE>
4.3 Specimen Warrant Certificate.(3)
4.4 Form of Representative's Warrant Agreement between the Company
and the Representative, including form of Representative's
Warrant therein.(5)
4.5 Specimen Convertible Preferred Stock Certificate.(3)
4.6 Form of Certificate of Designation, Preferences and Rights of 10%
Senior Convertible Redeemable Preferred Stock of the Company.(6)
*4.7 Certificate of Designation, Preferences and Rights of Series B
Convertible Redeemable Preferred Stock of the Company.
10.1 Employment Agreement, dated as of August 1, 1996, between the
Company and Alan R. Burkart.(1)
10.2 Employment Agreement, dated as of September 1, 1996, between the
Company and Carl O. Magnell.(1)
10.3 Employment Agreement, dated as of September 1, 1996, between the
Company and James M. DeAngelis.(1)
10.4 Employment Agreement, dated as of September 1, 1996, between the
Company and Srinivas Kilambi, Ph.D.(1)
10.5 Employment Agreement, dated as of September 1, 1996, between the
Company and Michael D. Kiehnau.(1)
10.6 1996 Stock Option Plan of the Company.(1)
10.7 Executive Bonus Plan of the Company.(1)
10.8 Memorandum of Understanding, dated August 30, 1996, between the
Company and Teledyne Brown Engineering, a Division of Teledyne
Industries, Inc., as amended.(1) and (5)
10.9 Memorandum of Understanding, dated August 29, 1996, between the
Company and Sverdrup Environmental, Inc., as amended.(1) and (5)
10.10 Services Agreement, dated August 31, 1996, between the Company
and Commodore CFC Technologies, Inc.(1)
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.(1)
10.12 Employment Agreement, dated as of October 31, 1996, between
Environmental and Edwin L. Harper, Ph.D.(3)
10.13 Undivided Rights (Sole Commercial) License Agreement, dated
January 5, 1997, between Lockheed Martin Energy Research
Corporation and the Company.(3)
10.14 Stock Purchase Agreement, dated as of December 2, 1996, by and
between Environmental and Applied.(3)
10.15 Form of Revolving Credit Agreement between the Company and
Environmental.(5)
10.16 Employment Agreement, dated as of January 27, 1997, between the
Company and Kenneth J. Houle.(4)
10.17 Employment Agreement, dated as of November 18, 1996, between
Environmental and Paul E. Hannesson.(7)
10.18 Employment Agreement, dated May 7, 1997, between Environmental
and Michael D. Fullwood.(7)
34
<PAGE>
10.19 Equipment Lease, dated as of November 25, 1997, between the
Company and Maryland Environmental Service.(8)
10.20 License Agreement, dated as of November 25, 1997, between the
Company and Maryland Environmental Service.(8)
10.21 Equipment Lease, dated as of February 5, 1998, between the
Company and Maryland Environmental Service.(8)
10.22 License Agreement, dated as of February 5, 1998 between the
Company and Maryland Environmental Service.(8)
22.1 Subsidiaries of the Company.(1)
*27.1 Financial Data Schedule.
99.1 Debt repayment and change in control agreement, dated as of
September 28, 1998 between Environmental and Applied.(9)
- ----------
* Filed herewith.
(1) Incorporated herein by reference and filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on September 12, 1996 (File No. 333-11813) (the
"Registration Statement").
(2) Incorporated herein by reference and filed as an Exhibit to Amendment No. 1
to the Registration Statement filed with the Securities and Exchange
Commission on October 18, 1996.
(3) Incorporated herein by reference and filed as an Exhibit to Amendment No. 3
to the Registration Statement filed with the Securities and Exchange
Commission on January 23, 1997.
(4) Incorporated herein by reference and filed as an Exhibit to Amendment No. 4
to the Registration Statement filed with the Securities and Exchange
Commission on January 28, 1997.
(5) Incorporated herein by reference and filed as an Exhibit to Amendment No. 5
to the Registration Statement filed with the Securities and Exchange
Commission on March 13, 1997.
(6) Incorporated herein by reference and filed as an Exhibit to Amendment No. 6
to the Registration Statement filed with the Securities and Exchange
Commission on March 25, 1997.
(7) Incorporated herein by reference and filed as an Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997.
(8) Incorporated herein by reference and filed as an Exhibit to the Company's
Transition Report on Form 10-K for the six months ended December 31, 1997.
(9) Incorporated herein by reference and filed as an Exhibit to the Company's
Form 8-K dated December 25, 1998 and filed with the Securities and Exchange
Commission on January 5, 1999.
Reports on Form 8-K:
None.
35
<PAGE>
SIGNATURES
Pursuant to the requirements to Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 14, 1999 COMMODORE SEPARATION TECHNOLOGIES, INC.
By: /s/ Paul E. Hannesson
-----------------------------------------
Paul E. Hannesson, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ James M. DeAngelis Senior Vice President, Sales and April 14, 1999
- ----------------------------------- Marketing (principal financial and
James M. DeAngelis accounting officer)
/s/ Paul E. Hannesson Chairman of the Board and Chief April 14, 1999
- ----------------------------------- Executive Officer (principal executive
Paul E. Hannesson officer)
/s/ Bentley J. Blum Director April 14, 1999
- -----------------------------------
Bentley J. Blum
/s/ David L. Mitchell Director April 14, 1999
- -----------------------------------
David L. Mitchell
/s/ William R. Toller Director April 14, 1999
- -----------------------------------
William R. Toller
/s/ Kenneth L. Adelman Director April 14, 1999
- -----------------------------------
Kenneth L. Adelman, Ph.D.
/s/ Herbert A. Cohen Director April 14, 1999
- -----------------------------------
Herbert A. Cohen
</TABLE>
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements. Page No.
- --------------------- --------
<S> <C>
Report of Independent Accountants........................................................... F-1
Independent Auditor's Report................................................................ F-1A
Balance Sheets as of December 31, 1998 and 1997............................................. F-2
Statements of Operations for the year ended December 31, 1998,
for the six months ended December 31, 1997,
for the year ended June 30, 1997,
and for the period from November 15, 1995 to December 31, 1998......................... F-3
Statements of Stockholders' Equity for the year ended December 31, 1998,
for the six months ended December 31, 1997,
for the year ended June 30, 1997
and for the period from November 15, 1995 to December 31, 1998......................... F-4
Statements of Cash Flows for the year ended December 31, 1998,
for the six months ended December 31, 1997,
for the year ended June 30, 1997
and for the period from November 15, 1995 to December 31, 1998......................... F-5
Notes to Financial Statements............................................................... F-6
</TABLE>
All financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and, therefore,
have been omitted.
37
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Commodore Separation Technologies, Inc. (a development stage company):
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Commodore Separation Technologies,
Inc. (a development stage company) at December 31, 1998 and 1997, and the
results of its operations and its cash flows for the year ended December 31,
1998, the six months ended December 31, 1997, the year ended June 30, 1997 and
the period from November 15, 1995 (inception) through December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and net cash outflows from operations. These facts raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 13, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Commodore Separation Technologies, Inc.
