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, 1999
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
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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 22, 2000 with an aggregate market value of approximately $473,617 (based
upon the average bid and asked prices of the Common Stock on March 22, 2000 as
quoted by the Nasdaq Small Cap Market).
As of March 22, 2000, 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, 1999
TABLE OF CONTENTS
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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.................................................................................5
Backlog.......................................................................................6
Research and Development......................................................................6
Intellectual Property.........................................................................6
Competition...................................................................................6
Government Regulation.........................................................................7
Environmental Matters.........................................................................7
Employees.....................................................................................8
ITEM 2. PROPERTIES.......................................................................................8
ITEM 3. LEGAL PROCEEDINGS................................................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................8
PART II...........................................................................................................9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................9
Market Information............................................................................9
Dividend Information..........................................................................9
ITEM 6. SELECTED FINANCIAL DATA.........................................................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........11
General......................................................................................11
Results of Operations........................................................................11
Liquidity and Capital Resources..............................................................13
Net Operating Losses.........................................................................14
Forward-Looking Statements...................................................................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................................15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........15
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PART III.........................................................................................................17
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................17
Executive Officers and Directors.............................................................17
Key Employees................................................................................18
Board Committees.............................................................................18
Compensation of Directors....................................................................19
Compliance with Section 16(a) of the Exchange Act............................................19
ITEM 11. EXECUTIVE COMPENSATION.........................................................................20
Summary Compensation.........................................................................20
Stock Options................................................................................21
Employment Agreements........................................................................21
Compensation Committee Interlocks and Insider Participation..................................22
Report of the Compensation Committee on Executive Compensation...............................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................23
Organization and Capitalization of the Company...............................................23
Offices......................................................................................24
Services Agreement...........................................................................24
Future Transactions..........................................................................24
PART IV..........................................................................................................25
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................25
SIGNATURES.......................................................................................................28
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PART I
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ITEM 1. BUSINESS.
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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 22, 2000, approximately 87% of the Company's
common stock was owned by Commodore Environmental Services LLC ("LLC"), a wholly
owned subsidiary of 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.
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.
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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 may be a 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
laboratory and selected industrial settings at greater speed and with a
higher degree of effectiveness;
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 may 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 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:
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Applicable
Material Before Treatment After Treatment Federal Guideline
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Metals:
Chromium (hexavalent) 400 ppm 0.05 ppm (field test) Less than 0.05 ppm
Zinc 2,700 ppm Less than 2 ppm (after 30 minutes) Less than 2 ppm
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 -----
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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. Throughout 1999, the SLiM
equipment installed at the Hawkins Point site experienced several operation
difficulties due to SLiM's inability to remove "total chromium" to the specified
limits on an ongoing commercial basis. The SliM equipment removed the Chromium
VI to the specified limits but was unable to remove the Chromium III, solely or
in conjunction with third party technology designed for Chromium III removal, to
the specified limits of the Hawkins Point Contract. The Company is currently
investigating alternatives to the third party technologies to effectively meet
the "total chromium" removal limits specified by the Hawkins Point Contract. In
1999, the Company had generated revenues of approximately $250,000 relating to
this contract.
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. The Company has satisfied
approximately 25% of the terms of the contract and therefore recorded $87,500 in
revenues for 1999. 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 was completed in June
1999 and is currently in its initial startup trials. Throughout the initial
startup trials at the Dundalk Marine Terminal, the SLiM equipment has been
unable to consistently meet the "total chromium" removal limits. The SliM
equipment removed the Chromium VI to the specified limits but was unable to
remove trace amounts of Chromium III to the specified limits of the Dundalk
Contract. The Company is currently investigating alternative technologies, in
combination with SLiM or solely, to effectively meet the "total chromium"
removal limits specified by the Dundalk Contract.