We have audited financial statements of operations, stockholders' deficit,
and cash flows for the period from November 15, 1995 (date of inception) to June
30, 1996, of Commodore Separation Technologies, Inc. (a developement stage
company). 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 results of operations and cash flows for the
period from November 15, 1995 (date of inception) to June 30, 1996, of Commodore
Separation Technologies, Inc. (a development stage company) 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 2, the Company's
significant operating losses and deficits in working capital and stockholder's
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 2. The
accompanying financial statements do not include any adjustment that might be
the result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
August 1,1996
F-1A
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Balance Sheets
(amounts in thousands, except shares and share data)
================================================================================
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 209 $ 4,951
Restricted cash 210 88
Inventory, net 685 360
Prepaid and other current assets 1 58
-------- --------
Total current assets 1,105 5,457
Property and equipment:
Technical equipment 1,411 690
Office equipment 403 388
Leasehold improvements 210 205
-------- --------
2,024 1,283
Less accumulated depreciation 646 247
-------- --------
Net property and equipment 1,378 1,036
Intangible assets, net of accumulated amortization of $14 and $5 182 167
-------- --------
Total assets $ 2,665 $ 6,660
======== ========
Liabilities and Stockholders' Equity
Accounts payable $ 23 $ 405
Accrued expenses 56 328
Unearned revenue 450 --
Due to related party 27 262
-------- --------
Total current liabilities 556 995
Capital lease obligation 4 13
-------- --------
Total liabilities 560 1,008
Commitments and Contingencies -- --
Stockholders' equity:
Preferred stock, Series A, $.001 par value, 10% cumulative, 5,000,000
shares authorized, 600,000 shares
issued and outstanding at December 31, 1998 and 1997, respectively 1 1
Preferred stock, Series B, $.001 par value, 6% cumulative, 4,000 shares
authorized, 3,570 shares issued and outstanding at December 31, 1998 -- --
Common stock, $.001 par value, 50,000,000 shares
authorized, 11,515,575 and 11,503,650, shares issued
and outstanding at December 31, 1998 and 1997, respectively 11 11
Additional paid in capital 11,720 11,638
Deficit accumulated during the development stage (9,627) (5,998)
-------- --------
Total stockholders' equity 2,105 5,652
-------- --------
$ 2,665 $ 6,660
======== ========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Statements of Operations
(amounts in thousands, except shares and share data)
================================================================================
<TABLE>
<CAPTION>
Period from Cumulative
November 15, Amounts From
1995 November 15,
Six Months Year (Date of 1995
Year Ended Ended Ended Inception) (Date of
December 31, December 31, June 30, to June 30, Inception) to
1998 1997 1997 1996 December 31, 1998
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development $ 1,299 $ 817 $ 985 $ 50 $ 3,151
General and administrative 1,096 869 1,356 10 3,331
Depreciation and amortization 408 134 118 -- 660
Corporate overhead expenses 529 911 705 -- 2,145
Sales and marketing 417 230 51 -- 698
Licensing fee -- -- 50 -- 50
-------- -------- -------- -------- --------
Total costs and expenses 3,749 2,961 3,265 60 10,035
-------- -------- -------- -------- --------
Revenue 19 -- 8 -- 27
Interest income 101 195 99 -- 395
Interest expense -- -- (13) (1) (14)
-------- -------- -------- -------- --------
Net loss before income taxes (3,629) (2,766) (3,171) (61) (9,627)
Income taxes -- -- -- -- --
-------- -------- -------- -------- --------
Net loss $ (3,629) $ (2,766) $ (3,171) $ (61) $ (9,627)
======== ======== ======== ======== ========
Net loss per share - basic and diluted $ (0.37) $ (0.27) $ (0.32) $ (0.01)
======== ======== ======== ========
Weighted average number of shares
outstanding (in thousands) 11,514 11,502 10,375 10,000
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Statement of Stockholders' Equity
(amounts in thousands, except shares and share data)
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Series B Common Stock
----------------------- ----------------------- ------------------------
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for cash on
November 15, 1995 (inception) at $1 per share -- -- -- -- 100 --
Stock split of 150,000 shares for one share
on September 5, 1996 -- -- -- -- 14,999,900 $ 15
Reverse stock split of 1.50 shares
for one share on November 26, 1996 -- -- -- -- (5,000,000) (5)
Net loss for the period from
November 15, 1995 through June 30, 1996 -- -- -- -- -- --
----------- --------- ----------- --------- ----------- ---------
Balance, June 30, 1996 -- -- -- -- 10,000,000 10
Collection of subscription receivable -- -- -- -- -- --
Conversion of notes payable to capital -- -- -- -- -- --
Proceeds from sale of common
stock and warrants -- -- -- -- 1,500,000 1
Proceeds from sale of preferred stock,
Series A, and warrants 600,000 $ 1 -- -- -- --
Dividend on preferred stock, Series A -- -- -- -- -- --
Net loss for the year ended June 30, 1997 -- -- -- -- -- --
----------- --------- ----------- --------- ----------- ---------
Balance, June 30, 1997 600,000 1 -- -- 11,500,000 11
Issuance of common stock -- -- -- -- 3,650 --
Dividend on preferred stock, Series A -- -- -- -- -- --
Net loss for the six months
ended December 31, 1997 -- -- -- -- -- --
----------- --------- ----------- --------- ----------- ---------
Balance, December 31, 1997 600,000 1 -- -- 11,503,650 11
Issuance of common stock -- -- -- -- 11,925 --
Issuance of preferred stock, Series B -- -- 3,570 -- --
Gain on troubled debt restructuring -- -- -- -- -- --
Dividends on preferred stock, Series A -- -- -- -- -- --
Net loss for the year ended December 31, 1998 -- -- -- -- -- --
----------- --------- ----------- --------- ----------- ---------
Balance, December 31, 1998 600,000 $ 1 3,570 $ -- 11,515,575 $ 11
=========== ========= =========== ========= =========== =========
<CAPTION>
Deficit
Accumulated Total
Additional During the Shareholders'
Subscription Paid in Development Equity
Receivable Capital Stage (Deficit)
<S> <C> <C> <C> <C>
Common stock issued for cash on
November 15, 1995 (inception) at $1 per share -- -- -- --
Stock split of 150,000 shares for one share
on September 5, 1996 $ (15) -- -- --
Reverse stock split of 1.50 shares
for one share on November 26, 1996 -- $ 5 -- --
Net loss for the period from
November 15, 1995 through June 30, 1996 -- -- $ (61) $ (61)
----------- ----------- ----------- -----------
Balance, June 30, 1996 (15) 5 (61) (61)
Collection of subscription receivable 15 -- -- 15
Conversion of notes payable to capital -- 976 -- 976
Proceeds from sale of common
stock and warrants -- 6,108 -- 6,109
Proceeds from sale of preferred stock,
Series A, and warrants -- 4,977 -- 4,978
Dividend on preferred stock, Series A -- (138) -- (138)
Net loss for the year ended June 30, 1997 -- -- (3,171) (3,171)
----------- ----------- ----------- -----------
Balance, June 30, 1997 -- 11,928 (3,232) 8,708
Issuance of common stock -- 10 -- 10
Dividend on preferred stock, Series A -- (300) -- (300)
Net loss for the six months
ended December 31, 1997 -- -- (2,766) (2,766)
----------- ----------- ----------- -----------
Balance, December 31, 1997 -- 11,638 (5,998) 5,652
Issuance of common stock -- 25 -- 25
Issuance of preferred stock, Series B -- 143 -- 143
Gain on troubled debt restructuring -- 214 -- 214
Dividends on preferred stock, Series A -- (300) -- (300)
Net loss for the year ended December 31, 1998 -- -- (3,629) (3,629)
----------- ----------- ----------- -----------
Balance, December 31, 1998 $ -- $ 11,720 $ (9,627) $ 2,105
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Statements of Cash Flows
(amounts in thousands, except shares and share data)
================================================================================
<TABLE>
<CAPTION>
Period from Cumulative
November 15, Amounts From
Six Months Year 1995 November 15,
Year Ended Ended Ended (Inception) 1995
December 31, December 31, June 30, to June 30, (Inception) to
1998 1997 1997 1996 December 31, 1998
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,629) $ (2,766) $ (3,171) $ (61) $ (9,627)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 408 134 118 -- 660
Issuance of Common Stock for services 25 10 -- -- 35
Gain on troubled debt restructuring (See Note 4) 214 -- -- -- 214
Changes in assets and liabilities:
Inventory, net (325) (360) -- -- (685)
Accounts payable (382) 117 270 18 23
Accrued expenses (272) 187 129 12 56
Unearned revenue 450 -- -- -- 450
Other assets 57 (10) (48) -- (1)
-------- -------- -------- -------- --------
Net cash used in operating activities (3,454) (2,688) (2,702) (31) (8,875)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Acquisition of intangible assets (24) (114) (48) (10) (196)
Purchase of property and equipment (15) (33) (352) (3) (403)
Acquisition of leasehold improvements (5) (2) (203) -- (210)
Construction of technical equipment (721) (279) (404) (7) (1,411)
Increase in certificate of deposit (122) (88) -- -- (210)
-------- -------- -------- -------- --------
Net cash used in investing activities (887) (516) (1,007) (20) (2,430)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants -- -- 6,109 -- 6,109
Proceeds from sale of preferred stock and warrants -- -- 4,978 -- 4,978
Preferred stock dividend (300) (300) (138) -- (738)
Borrowings from (repayments to) stockholder (92) (433) 1,617 54 1,146
Collection of subscription receivable -- -- 15 -- 15
Repayment of capital lease obligation (9) (5) 18 -- 4
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities (401) (738) 12,599 54 11,514
-------- -------- -------- -------- --------
(Decrease) increase in cash and cash equivalents (4,742) (3,942) 8,890 3 209
Cash and cash equivalents, beginning of period 4,951 8,893 3 -- --
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period $ 209 $ 4,951 $ 8,893 $ 3 $ 209
======== ======== ======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ -- $ -- $ 13 $ 1 $ 14
======== ======== ======== ======== ========
Income taxes $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Non cash investing and financing activities:
Issuance of preferred stock in exchange for the
forgiveness of indebtness (See Note 4) $ 143 $ -- $ -- $ -- $ 143
======== ======== ======== ======== ========
Issuance of common stock in exchange for
subscription receivable $ -- $ -- $ -- $ 15 $ 15
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
1. Background
Commodore Separation Technologies, Inc. (a development stage company) (the
"Company") was incorporated on November 15, 1995, under the laws of the
State of Delaware. Effective February 29, 1996, the Company acquired the
rights to its proprietary separation technology and entered into a royalty
agreement with the inventor of the technology as described in Note 6.
The Company is a process technology company which has developed and intends
to commercialize its separation technology and recovery system, known as
SLiM(TM). The Company believes SLiM(TM) is capable of effectively
separating and extracting various solubilized materials, including metals,
organic chemicals, biochemicals, radionuclides and other targeted
substances, from liquid and possibly gaseous process streams. The Company
has commenced planned principal operations but has not received significant
revenue therefrom. As such, the Company is considered a development stage
company as defined in Statement of Financial Accounting Standards ("SFAS")
No. 7.
Effective December 2, 1996, Commodore Environmental Services, Inc.
("Environmental") transferred 100% of the capital stock of the Company and
notes receivable from the Company which aggregated $976 to its then 69.3%
owned subsidiary, Commodore Applied Technologies, Inc. ("Applied") in
exchange for cash and a warrant to purchase shares of Applied common stock.
Concurrent with this transaction, Applied contributed the notes receivable
from the Company as a capital contribution. The transfer was accounted for
as a transaction between entities under common control. Accordingly, the
assets and liabilities of the Company were recorded at Environmental's
carryover basis.
On September 28, 1998, Commodore Environmental Services LLC, a Delaware
limited liability company wholly owned by Environmental, acquired
10,000,000 shares of common stock of the Company representing approximately
87% of the issued and outstanding shares of capital stock from Applied, a
35% owned affiliate of Environmental, as part of a debt repayment plan
between Environmental and Applied. Because of the outstanding publicly
traded preferred stock of the Company, the resultant purchase accounting
adjustments have not been recorded by the Company.
2. Summary of Significant Accounting Policies
Liquidity
The accompanying financial statements have been prepared under the
assumption that the Company will continue as a going concern. Such
assumption contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements for the years ended December 31, 1998, the six months ended
December 31, 1997, the year ended June 30, 1997 and the period from
November 15, 1995 (inception) through June 30, 1996, the Company incurred
losses from operations of $3,629, $2,766, $3,171 and $61, respectively.
Presently, the Company does not have sufficient cash resources to meet its
requirements in 1999. The financial statements do not include any
adjustments that might be necessary should the Company be unable to
continue as a going concern. The Company's continuation as a going concern
is dependent upon its ability to obtain additional financing as may be
required, and ultimately to attain profitability. Potential sources of cash
include new contracts, the issuance of external debt, the sale of new
shares
F-6
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
of Company stock or alternative methods such as mergers or sale
transactions. No assurances can be given, however, that the Company will be
able to obtain any of these potential sources of cash.
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 include cash, cash equivalents and restricted cash.
As of December 31, 1998, recorded book value approximates fair value.
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments in money market
funds with remaining maturities of 90 days or less at the time of purchase.
Restricted Cash
Restricted cash consists of certificates of deposit that act as a
compensating balance for $600 of letters of credit which represent
collateral for a performance bond related to the Port of Baltimore
contract.
Research and Development Expenditures
Research and development expenditures are charged to operations as
incurred.
Inventory
Inventory represents finished goods and consists of machinery and equipment
built and held for sale. Inventory is recorded at historical cost per unit.
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements
are capitalized and minor replacements, maintenance and repairs which do
not increase the useful lives of the assets are expensed as incurred.
Depreciation and amortization are recorded using a straight-line method
over estimated useful lives of the assets, which vary from two to ten
years. The cost and related accumulated depreciation of assets sold,
retired or otherwise disposed of are removed from the respective accounts,
and any resulting gain or loss is included in the statement of operations.
Intangible Assets
The Company has incurred costs associated with application for certain
patents. These costs are capitalized and amortized over 17 years.
Income Taxes
Income taxes are determined in accordance with Statement of Financial
Accounting Standards ("SFAS") 109, which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax
returns. Under this method, deferred income tax liabilities and assets are
determined based on the difference between financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. SFAS 109 also
provides for the
F-7
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
recognition of deferred tax assets if it is more likely than not that the
assets will be realized in future years.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
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.
Stock Compensation
The Company has adopted the intrinsic value method of accounting for stock
options and warrants under Accounting Principles Board Opinion No. 25.
Under this standard, no compensation expense is recorded when the exercise
price of options granted to employees is equal to or less than the market
price of the underlying stock on the date of the grant. The Company has
elected the disclosure-only provisions of SFAS 123, which requires fair
value accounting for options issued to employees.
Impairment of Long-Lived Assets
The Company periodically performs analyses on the recoverability of
long-lived assets. Any excess of the carrying amount of an asset over the
estimated future undiscounted cash flows associated with the asset would be
recorded as an impairment loss in the statement of operations.
Contracts
In November 1997, the Company entered into a contract with the State of
Maryland for the treatment of chromium-contaminated leachate at the Hawkins
Point Hazardous Waste Treatment Facility at the Port of Baltimore. As of
December 31, 1998, the Company had not yet commenced work on this contract
and accordingly, had not recorded revenue related to the contract. Costs
incurred in preparation for the commencement of the contract have been
recorded as expenses as incurred.
Unearned Revenue
The Company has collected a $450 deposit related to the contract described
in the preceding paragraph. Such amount has been deferred until the
commencement of the contract.
Revenue
Revenue recorded during the development stage related primarily to
reimbursement for certain testing procedures performed by the Company,
related to the acquisition of the Port of Baltimore contracts.
New Accounting Pronouncements
The Company has adopted SFAS 129, "Disclosure of Information About Capital
Structure." The financial statements and footnotes reflect the disclosures
required under this standard.
F-8
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
The Company has adopted SFAS 130, "Reporting on Comprehensive Income."
During the years presented in these consolidated financial statements, the
Company did not experience any other comprehensive income.
The Company has adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information." The financial statements and footnotes
reflect the disclosures required under this new standard. Under the
definitions provided in SFAS 131, the Company operates in only in one line
of business.
In June 1998, the Financial Accounting Standard Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. SFAS 133 requires
that an entity recognize all derivative instruments as either assets or
liabilities on its balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction, and, if it is, the type of hedge transaction.
The Company will adopt SFAS 133 by the first quarter of 2000. Due to the
Company's limited use of derivative instruments, SFAS 133 is not expected
to have a material effect on the financial position or results of
operations of the Company.
3. Earnings Per Share
All earnings per share amounts reflect the implementation of SFAS 128,
"Earnings per Share," which establishes new standards for computing and
presenting earnings per share and requires all prior period earnings per
share data be restated to conform with the provisions of the statement.
Basic earnings per share are computed by dividing net income available to
common shareholders by the weighted average number of shares outstanding
during the period. Diluted earnings per share are computed using the
weighted average number of shares determined for the basic computation plus
the number of shares of common stock that would be issued assuming all
contingently issuable shares having a dilutive effect on earnings per share
were outstanding for the period.
F-9
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
<TABLE>
<CAPTION>
Period from
November 15,
Six Months Year 1995
Year Ended Ended Ended (Inception)
December 31, December 31, June 30, to June 30,
1998 1997 1997 1996
(Dollars in thousands except per share data)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $ (3,629) $ (2,766) $ (3,171) $ (61)
Preferred stock dividends (300) (300) (138) --
Dividends on Series A Preferred Stock
(not declared) (300) -- -- --
------------ ------------ ------------ ------------
Net loss applicable to common shareholders $ (4,229) $ (3,066) $ (3,309) $ (61)
------------ ------------ ------------ ------------
Weighted average common shares
outstanding (basic) 11,514,000 11,502,000 10,375,000 10,000,000
Convertible Preferred Stock (*) (*) (*) --
Warrants issued in initial public offering (*) (*) (*) --
Employee stock options (*) (*) (*) --
------------ ------------ ------------ ------------
Weighted average common shares
outstanding (diluted) 11,514,000 11,502,000 10,375,000 10,000,000
------------ ------------ ------------ ------------
Loss per share (basic) $ (.37) $ (.27) $ (.32) $ (.01)
============ ============ ============ ============
Loss per share (diluted) $ (.37) $ (.27) $ (.32) $ (.01)
============ ============ ============ ============
</TABLE>
(*) Due to the Company's loss from continuing operations for the year ended
December 31, 1998, the six months ended December 31, 1997, the year ended
June 30, 1997 and the period from November 15, 1995 (inception) to June 30,
1996, the incremental shares issuable in connection with these instruments
are anti-dilutive and accordingly not considered in the calculation.
4. Related Party Transactions
In connection with Environmental's September 1998 acquisition of 87% of the
Company's common stock from Applied, Applied transferred a $357 receivable
due from the Company to Environmental. In December 1998, the Company issued
3,570 shares of Series B Preferred Stock (see Note 7) valued by independent
appraisal at $143 to Environmental in exchange for the forgiveness of $357
of indebtedness. Because Environmental owns 87% of the common stock of the
Company, the $214 gain on troubled debt restructuring was recorded as a
direct reduction in additional paid in capital.
F-10
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
For the nine months ended September 30, 1998, the six months ended December
31, 1997 and the year ended June 30, 1997, the Company was charged
management fees by Applied of $529, $911 and $705, respectively. This
management fee is a result of allocated wages and salaries, rent, insurance
(including director and officer liability insurance) and other
administrative expenses. The management fees commenced in April 1997.
Management fees were not charged by Environmental for the three months
ended December 31, 1998.
The Company owed uncollaterized advances of $27 and $262 to Applied as of
December 31, 1998 and 1997, respectively.
Through June 30, 1996, the Company had an unwritten agreement pursuant to
which its sole stockholder provided space for the Company's New York
offices at no cost, and another company under common control provided
research and development facility space to the Company at no cost.