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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, 1999, there were approximately 7,000 companies
operating metal plating and metal finishing facilities in the United States and
an additional 1,000 such facilities in Canada. Based on estimated sales by these
facilities, the Company believes that on average each of these facilities could
utilize the Company's SLiM technology on a selected basis. Additionally, there
were more than 1,000 biochemical, bulk drug manufacturing and pharmaceutical
companies operating in the United States and Canada that may be potential users
of the SLiM technology. The Company believes that the potential international
market for the above applications may be equal or greater than 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 intends to
lease 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 may obtain
additional revenues through servicing the SLiM equipment, including periodic
replacement of the membrane component. In addition to leasing and selling its
equipment, the Company may 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 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
were in this 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.
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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. To date the Company has been unsuccessful in
placing SLiM equipment in this industrial sector.
Environmental Remediation and Restoration. The Company believes that
SLiM has the 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. To date the SLiM
technology has not performed profitability on a commercial scale.
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. The Company has successfully demonstrated selective
radionuclide capabilities on a limited basis.
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.
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, 1999, total backlog for the Company was approximately
$300,000. 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.
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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 $338,000, $1,299,000, $817,000 and
$985,000 for the years ended December 31, 1999 and 1998, for the transition
period from July 1 to December 31, 1997 (the "Transition Period") and for the
year ended June 30, 1997, 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 Lockheed 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 Company filed a U.S. patent application for
chromium removal and recovery covering the sole invention of Dr. W.S. Winston
Ho, former Senior Vice President - Technology. In February 2000, the Company
filed three U.S. Patent Application for using a strip dispersion technique and
interfacial polymerization with SLiM covering the sole inventions 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.
6
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By contrast, the Company believes SLiM may be capable of handling a
broad range of compounds in a faster and cost effective manner. Furthermore, the
expected by-products of the SLiM process consist primarily of wastewater, which
can be discharged as normal wastewater effluent, and to a 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 may have 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 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.
7
<PAGE>
EMPLOYEES
As of March 22, 2000, the Company had 4 full-time employees, two
engineers, a chemist and a technician. None of such employees are covered by
collective bargaining agreements, and the Company's relations with its employees
are believed to be good.
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 $132,000 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, 1999, and as of March 22, 2000, the
Company was not involved in any litigation.
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, 1999.
8
<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 22, 2000, there were 177 holders of record of Common Stock, two holders of
record of Convertible Preferred Stock and 16 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 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
FISCAL YEAR 1999
January 1 to March 31, 1999....... $0.63 $0.05 $0.25 $0.13 $0.01 $0.01
April 1 to June 30, 1999.......... 0.13 0.06 0.25 0.13 0.01 0.01
July 1 to September 30, 1999...... 0.13 0.06 0.13 0.06 0.01 0.01
October 1 to December 31, 1999.... 0.08 0.01 0.13 0.06 0.01 0.01
- --------------------------
</TABLE>
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 therefore, 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.
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.
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.
9
<PAGE>
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 and 1999, 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
years ended December 31, 1998 and 1999 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>
November 15,
1995
(date of Six Months Ended
inception) Year Ended December 31, Year Ended Year Ended
Statement of Operations Data to June 30, June 30, ------------------------- December 31, December 31,
(1): 1996 1997 1996 1997 1998 1999
----------- ----------- ---------- ----------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses............ $ (60,000) $ (3,265,000) $ (857,000) $(2,961,000) $ (3,749,000) $(2,141,000)
Revenue....................... -- -- -- -- 19,000 337,000
Other income
And (expense)............... (1,000) 94,000 3,000 195,000 101,000 18,000
Net loss...................... (61,000) (3,171,000) (854,000) (2,766,000) (3,629,000) (1,786,000)
Net loss per share--basic
And diluted (2)............ (.01) (.32) (.09) (.27) (.37) (.21)
Weighted Average Number of
Shares..................... 10,000,000 10,375,000 10,000,000 11,502,000 11,514,000 11,516,000
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: December 31, December 31, December 31,
June 30, 1996 June 30, 1997 1997 1998 1999
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit).......... $(81,000) $ 7,817,000 $ 4,462,000 $ 549,000 $ (824,000)
Total assets....................... 23,000 9,850,000 6,660,000 2,665,000 1,908,000
Long-term liabilities.............. -- 18,000 13,000 4,000 916,000
Deficit accumulated during
development stage.................. (61,000) (3,232,000) (5,998,000) (9,627,000) (11,413,000)
Stockholders' equity (deficit)..... (61,000) 8,708,000 5,652,000 2,105,000 (597,000)
- ------------------------------------
</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.
10
<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, 1999. 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, 1999, the Company incurred
a net loss of $11,413,000. For the year ended December 31, 1999, the Company
incurred a loss of $1,786,000 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 to 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, 1999 compared
to year ended December 31, 1998
The Company commenced its contracts with the Port of Baltimore in
February 1999 and generated revenues of $337,000 for the year then ended as
compared to $0 for the year ended December 31, 1998. These revenues were
generated primarily from the contract with Maryland Environmental Services at
the Port of Baltimore. Cost of sales amounted to $541,000 for the year ended
December 31, 1999. Cost of sales primarily include the cost of equipment,
shipping and set up costs.
Research and development costs were $338,000 for the year ended
December 31, 1999 as compared to $1,299,000 for the year ended December 31,
1998. Since 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 $743,000 for the year ended
December 31, 1999 as compared to $1,096,000 for the year ended December 31,
1998. 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 to $507,000 in 1999 from
$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 to $0 in 1999 from $529,000 in
1998 as a result of reduced reliance on corporate personnel and elimination of
administrative expenses charged by its parent.
11
<PAGE>
Sales and marketing expense decreased to $12,000 in 1999 from $417,000
in 1998 as a result of the Company's focus on the commencing of operations. The
Company is trying to identify new markets for applications of its technology,
however its main focus is on commencing its operations.
Interest income was $18,000 in 1999 as compared to $101,000 in 1998.
The Company successfully completed an initial public offering in April 1997 and
through 1998 had generated interest income from the proceeds of the offering.
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 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.
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."
12
<PAGE>
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."
Other income for the year ended June 30, 1997 was $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.
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, 1999, the Company purchased or constructed equipment
totaling $1,894,000 and has incurred patent filing and maintenance costs of
$206,000. 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. In addition,
Environmental received 3,570 shares of the Company's Series B Preferred Stock
which converts into 2,380,000 shares of the Company's common stock in exchange
for indebtedness to the Company of $357,000. The transaction was consummated on
December 25, 1998. Environmental, as of March 15, 2000, owns approximately 49%
of the outstanding shares of Applied common stock. Bentley J. Blum, a director
of Environmental and the beneficial owner of approximately 52% of the
outstanding shares of Environmental common stock, is also a director of Applied
and the Company.
13
<PAGE>
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 $1,786,000, $3,629,000, $2,766,000
and $3,171,000 for the years ended December 31, 1999, 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, 1999. Substantially all of the Company's
losses are attributable to the expenses detailed above. At December 31, 1999 the
Company had a working capital deficit of $824,000 and a stockholders' deficit of
$597,000. 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 $1,805,000, $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, 1999 is principally due to the net loss for the period and
dividends paid or accrued on the Company's Convertible Preferred Stock.
The Company has been obtaining financing from Commodore Environmental
Services, Inc., the owner of 87% of the outstanding shares of Common Stock,
however there can be no assurance that the Company will continue to be able to
obtain additional financing from Environmental. The Company is continuing to
pursue external financing.