Subsequent to June 30, 1996, the Company paid a monthly rent of $1 for the
research and development facility.
Pursuant to the royalty agreements with the investor of the technology, the
Company caused its then parent, Commodore Environmental Services, Inc.
("Environmental"), to issue 200,000 shares of Environmental common stock to
the inventor of the technology upon inception of the Company.
5. Income Taxes
The Company provides for deferred income taxes on temporary differences
which represent tax effects of transactions reported for tax purposes in
periods different than for book purposes. The difference between the income
tax benefit at statutory rates for 1998 and 1997 and the amount presented
in the financial statements is due to the change in the tax valuation
allowance which offsets the income tax benefit of the operating loss.
The provision for income taxes for results in an effective tax rate which
differs from federal income tax rates as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June 30,
December 31, December 31, -------------------------
1998 1997 1997 1996
<S> <C> <C> <C> <C>
Expected tax benefit at federal statutory rate $(1,234) $ (941) $(1,078) $ (21)
State income tax benefits, net of federal income tax
benefit (218) (166) (190) (3)
Change in valuation allowance 1,452 1,107 1,268 24
------- ------- ------- -------
Income taxes $ -- $ -- $ -- $ --
======= ======= ======= =======
</TABLE>
F-11
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
The components of the net deferred income tax as of December 31, are as
follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June 30,
December 31, December 31, ----------------------
1998 1997 1997 1996
<S> <C> <C> <C> <C>
Net operating loss carryforward $3,851 $2,398 $1,292 $ 24
Less: Valuation allowance 3,851 2,398 1,292 24
------ ------ ------ ------
Net deferred tax asset $ -- $ -- $ -- $ --
====== ====== ====== ======
</TABLE>
The Company conducts a periodic examination of its valuation allowance.
Factors considered in the evaluation include recent and expected future
earnings and the Company's liquidity and equity positions. As of December
1998 and 1997, the Company has established a valuation allowance for the
entire amount of net deferred tax assets.
At December 31, 1998, the Company had tax loss carryforwards of
approximately $9,600. 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. The change in
control of CST that took place in September 1998 could limit the Company's
ability to utilize all existing tax loss carryforwards. These net operating
carryforwards begin to expire in 2011.
6. Royalty Agreements
The Company has an agreement with a former officer of the Company pursuant
to which the former officer is to receive a royalty of 2% of collected
revenues from the Company's membrane separation technology directly
attributable to his patentable property through December 3, 2002, except
for applications related to the radionuclides technetium and rhenium, for
which the former officer is entitled to receive a royalty of .66% of net
sales directly attributable to his patentable property (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, for which the Company paid
Lockheed Martin a $50 licensing fee during the year ended June 30, 1997.
Under this agreement, 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 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. No royalties have been paid as of December 31, 1998.
F-12
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
7. Capital Structure
On September 5, 1996, the Company amended its Certificate of Incorporation
authorizing up to 5,000,000 shares of Preferred Stock, Series A, $.001 par
value and up to 50,000,000 shares of Common Stock, $.001 par value. The
Company also effected a 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. 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.
In April 1997, the Company completed an Initial Public Offering of
1,500,000 units each consisting of one share of Common Stock and a Warrant
to purchase one share of Common Stock, and 600,000 units each consisting of
one share of Convertible Preferred Stock, Series A, and a Warrant to
purchase one share of Common Stock.
Proceeds from the offering were as follows:
Common Preferred
Units Units
Proceeds allocated to shares $5,564 $5,214
Proceeds allocated to warrants 2,086 846
------ ------
Gross proceeds 7,650 6,060
Less: Discount and offering expenses 1,541 1,082
------ ------
Net proceeds $6,109 $4,978
====== ======
The underwriter of the offering exercised its right to purchase an
additional 315,000 Warrants for $32.
Preferred Stock, Series A
The Convertible Preferred Stock, Series A, has a par value of $.001 per
share and a stated value of $10.00 per share. Cumulative dividends are
payable at the rate of $1.00 per share per annum, payable quarterly,
commencing June 30, 1997, when, 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, Series A.
Failure to pay any quarterly dividend will result in a reduction of the
conversion price as described below.
The Convertible Preferred Stock, Series A, is 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 of Common Stock), subject to adjustment
under certain circumstances, including the failure of the Company to pay a
dividend on the Convertible Preferred Stock, Series A, 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.
F-13
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
The Company did not pay dividends on September 30, 1998 or December 31,
1998, therefore adjusting the effective conversion price from $6.00 to
$5.00.
The Convertible Preferred Stock, Series A is redeemable, in whole but not
in part, by the Company upon 30 days' prior written notice after April 3,
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 3,
2001, at certain cash redemption prices plus accumulated and unpaid
dividends. Accumulated and unpaid dividends at December 31, 1998 amounted
to $300, an amount equal to $0.50 per share.
The holders of Convertible Preferred Stock, Series A, 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, Series A, 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, Series A, for four consecutive quarterly
dividend payment periods, holders of Convertible Preferred Stock, Series A,
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.
Upon liquidation, dissolution or winding up of the company, holders of
Convertible Preferred Stock, Series A, 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, Series A.
Preferred Stock, Series B
In December 1998, the Company issued 3,570 shares of Preferred Stock,
Series B. The Preferred Stock, Series B ranks junior to Preferred Stock,
Series A and senior to Common Stock.
The Convertible Preferred Stock, Series B, has a par value of $.001 per
share and a stated value of $100.00 per share. Cumulative dividends are
payable at the rate of $6.00 per share per annum, payable quarterly in
arrears, commencing June 30, 1999, when, 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, Series
B. Failure to pay any quarterly dividend will result in a reduction of the
conversion price as described below.
The Convertible Preferred Stock, Series B is convertible into Common Stock
at any time prior to redemption at a conversion rate of 666.67 shares of
Common Stock for each share of Convertible Preferred Stock, Series B (an
effective conversion price of $.15 per share of Common Stock), subject to
adjustment under certain circumstances.
The Convertible Preferred Stock, Series B, is redeemable, in whole but not
in part, by the Company not less than 30 nor more than 60 days prior to the
Business Day designated by written notice as the Redemption Date at $105.00
per share, plus accumulated and unpaid dividends.
F-14
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
The holders of Convertible Preferred Stock, Series B, 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.
Upon liquidation, dissolution or winding up of the Company, holders of
Convertible Preferred Stock are entitled to receive liquidation
distributions equivalent to $100 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, Series B.
Warrants
Each Warrant entitles the holder thereof to purchase, at any time from
April 3, 1998 through April 3, 2002, one share of Common stock at a price
of $5.50 per share, subject to adjustment. Commencing October 3, 1998, 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.
Representative's Warrants
In connection with the Initial Public Offering, the Company sold to the
Underwriter 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 exercisable at a price of $12.00 per share of
Convertible Preferred Stock, $6.00 per share of Common Stock and $.12 per
Warrant from April 3, 1998 through April 3, 2002, and are restricted from
sale, transfer, assignment or hypothecation prior to that date, except to
officers of the Underwriter. 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.
9. Stock Option Plans
The Company's 1996 Stock Option Plan (the "1996 Plan") provides the Board
of Directors the authority to issue incentive and non-qualified stock
options to purchase up to 1,350,000 shares of the Company's Common Stock to
officers, directors, key employees and/or consultants. Through January
1997, the Board of Directors had awarded 630,000 five-year non-qualified
options under the 1996 Plan to officers. These options became effective
upon the completion of the Company's initial public offering in April 1996
and carried an exercise price equal to the initial public offering price.
These options vest 20% per year, with the first 20% vesting immediately
upon the date of grant.
In addition, in September 1996 the Board awarded 136,689 five-year
non-qualified options under the 1996 Plan to non-employee directors. These
options also became effective upon completion of the
F-15
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
Company's initial public offering and carry an exercise price equal to the
initial public offering price. These options vest 33-1/3% per year, with
the first third vesting immediately upon the date of grant.
In May and June 1997, the Company awarded 230,000 five-year incentive and
non-qualified options under the 1996 Plan to certain key employees and
officers. These options carry an exercise price of $2.50, equal to the
market price at the time of the awards. These options vest 20% per year,
with the first 20% vesting immediately upon the date of grant.
In July 1997, the Company modified the term of all existing options
outstanding under the 1996 Plan to ten years. No other terms of the
existing awards were changed. This did not result in a charge to
compensation as the market value on the date of modification was less than
the exercise price for all options outstanding. For purposes of the SFAS
123 disclosures in the following paragraphs, this modification was treated
as a rescission of the initial awards and a grant of new awards.
In December 1997, the Company awarded 45,563 ten-year non-qualified options
under the 1996 Plan to a new member of the Board of Directors. These
options carry an exercise price of $1.88, equal to the market price at the
time of the award. These options vest 33-1/3% per year, with the first
third vesting immediately upon the date of grant.