NET OPERATING LOSSES
At December 31, 1999, the Company had tax loss carryforwards of
approximately $11,400,000. 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
Prior to January 1, 2000, there was a great deal of concern regarding
the ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished during the years leading up to
2000 was effective to prevent any problems. As of the date of this prospectus,
the Company has not experienced any such computer difficulty; however, computer
experts have warned that there may still be residual consequences of the change
in centuries and any such difficulties may, depending upon their pervasiveness
and severity, have a material adverse effect on the Company's business,
financial condition and results of operations. Any of the following could have a
material adverse effect on the Company's business, financial condition and
results of operations:
o a failure to fully identify all year 2000 dependencies in the Company's
systems;
o a failure to fully identify all year 2000 dependencies in the systems
of third parties with whom the Company does business;
o a failure of any third party with whom the Company does business to
adequately address their year 2000 issues;
o the failure of any contingency plans develop to protect the Company's
business and operations from year 2000-related interruptions; and
o delays in the implementation of new systems resulting from year 2000
problems.
14
<PAGE>
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 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.
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-26 of this Annual Report and are incorporated herein by reference.
COMMODORE SEPARATION TECHNOLOGIES, INC.
Financial Statements
December 31, 1999 and 1998
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Index
- --------------------------------------------------------------------------------
Page
Report of Tanner + Co. F-1
Report of PricewaterhouseCoopers LLP F-2
Balance Sheet as of December 31, 1999 and 1998 F-3
Statements of Operations for the years ended December 31, 1999 and 1998,
for the six months ended December 31, 1997, for the year ended
June 30, 1997 and cumulative amounts since inception F-4
Statements of Stockholders' (Deficit) Equity
Period November 15, 1995 (date of inception)
through December 31, 1999 F-5
Statements of Cash Flows for the years ended December 31, 1999 and 1998,
for the six months ended December 31, 1997, the year ended
June 30, 1997 and cumulative amounts since inception F-7
Notes to Financial Statements F-9
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Commodore Separation Technologies, Inc.
We have audited the balance sheet of Commodore Separation Technologies, Inc. (a
development stage company) as of December 31, 1999 and the related statements of
operations, stockholders' (deficit) equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commodore Separation
Technologies, Inc. (a development stage company) as of December 31, 1999, and
the results of its operations and its cash flows for the year then ended, 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 uncertainly.
TANNER + Co.
Salt Lake City, Utah
February 4, 2000
F-1
<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 sheet as of December 31, 1998 and the
related statements of operations, of stockholders' equity and of 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, present fairly, in all material respects, the
financial position, results of operations and cash flows of Commodore Separation
Technologies, Inc. (a development stage company) at December 31, 1998 and 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. We have not audited the financial statements of Commodore Separation
Technologies, Inc. for any period subsequent to December 31, 1998.
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-2
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------
1999 1998
-----------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 16 $ 209
Restricted cash 220 210
Accounts receivable 10 -
Inventory 519 685
Prepaid and other current assets - 1
-----------------------------------
Total current assets 765 1,105
Property and equipment:
Technical equipment 1,491 1,411
Office equipment 403 403
Leasehold improvements 210 210
-----------------------------------
2,104 2,024
Less accumulated depreciation (1,141) (646)
-----------------------------------
Net property and equipment 963 1,378
Intangible assets, net of accumulated
amortization of $26 and $14 180 182
-----------------------------------
Total assets $ 1,908 $ 2,665
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Balance Sheet
(In thousands, except shares and per share data)
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' (Deficit) Equity
<S> <C> <C>
Accounts payable $ 352 $ 23
Accrued expenses 78 56
Unearned revenue 263 450
Due to related parties 896 27
---------------------------------
Total current liabilities 1,589 556
Accrued dividends 916 300
Capital lease obligation - 4
---------------------------------
Total liabilities 2,505 860
Commitments and contingencies - -
Stockholders' (deficit) equity:
Preferred stock, Series A, $.001 par value, 10% cumulative,
5,000,000 shares authorized, 600,000 shares issued and
outstanding at December 31, 1999 and 1998 1 1
Preferred stock, Series B, $.001 par value, 6%
cumulative, 4,000 shares authorized, 3,570 shares
issued and outstanding at December 31, 1999 and
1998 - -
Common stock, $.001 par value, 50,000,000 shares
authorized, 11,515,575 shares issued and
outstanding at December 31, 1999 and 1998,
respectively 11 11
Additional paid-in capital 10,804 11,420
Accumulated deficit (11,413) (9,627)
---------------------------------
Total stockholders' (deficit) equity (597) 1,805
---------------------------------
Total liabilities and stockholders' (deficit) equity $ 1,908 $ 2,665
---------------------------------
- ----------------------------------------------------------------------------------------------------------
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Statements of Operations
(In thousands, except share and per share data)
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
From
November 15,
Six Months 1995 (Date of
Year Ended Year Ended Ended Inception) to
December 31, December 31, December 31, Year Ended December 31,
1999 1998 1997 June 30, 1997 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract revenues $ 337 $ - $ - $ - $ 337
Costs and expenses:
Cost of sales 541 - - - 541
Research and development 338 1,299 817 985 3,489
General and administrative 743 1,096 869 1,356 4,074
Depreciation and amortization 507 408 134 118 1,167
Corporate overhead expenses - 529 911 705 2,145
Sales and marketing 12 417 230 51 710
Licensing fee - - - 50 50
-------------------------------------------------------------------------
Total costs and expenses 2,141 3,749 2,961 3,265 12,176
-------------------------------------------------------------------------
Loss from operations (1,804) (3,749) (2,961) (3,265) (11,839)
Other income - 19 - 8 27
Interest income 18 101 195 99 413
Interest expense - - - (13) (14)
-------------------------------------------------------------------------
Net loss before
income taxes (1,786) (3,629) (2,766) (3,171) (11,413)
Income taxes - - - - -
-------------------------------------------------------------------------
Net loss $ (1,786) $ (3,629) $ (2,766) $ (3,171) $ (11,413)
-------------------------------------------------------------------------
Net loss per share -
basic and diluted $ (.21) $ (.37) $ (.27) $ (.32) $ (1.21)
-------------------------------------------------------------------------
Weighted average number of
shares outstanding ( in
thousands) 11,516 11,514 11,502 10,375 10,786
-------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Statement of Stockholders' (Deficit) Equity
(In thousands, except shares and per share data)
- ------------------------------------------------------------------------------------------------------------
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, 2996 - - - - (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
</TABLE>
<TABLE>
<CAPTION>
Total
Stock-holders'
Additional (Deficit)
Subscription Paid-in Accumulated
Receivable Capital Deficit Equity
---------------------------------------------------------
<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, 2996 - 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
- -----------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Statement of Stockholders' (Deficit) Equity
Continued
(In thousands, except shares and per share data)
- -------------------------------------------------------------------------------------------------------
Preferred Stock Preferred Stock
Series A Series B Common Stock
-------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Dividends on preferred stock,
Series A - - - - - -
Dividends on preferred stock,
Series B - - - - - -
Net loss for the year ended
December 31, 1999 - - - - - -
-------------------------------------------------------------------------
Balance, December 31, 1999 600,000 $1 3,570 $ - 11,515,575 $11
=========================================================================
</TABLE>
<TABLE>
Total
Stock-holders'
Additional (Deficit)
Subscription Paid-in Accumulated
Receivable Capital Deficit Equity
----------------------------------------------------
<S> <C> <C> <C> <C>
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 - (600) - (600)
Net loss for the year ended
December 31, 1998 - - (3,629) (3,629)
----------------------------------------------------
Balance, December 31, 1998 - 11,420 (9,627) 1,805
Dividends on preferred stock,
Series A - (600) - (600)
Dividends on preferred stock,
Series B - (16) - (16)
Net loss for the year ended
December 31, 1999 - - (1,786) (1,786)
----------------------------------------------------
Balance, December 31, 1999 $ - $10,804 $(11,413) $ (597)
====================================================
- ---------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Statements of Cash Flows
(In thousands, except share and per share data)
- ----------------------------------------------------------------------------------------------------
Cumulative
Amounts From
November 15,
Six Months 1995
Year Ended Year Ended Ended (Inception) to