In December 1998, the Company terminated the 1996 Plan and all of the
outstanding options granted were surrendered to the Company for
cancellation. In addition, the Company's Board of Directors approved the
Company's 1998 Stock Option Plan (the "1998 Plan"). The Company awarded
1,386,950 five year non-qualified options under the 1998 Plan to employees,
officers and directors. These options carry an exercise price of $.09375,
equal to the market price at the time of the awards. For purposes of the
SFAS 123 disclosures in the following paragraphs, this transaction was
treated as a rescission of the initial awards and a grant of new awards.
F-16
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
A summary of the status of options granted under the Plan as of June 30,
1997, December 31, 1997 and December 31, 1998 and changes during the
periods then ended is presented below:
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended
December 31, 1998 December 31, 1997 June 30, 1997
---------------------------- --------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,042,252 $4.31 996,689 $4.42 -- --
Granted 1,461,950 .19 1,042,252 4.31 996,689 $ 4.42
Exercised -- -- -- -- --
Forfeited -- -- -- -- --
Rescinded (1,092,252) 4.14 (996,689) 4.42 -- --
------------- ------------- -----------
Options outstanding at end of year 1,411,950 .19 1,042,252 4.31 996,689 4.42
============= ============= ===========
Options exercisable at year end 950,890 384,313 217,564
============= ============= ===========
Weighted average fair value of
options granted during the period $.12 $1.42 $ 2.47
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
Weighted-
Average
Remaining
Exercise Number Contractual Options
Price Outstanding Life Exercisable
$ 5.00 25,000 7.79 25,000
$ .09 1,386,950 9.95 925,890
------------ ------------
1,411,950 9.77 950,890
============ ============
F-17
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
Had compensation expense for the Company's employee stock options been
determined based on the fair value at the grant date for awards consistent
with the provisions of SFAS 123, the Company's net loss per share would
have been increased to the pro forma amounts indicated below:
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1998 1997 1997
Net loss - as reported $ (3,629) $ (2,766) $ (3,171)
Net loss - pro forma $ (4,303) $ (3,114) $ (3,706)
Loss per share - as reported $ (.37) $ (.27) $ (.32)
Loss per share - pro forma $ (.43) $ (.30) $ (.37)
SFAS 123 requires stock options to be valued using an approach such as the
Black-Scholes option pricing model. The Black-Scholes model calculates the
fair value of the grant based upon certain assumptions about the underlying
stock. The expected dividend yield of the stock is zero, the expected life
of the options is 10 years for the year ended December 31, 1998, 9 years
for the six months ended December 31, 1997 and 5 years for the year ended
June 30, 1997, the expected volatility is 60 percent, and the expected
risk-free rate of return is between 4.6 and 6.5 percent, calculated as the
rate offered on U.S. Government securities with the same term at the
expected life of the options.
10. Commitments and Contingencies
Leases
The Company is committed under non-cancelable leases for office space,
machinery and equipment. Future obligations under the leases for the next
five years are as follows:
Operating
Fiscal Capital Lease Lease
Year Ended Payments Payments
1999 $ 9 $129
2000 -- 132
2001 -- 132
----- ----
9 $393
====
Amount representing interest (5)
-----
$ 4
=====
F-18
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
Property and equipment at December 31, 1998 and 1997 includes the following
amounts for capitalized leases:
1998 1997
Technical equipment $ 26 $ 26
Less: Accumulated Depreciation (4) (1)
---- ----
$ 22 $ 25
==== ====
Rent expense approximated $114 for the year ended December 31, 1998, $56
for the six months ended December 31, 1997 and $72 for the year ended June
30, 1997.
Employment Agreements
The Company has employment agreements with one executive. Aggregate minimum
payments under the employment agreement are $106 in 1999.
Litigation
The Company has no matters of litigation arising in the ordinary course of
business which in the opinion of management will have a material adverse
effect on its financial condition, results of operations or cash flows.
11. Comparative Financial Information (Unaudited)
The selected financial data included in the following table for the year
ended December 31, 1997 and the six months ended December 31, 1996 is
unaudited and, in the opinion of management, includes all adjustments
consisting of only normal recurring adjustments necessary for a fair
presentation of such data.
(unaudited)
(unaudited) Six Months
Year Ended Ended
December 31, December 31,
1997 1996
Cost and expenses $(5,369) $ (857)
Revenues -- 8
Interest income 294 --
Interest expense (8) (5)
Income taxes -- --
------- -------
Net loss $(5,083) $ (854)
------- -------
Net loss per share $ (.46) $ (.09)
======= =======
F-19
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================
12. Subsequent Events
The Company signed a non-binding letter of intent on February 2, 1999 to
merge with and into American Technologies Group, Inc. ("ATEG"). ATEG is
engaged in the development, commercialization and sale of products and
systems using its patented and proprietary technologies, concentrating in
three core areas: (i) IE(TM) technology, (ii) water purification, and (iii)
high energy particle beams.
The Company commenced operation of its first commercial project with the
State of Maryland and as such, has entered into a multi-year, sole-source
contract with Maryland Environmental Services for the removal of
chromium-contaminated leachate at the Port of Baltimore.
F-20
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF
COMMODORE SEPARATION TECHNOLOGIES, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
I, Paul E. Hannesson, Chairman of the Board of Commodore Separation
Technologies, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware, in accordance with the provisions of
Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation of the said Corporation, the said Board of
Directors as of December 3, 1998, adopted the following resolution creating a
series of 4,000 shares of 6% Series B Convertible Redeemable Preferred Stock,
par value $0.001 per share, designated as "6% Series B Convertible Redeemable
Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of its Certificate of
Incorporation, a series of Preferred Stock of the Corporation be and it hereby
is created, and that the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations or restrictions
thereof are as follows:
1. DESIGNATION AND NUMBER. The designation of the series of preferred stock
fixed by this resolution shall be "6% Series B Convertible Redeemable Preferred
Stock" (hereinafter referred to as the "Series B Preferred Stock") and the
number of shares constituting such series shall be 4,000. The Board of Directors
of the Corporation may not increase or decrease the number of shares of this
series so designated except as hereinafter provided. The stated value of each
share of this series shall be $100.00, and each share of this series shall be
validly issued and fully paid upon receipt by the Corporation of legal
consideration in an amount at least equal to such stated value (less applicable
underwriting discounts or commissions) and shall not thereafter be assessable.
2. RANK. The Series B Preferred Stock shall rank: (i)
prior to all of the Corporation's Common Stock, par value $0.001 per share
("Common Stock"), (ii) prior to any class or series of capital stock of the
Corporation hereafter created either specifically ranking by its terms junior to
the Series B Preferred Stock or not specifically ranking by its terms senior to
or on parity with the Series B Preferred Stock (collectively with the Common
Stock, "Junior Securities"); (iii) subject to the provisions of subparagraph
4(ii) hereof, on parity with any class or series of
<PAGE>
capital stock of the Corporation hereafter created specifically ranking by its
terms on parity with the Series B Preferred Stock ("Parity Securities"); and
(iv) subject to the provisions of subparagraph 4(ii) hereof, junior to the
Corporation's 10% Senior Convertible Redeemable Preferred Stock, par value
$0.001 per share, and any class or series of capital stock of the Corporation
hereafter created specifically ranking by its terms senior to the Series B
Preferred Stock ("Senior Securities"), in each case, as to payment of dividends
or as to distributions of assets upon liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary (all such distributions being
referred to collectively as "Distributions").
3. DIVIDENDS.
(i) The dividend rate of the Series B Preferred Stock shall be computed at
a rate of $6.00 per share per annum from the date of the issuance of the Series
B Preferred Stock. Dividends shall be payable quarterly in arrears out of funds
legally available therefor on the last business day of March, June, September
and December of each year, commencing June 30, 1999 (each a "Dividend Payment
Date"). Dividends on shares of Series B Preferred Stock shall be cumulative and
shall accrue (whether or not declared), without interest, from the first day of
the quarterly period in which such dividend may be payable as herein provided,
except with respect to the first quarterly payment which shall accrue from the
date of issuance. On each Dividend Payment Date all dividends which shall have
accrued on each share of Series B Preferred Stock outstanding on the applicable
record date shall accumulate and be deemed to become "due." Any dividend which
shall not be paid on the Dividend Payment Date on which it shall become due
shall be deemed to be "past due" (a "Cumulated Dividend") until such Cumulated
Dividend shall have been paid.
(ii) The Board of Directors shall declare and pay current dividends out of
funds legally available therefor (after giving effect to the payment of all
requisite dividends on Senior Securities).
(iii) In order to determine the holders of the Series B Preferred Stock
entitled to receive dividends, the Corporation shall fix a record date not more
than 60 days prior to any Dividend Payment Date. If any such Dividend Payment
Date should fall on a day that is not a Business Day, then the Corporation shall
pay the applicable dividend on the next succeeding Business Day. "Business Day"
shall mean a day other than a Saturday, Sunday or other day on which any
national securities exchange or quotation system on which the Common Stock of
the Corporation is traded or quoted is authorized or required by law to close.
(iv) The Corporation shall not: (A) pay or declare and set apart for
payment any dividends or Distributions on the Corporation's Junior Securities,
other than dividends payable in the form of additional shares of the same Junior
Security as that on which such dividend is declared, or (B) redeem, purchase, or
otherwise acquire any shares of Junior Securities or any right, warrant or
option to acquire any Junior Securities, unless full Cumulated Dividends have
been, or contemporaneously are, paid or declared and set apart for such payment
on the Series B Preferred Stock.
2
<PAGE>
(v) No full dividends shall be paid or declared and set apart for payments
on any class or series of Parity Securities for any period unless full Cumulated
Dividends have been, or contemporaneously are, paid or declared and set apart
for such payment on the Series B Preferred Stock for all dividend periods
terminating on or prior to the date of payment of such full Cumulated Dividends.
No full Cumulated Dividends shall be paid or declared and set apart for payment
on the Series B Preferred Stock for any period unless full cumulative dividends
have been, or contemporaneously are, paid or declared and set apart for payment
on the Parity Securities, for all dividend periods terminating on or prior to
the date of payment of such full Cumulated Dividends. When dividends are not
paid in full upon the Series B Preferred Stock and the Parity Securities, all
dividends paid or declared and set apart for payment upon shares of Series B
Preferred Stock and the Parity Securities shall be paid or declared and set
apart for payment PRO RATA, so that the amount of dividends paid or declared and
set apart for payment per share on the Series B Preferred Stock and the Parity
Securities shall in all cases bear to each other the same ratio that accrued and
unpaid dividends per share on the shares of Series B Preferred Stock and the
Parity Securities bear to each other (without taking into account the dividends
so paid and those so declared and set apart for payment).
4. VOTING RIGHTS
(i) Except as may otherwise be provided herein or required by law, the
holders of the shares of Series B Preferred Stock (the "Holders") shall not be
entitled to any vote in respect of such shares.
(ii) So long as any shares of Series B Preferred Stock are outstanding, the
consent of the Holders of at least a majority of the shares of Series B
Preferred Stock at the time outstanding, given in person or by proxy, either in
writing without a meeting or by vote at any meeting called for such purpose,
shall be necessary for the Corporation to: (a) authorize any class or series of
Senior Securities; (b) authorize any class or series of Parity Securities; (c)
reclassify any Junior Securities into Parity or Senior Securities; or (d) amend,
repeal or modify any provision of, or add any provision to, the Corporation's
Certificate of Incorporation, By-Laws or this Certificate of Designation if such
action would alter or change the rights, preferences, privileges or powers of,
or the restrictions provided for the benefit of the Holders so as to adversely
affect the Series B Preferred Stock; PROVIDED, HOWEVER, that no such vote shall
be required pursuant to clause (a), (b), (c) or (d) in the event the Corporation
shall then have the right to redeem the Series B Preferred Stock and, prior to
the date of issuance or such new class or series of Senior Securities or Parity
Securities provision shall have been made for the redemption of all the
outstanding shares of the Series B Preferred Stock and such redemption occurs on
or prior to the date of issuance of such new series or class of Senior
Securities or Parity Securities.
(iii) On all matters on which the Series B Preferred Stock is entitled to
vote by law, the Holders shall be entitled to one vote per share of Series B
Preferred Stock, voting separately as a single class, and the presence, in
person or by proxy, of the Holders of a majority of the outstanding shares of
the Series B Preferred Stock shall constitute a quorum.
3
<PAGE>
5. CONVERSION RIGHTS.
(i) Each share of Series B Preferred Stock may be converted, at the option
of each Holder, at any time and from time to time, into fully-paid and
non-assessable shares of Common Stock; PROVIDED, HOWEVER, a Holder's right to so
convert shares of Series B Preferred Stock shall terminate as to shares thereof
that are redeemed by the Corporation on the Redemption Date (as hereinafter
defined) therefor as provided in and subject to the terms and conditions of
subparagraph 7(ii) hereof. The number of shares of Common Stock to which the
Holder of each share of Series B Preferred Stock shall be entitled upon
conversion shall be the product obtained by multiplying the number of shares of
Series B Preferred Stock to be converted by the Conversion Rate (as hereinafter
defined); in addition, the Holder shall be entitled upon conversion to receive
cash in an amount equal to all Cumulated Dividends on each share of Series B
Preferred Stock so converted, PROVIDED there are funds legally available
therefor. To the extent the Corporation shall not have funds legally available
to pay all such Cumulated Dividends, the Corporation's obligation to make such
payment shall be deferred until the first date on which the Corporation shall
have funds legally available for all or a portion of such payment, which shall
then be made in whole or in part, as the case may be, until such Cumulated
Dividends shall have been paid in full. The "Conversion Rate," that is, the
number of shares of Common Stock for which each share of Series B Preferred
Stock may be converted, shall be determined by dividing $100.00 by $0.15
("Conversion Price"). The Conversion Price shall be adjusted from time to time
as set forth in subsection (ii) hereof. The Corporation shall not issue
fractional shares of Common Stock upon conversion of Series B Preferred Stock
but, in lieu thereof, shall pay to a Holder cash in an amount equal to such
fraction multiplied by the Last Sale Price of the Common Stock on the trading
day prior to the date on which the shares are converted. "Last Sale Price" shall
mean (w) the reported last sale price regular way or, in case no such reported
sale takes place on such day, the average of the reported closing bid and asked
prices regular way, in either case on the principal national securities exchange
or market on which the Common Stock is listed or admitted to trading or, (x) if
not listed or admitted to trading on any national securities exchange or market,
on the Nasdaq SmallCap Market or, (y) if the Common Stock is not listed or
admitted to trading on any national securities exchange or market or quoted on
the Nasdaq SmallCap Market, the average of the closing bid and asked prices in
the over-the-counter market as furnished by any New York Stock Exchange member
firm selected from time to time by the Board of Directors for that purpose or,
(z) if the Common Stock is not listed or admitted to trading or otherwise quoted
as set forth above, the fair market value of the Common Stock as determined in
good faith using customary valuation methods by the Board of Directors of the
Corporation.
(ii) The Series B Preferred Stock shall be converted into Common Stock in
the following manner:
(A) Shares of Series B Preferred Stock received by the Corporation in
exchange for Common Stock shall be retired and canceled and shall no longer be
available for issuance as Series B Preferred Stock or any other series of
preferred stock.
4
<PAGE>
(B) A Holder shall give written notice to the Corporation of its desire to
convert all or a portion of the shares of Series B Preferred Stock owned by such
Holder. Such notice shall be accompanied by certificates, duly endorsed for
conversion, evidencing the number of shares of Series B Preferred Stock such
Holder desires to convert. The Corporation will, as soon as practicable
thereafter, deliver to such Holder or to such Holder's nominee or nominees, a
certificate or certificates for the appropriate number of shares of Common
Stock, together with cash, as provided in subparagraph 5(i), with respect to any
fractional shares otherwise issuable upon conversion, and cash in an amount
equal to all Cumulated Dividends on each share of Series B Preferred Stock so
converted, PROVIDED there are funds legally available therefor, and, in the
event of a partial conversion, a certificate representing the balance, it any,
of the shares of Series B Preferred Stock represented by the surrendered
certificate or certificates but not converted to Common Stock. To the extent the
Corporation shall not have funds legally available to pay all such Cumulated
Dividends, the Corporation's obligation to make such payment shall be deferred
until the first date on which the Corporation shall have funds legally available
for all or a portion of such payment, which shall then be made in whole or in
part, as the case may be, until such Cumulated Dividends shall have been paid in
full.
(C) In the event that shares of Series B Preferred Stock are surrendered
for conversion on any date during the period from the close of business on a
record date fixed for determining the Holders entitled to receive dividends to
the opening of business on the corresponding Dividend Payment Date, the Holder
shall continue to be entitled to receive such dividend on such Dividend Payment
Date. In the event that the date on which the shares are converted is the
Dividend Payment Date, such Holder will be entitled to receive the dividend
payable with respect to such Series B Preferred Stock.
(D) If, prior to the date on which all shares of Series B Preferred Stock
are converted, the Corporation shall (1) pay a dividend in shares of Common
Stock or make a distribution in shares of Common Stock, (2) subdivide its
outstanding Common Stock, (3) combine its outstanding Common Stock into a
smaller number of shares of Common Stock or (4) issue by reclassification of its
Common Stock other securities of the Corporation, the Conversion Price in effect
on the opening of business on the record date for determining stockholders
entitled to participate in such transaction shall thereupon be adjusted, or, if
necessary, the right to convert shall be amended, such that the number of shares
of Common Stock receivable upon conversion of the shares of Series B Preferred
Stock immediately prior thereto shall be adjusted so that the Holder shall be
entitled to receive, upon the conversion of such shares of Series B Preferred
Stock, the kind and number of shares of Common Stock or other securities of the
Corporation which it would have owned or would have been entitled to receive
after the happening of any of the events described above had the Series B
Preferred Stock been converted immediately prior to the happening of such event
or any record date with respect thereto. Any adjustment made pursuant to this
subparagraph 5(ii)(D) shall become effective immediately after the effective
date of such event and such adjustment shall be retroactive to the record date,
if any, for such event. No adjustment with respect to any ordinary cash
dividends (made out of current earnings) on shares of Common Stock shall be
made.
5
<PAGE>
(E) Except in respect of transactions described in subparagraph 5(ii)(D)
above, if, prior to the date on which all shares of Series B Preferred Stock are
converted, the Corporation shall sell or issue Common Stock or rights, options,
warrants or convertible securities (or rights, options or warrants to purchase
convertible securities) containing the right to subscribe for or purchase shares
of Common Stock (collectively, "Rights"), and the sale or issuance price per
share of Common Stock (or in the case of Rights, the sum of the consideration
paid or payable for any such Right entitling the holder thereof to acquire one
share of Common Stock and such additional consideration paid or payable upon
exercise or conversion of any such Right to acquire one share of Common Stock)
is less than the lower of the then current Conversion Price or the then current
average Market Price of the Common Stock (as defined in subparagraph 7(i) below)
for the five (5) trading days immediately preceding the dates of such sale or
issuance (the "Current Common Stock Price"), the Conversion Price shall
thereupon be adjusted such that the number of shares of Common Stock receivable
upon conversion of the Series B Preferred Stock shall be the number determined
by multiplying (1) the number of shares of Common Stock receivable upon
conversion of the shares of Series B Preferred Stock immediately prior to such
issuance or sale by (2) a fraction (not to be less than one) with a numerator
equal to the product of the number of shares of Common Stock outstanding after
giving effect to such sale or issuance (and assuming, in the case of Rights that
such Rights had been fully exercised or converted, as the case may be) and the
Current Common Stock Price and a denominator equal to the sum of (x) the product
of the number of shares of Common Stock outstanding immediately before the
issuance or sale or the record date, as the case may be, multiplied by the
Current Common Stock Price and (y) the aggregate consideration received or
deemed to be received by the Corporation for the shares of Common Stock to be
issued or sold or to be purchased or subscribed for upon exercise of such
Rights. For the purposes of such adjustments, the Common Stock which the holders
of any such Rights shall be entitled to subscribe for or purchase shall be
deemed to be issued and outstanding as of the date of such issuance or sale or
the record date, as the case may be.
(F) Except in respect of transactions described in subparagraph 5(ii)(D)
above, if, prior to the date on which all shares of Series B Preferred Stock are
converted, the Corporation shall declare, order, pay or make a dividend or other
distribution (including without limitation any distribution of cash, other or
additional stock or other securities or property or options, by way of dividend
or spin-off, reclassification, recapitalization or similar corporate
rearrangement or otherwise, but excluding dividends described in paragraph 3 or
in the last sentence of subparagraph 5(ii)(D)), then, in each case, the
Conversion Price shall thereupon be adjusted such that the number of shares of
Common Stock thereafter receivable upon the conversion of shares of Series B
Preferred Stock shall be determined by multiplying (1) the number of shares of
Common Stock theretofore receivable upon conversion of the shares of the Series
B Preferred Stock by (2) a fraction of which the numerator shall be the then
Conversion Price on the record date for the determination of stockholders
entitled to receive such dividend or other distribution, and of which the
denominator shall be such Conversion Price on such date minus the amount of such
dividend or distribution applicable to one share of Common Stock. The Board of
Directors of the Corporation shall determine the amount of such dividend or
distribution allocable to one share of Common Stock and such determination, if
reasonable and based upon the Board of Directors' good faith business judgment,
shall be binding upon the Holder. Such adjustment shall be made whenever any
such
6
<PAGE>
distribution is made and shall become effective on the date of distribution
retroactive to the record date for the determination of stockholders entitled to
receive such distribution.
(G) Upon the expiration of any Rights if such shall not have been
exercised, the Conversion Price, to the extent that shares of Series B Preferred
Stock have not been converted, shall, upon such expiration, be readjusted and
shall thereafter be such as they would have been had they been originally
adjusted (or had the original adjustment not been required, as the case may be)
on the basis of (1) the fact that the only shares of Common Stock so issued were
the shares of Common Stock, if any, actually issued or sold upon the exercise of
such Rights and (2) such shares of Common Stock, if any, were issued or sold for
the consideration actually received by the Corporation (including for purposes
hereof, any underwriting discounts or selling commissions paid by the
Corporation) for the issuance, sale or grant of all such Rights, whether or not
exercised; PROVIDED, HOWEVER, that no such readjustment shall have the effect of
increasing the Conversion Price by a proportion (relative to the Conversion
Price in effect immediately prior to such readjustment) in excess of the inverse
of the aggregate proportional adjustment thereof made in respect of the issue,
sale, grant or assumption of such Rights.
If the consideration provided for in any Right or the additional
consideration, if any, payable upon the conversion or exchange of any right
shall be reduced, or the rate at which any Right is exercisable or convertible
into or exchangeable for shares of Common Stock shall be increased, at any time
under or by reason of provisions with respect thereto designed to protect
against dilution, then, effective concurrently with each such change, the
Conversion Price then in effect shall first be adjusted to eliminate the effects
(if any) of the issuance (or deemed issuance) of such Right on the Conversion
Price and then readjusted as if such Right had been issued on the date of such
change with the terms in effect after such change, but only if as a result of
such readjustment the Conversion Price then in effect hereunder is thereby
reduced.
(H) If, prior to the date on which all shares of Series B Preferred Stock
are converted, the Corporation shall (1) consolidate with or merge with or into
another person resulting in a reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock or (2) sell or otherwise
transfer all or substantially all of the assets of the Corporation, then a
Holder shall thereafter have the right to convert such shares of Series B
Preferred Stock into the kind and amount of stock, securities or assets, if any,
such Holder would have been entitled to receive upon such consolidation, merger,
sale or transfer had such Holder converted its shares of Series B Preferred
Stock into Common Stock immediately prior to such transaction.
(I) For the purposes of this paragraph 5: (x) the consideration for the
issue or sale of any additional shares of Common Stock shall, irrespective of
the accounting treatment of such consideration, be deemed to be the
consideration actually received by the Corporation and (1) insofar as it
consists of cash, be computed at the net amount of cash received by the
Corporation, plus any expense paid or incurred by the Corporation and any
commissions or compensation paid or concessions or discounts allowed to
underwriters, dealers or others performing similar services in connection with
such issue or sale, (2) insofar as it consists of
7
<PAGE>
property (including securities) other than cash, be computed at the fair value
thereof at the time of such issue or sale, as determined in good faith by the
Board of Directors of the Corporation, and (3) in case additional shares of
Common Stock are issued or sold together with other stock or securities or other
assets of the Corporation for consideration which covers both cash and property,
be the portion of such consideration so received, computed as provided in
clauses (1) and (2) above, allocable to such additional shares of Common Stock,
all as determined in good faith by the Board of Directors of the Corporation;
(y) additional shares of Common Stock deemed to have been issued pursuant to
subparagraph 5(ii)(G) relating to Rights, shall be deemed to have been issued
for a consideration per share determined by dividing (1) the total amount, if
any, received by the Corporation as consideration for the issue, sale or grant
of the Rights in question, less the value of the Rights not actually received by
the Corporation as consideration therefor, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provisions contained therein for a subsequent adjustment
of such consideration to protect against dilution) payable to the Corporation
upon the exercise in or the conversion or exchange of such Rights or, in the
case of Rights which are rights, options or warrants for convertible securities,
the exercise of such Rights for convertible securities and the conversion or
exchange of such convertible securities, in each case computing such
consideration as provided in the foregoing clause (x) of this subparagraph
5(ii)(I), by (2) the maximum number of shares of Common Stock (as set forth in
the instruments relating thereto, without regard to any provision contained
therein for subsequent adjustment of such number to protect against dilution)
issuable upon the exercise, conversion or exchange of such Rights; and, (z)
additional shares of Common Stock deemed to have been issued pursuant to
subparagraph 5(ii)(D) and (F), relating to stock dividends, stock splits, etc.,
shall be deemed to, have been issued for no consideration. For the purposes of
this paragraph 5, the term "Common Stock" shall mean (i) the class of stock
designated as Common Stock in the Certificate of Incorporation of the
Corporation as may be amended as of the date hereof, or (ii) any other class of
stock resulting from successive changes or reclassification of such Common Stock
consisting solely of changes in par value or from par value to no par value, or
from no par value to par value.
(J) No adjustment in the Conversion Price shall be required unless
explicitly provided for in this paragraph 5 and unless such adjustment (plus any
adjustments not previously made by reason of this subparagraph 5(ii)(J)), would
require an increase or decrease of at least five percent (5%) in such price;
PROVIDED, HOWEVER, that any adjustments which by reason of this subparagraph
5(ii)(J) are not required to be made shall be carried forward and shall be made
at the time of and together with the next succeeding adjustment which, together
with any adjustment so carried forward, shall amount to an increase or decrease
of at least five percent (5%) in such price. All calculations under this
subparagraph 5(ii)(J) shall be made to the nearest cent.
(K) No adjustment shall be made (1) upon conversion of the Series B
Preferred Stock, (2) upon exercise of options and/or warrants of the Corporation
outstanding on the date hereof, (3) with respect to options thereafter granted
to employees, officers, directors or stockholders of or consultants to the
Corporation, pursuant to existing stock option plans, and (4) upon exercise of
the Redeemable Common Stock Purchase Warrants offered and sold in the
Corporation's initial public offering and the Representative's Warrants issued
in connection
8
<PAGE>
therewith.
(L) Whenever the Conversion Price is adjusted pursuant to any of the
foregoing provisions of this paragraph 5, the Corporation shall forthwith
prepare a written statement signed by the president or any vice president and
the treasurer or any assistant treasurer or the secretary or any assistant
secretary of the Corporation, setting forth the adjusted Conversion Rate
determined as provided in this paragraph 5, and in reasonable detail the facts
requiring such adjustment. Such statement shall be filed among the permanent
records of the Corporation and a copy thereof shall be furnished to any Holder
requesting the same, and shall at all reasonable times during business hours be
open to inspection by the Holders. Within 10 days of the event requiring an
adjustment, the Corporation shall also cause a notice, stating that such an
adjustment has been made and setting forth the adjusted Conversion Rate, to be
mailed, first-class, postage prepaid, to all then Holders of record at their
addresses as the same appear on the stock records of the Corporation.
(M) If a Holder has delivered notice to the Corporation of its desire to
convert all or a portion of its shares of Series B Preferred Stock, and
certificates, duly endorsed for conversion in respect of such shares have been
delivered to the Corporation, then all shares of Series B Preferred Stock so
tendered to the Corporation shall be deemed to be no longer outstanding and,
notwithstanding the failure of the Corporation to issue the Common Stock, such
Holder shall be deemed, for all purposes (except as set forth in the next
sentence of this subparagraph 5(ii)(M)), to be a holder of the number of shares
of Common Stock into which the shares of Series B Preferred Stock such Holder is
entitled to receive pursuant to the terms of this paragraph 5 in each case as of
the close of business on the date on which such conversion notice is delivered.
In the event such Holder has delivered notice to the Corporation of his desire
to convert all or a portion of his shares of Series B Preferred Stock, such
Holder shall retain the right to receive all Cumulated Dividends payable on the
shares so converted, as provided in this paragraph 5, notwithstanding such
conversion.
(iii) The Corporation shall not, by amendment of its Certificate of
Incorporation as amended as of the date hereof, or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation but shall at all times in good faith assist in the carrying out of
all the provisions of this paragraph 5. The Corporation shall at all times
reserve and keep available out of its authorized but unissued Common Stock the
full number or shares of Common Stock deliverable upon the conversion of all the
then outstanding shares of Series B Preferred Stock and shall take all such
action and obtain all such permits or orders as may be necessary to enable the
Corporation to validly and legally issue fully paid and non-assessable shares of
Common Stock upon the conversion of Series B Preferred Stock. The Corporation
shall pay any and all transfer, stamp and other like taxes that may be payable
in respect of the issuance or delivery to a Holder of shares of Common Stock or
conversion of the Series B Preferred Stock by such holder.
9
<PAGE>
6. LIQUIDATION PRICE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
amount that shall be paid to a Holder of each share of Series B Preferred Stock
shall be $100.00 and an additional sum equal to all Cumulated Dividends on a
share of Series B Preferred Stock (hereinafter called the "Liquidation Price"),
and no more. Upon any liquidation, dissolution or winding-up of the Corporation,
the Holders will be entitled to be paid, after payment or provision for payment
of the debts and other liabilities of the Corporation and after payment or
provision for payment is made upon any Senior Securities, but before any
Distribution or payment is made upon any Junior Securities, an amount in cash
equal to the aggregate Liquidation Price of all shares outstanding, and the
Holders will not be entitled to any further payment. If, upon any such
liquidation, dissolution or winding-up of the Corporation, the Corporation's
assets to be distributed among the Holders and the holders of Parity Securities
(the "Parity Holders") are insufficient to permit payment in full to such
Holders and the Parity Holders of the aggregate amount which they are entitled
to be paid, then the available assets to be distributed will be distributed
ratably among such Holders and Parity Holders based upon the aggregate
Liquidation Price of the Series B Preferred Stock and the aggregate liquidation
preference of any Parity Securities held by each such Holder and Parity Holder,
respectively. The Corporation will mail written notice of such liquidation,
dissolution or winding-up, not less than 30 days prior to the payment date
stated therein, to each Holder of record. Neither the consolidation or merger of
the Corporation into or with any other corporation or any other person, nor the
sale or transfer by the Corporation of all or any part of its assets, nor the
reduction of the capital stock of the Corporation will be deemed to be a
liquidation, dissolution or winding-up of the Corporation within the meaning of
paragraphs 2 and 6 hereof.
7. REDEMPTION.
(i) TIME OF REDEMPTION. The Corporation may, at its option, redeem shares
of the Series B Preferred Stock, in whole but not in part, out of funds legally
available therefor, by action of the Board of Directors, at any time after
issuance of such Series B Preferred Stock, at a redemption price of $105.00 per
share, plus all Cumulated Dividends on such share of Series B Preferred Stock,
upon notice and in the manner set forth in, and subject to the conditions of,
this paragraph 7.
(ii) PRIORITY OF REDEMPTION. None of the shares of any class or series of
Parity Securities or Junior Securities shall be redeemed, repurchased or
otherwise acquired unless full Cumulated Dividends have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series B Preferred Stock for all dividend periods terminating on or prior to the
date of payment of such full Cumulated Dividends. None of the shares of Series B
Preferred Stock shall be redeemed, repurchased or otherwise acquired unless full
cumulative dividends have been, or contemporaneously are, paid or declared and
set apart for payment on the Parity Securities or Senior Securities, for all
dividend periods terminating on or prior to the Redemption Date of Series B
Preferred Stock.
8. PROCEDURES FOR REDEMPTION. The Series B Preferred Stock shall be
redeemed
10
<PAGE>
pursuant to subparagraph 7(i) in the following manner:
(i) Shares of the Series B Preferred Stock redeemed, repurchased or
otherwise acquired by the Corporation shall be retired and canceled and shall no
longer be available for issuance as Series B Preferred Stock or any other series
of preferred stock.
(ii) In the event of a redemption of shares of Series B Preferred Stock
pursuant to subparagraph 7(i), notice of redemption of shares of Series B
Preferred Stock shall be given by the Corporation, not less than 30 nor more
than 60 days prior to the Business Day designated in such notice (the
"Redemption Date"), by first class mail to Holders at their respective addresses
then appearing on the records of the Corporation, and shall also be published,
on or about the date of such mailing, in the National Edition of the Wall Street
Journal. Such notice of redemption shall specify the Redemption Date, the
redemption price plus the Cumulated Dividends on a share of Series B Preferred
Stock, if any (the "Redemption Price"), the total number of shares of Series B
Preferred Stock to be redeemed and the place or places of payment. The
conversion rights of the Holders shall continue until the Redemption Date
(provided no default by the Corporation in the payment of the Redemption Price
shall have occurred and be continuing) and in the event of any such default the
Holders' conversion rights shall continue until such shares are actually
redeemed, exchanged or converted, and such notice shall state the then effective
Conversion Price and that the right of Holders to exercise their conversion
rights shall terminate at the close of business on the Redemption Date (provided
no default by the Corporation in the payment of the Redemption Price shall have
occurred and be continuing). On or before the Redemption Date, each Holder shall
surrender to the Corporation or its designated agent, at such place as it may
designate in the redemption notice, certificates, duly endorsed for transfer,
evidencing the number of shares of Series B Preferred Stock held by such Holder
and being redeemed. Upon such surrender, the Holder shall be entitled to receive
payment of the Redemption Price without interest.
(iii) If, on the Redemption Date, (1) notice of redemption has been mailed
or delivered as provided herein, (2) the Corporation has deposited with an
independent paying agent funds necessary to pay the amount due for all shares of
Series B Preferred Stock subject to such redemption, and (3) all such funds are
available for the sole purpose of paying such amount, then, unless the
Corporation defaults on the payment of the Redemption Price, all shares of
Series B Preferred Stock subject to redemption shall, whether or not
certificates for such shares have been surrendered for cancellation, be deemed
to be no longer outstanding for any purpose and all rights with respect to such
shares shall cease, except the right of the Holder to receive the Redemption
Price, without interest; PROVIDED, HOWEVER, that the Corporation shall not have
to so redeem any shares of Series B Preferred Stock which have been converted to
Common Stock prior to the date of such redemption. If the Corporation shall not
have funds legally available for redemption of shares to be redeemed pursuant to
subparagraph 7(i) on the Redemption Date, the notice of redemption shall be null
and void and at such time as the Corporation shall have funds legally available
for redemption of such shares and shall determine to redeem the Series B
Preferred Stock on the terms and conditions set forth in subparagraph 7(i), a
new notice of redemption to Holders shall be required to effect such redemption.
11
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Paul E. Hannesson, its Chairman of the Board, as of this 3rd day of
December 1998.
COMMODORE SEPARATION TECHNOLOGIES, INC.
By:
Paul E. Hannesson
Chairman of the Board
12
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