December 31, December 31, December 31, Year Ended December 31,
1999 1998 1997 June 30, 1997 1999
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (1,786) $ (3,629) $ (2,766) $ (3,171) $ (11,413)
Adjustments to reconcile
net loss to cash used
in operating
activities:
Depreciation and
amortization 507 408 134 118 1,167
Issuance of Common
Stock for services - 25 10 - 35
Gain on troubled debt
restructuring - 214 - - 214
(Increase) decrease in:
Accounts receivable (10) - - - (10)
Inventory, net 166 (325) (360) - (519)
Accounts payable 329 (382) 117 270 352
Accrued expenses 22 (272) 187 129 78
Increase (decrease) in:
Unearned revenue (187) 450 - - 263
Other assets 1 57 (10) (48) -
-----------------------------------------------------------------------
Net cash used in
operating
activities (958) (3,454) (2,688) (2,702) (9,833)
-----------------------------------------------------------------------
Cash flows from investing
activities:
Acquisition of intangible
assets (10) (24) (114) (48) (206)
Purchase of property and
equipment - (15) (33) (352) (403)
Acquisition of leasehold
improvements - (5) (2) (203) (210)
Construction of technical
equipment (80) (721) (279) (404) (1,491)
Increase in unrestricted
cash (10) (122) (88) - (220)
-----------------------------------------------------------------------
Net cash used in
investing activities (100) (887) (516) (1,007) (2,530)
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Statements of Cash Flows
Continued
(In thousands, except shares and per share data)
- -----------------------------------------------------------------------------------------------------
Cumulative
Amounts From
November 15,
Six Months 1995
Year Ended Year Ended Ended (Inception) to
December 31, December 31, December 31, Year Ended December 3,
1999 1998 1997 June 30, 1997 1999
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 869 (92) (433) 1,617 2,015
Collection of
subscription receivable - - - 15 15
Repayment of capital
lease obligation (4) (9) (5) 18 -
-----------------------------------------------------------------------
Net cash provided by
(used in) financing
activities 865 (401) (738) 12,599 12,379
-----------------------------------------------------------------------
(Decrease) increase in cash
and cash equivalents (193) (4,742) (3,942) 8,890 16
Cash and cash equivalents,
beginning of period 209 4,951 8,893 3 -
-----------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 16 $ 209 $ 4,951 $ 8,893 $ 16
-----------------------------------------------------------------------
Supplemental disclosure of
cash flow information
Cash paid during the
period for:
Interest paid $ - $ - $ - $ 13 $ 14
-----------------------------------------------------------------------
Income taxes paid $ - $ - $ - $ - $ - -
-----------------------------------------------------------------------
Non cash investing and financing activities:
The Company accrued dividends on preferred stock of $616 and $300 which
were not declared, or paid, for the years ending December 31, 1999 and
1998, respectively.
- -------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-8
</TABLE>
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Organization
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.
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.
Inventory
Inventory represents finished goods and consists of machinery and equipment
built and held for sale. Inventory is recorded at the lower of historical cost
per unit or market.
- --------------------------------------------------------------------------------
F-9
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
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.
Unearned Revenue
The Company has collected a $263 deposit related to a contract. Such amount has
been deferred until the commencement of the contract.
Contract Revenues
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. During 1999, the
Company commenced work on this contract and accordingly, has recorded revenue
related to the contract. Costs incurred in preparation for the commencement of
the contract are recorded as expenses as incurred. Substantially all of the
Company's revenues are from this contract for the year ended December 31, 1999.
Research and Development Expenditures
Research and development expenditures are charged to operations as incurred.
- --------------------------------------------------------------------------------
F-10
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
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 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.
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.
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 greater 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.
- --------------------------------------------------------------------------------
F-11
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
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.
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, 1999,
recorded book value approximates fair value.
Reclassifications
Certain balances in the prior periods have been reclassified to agree to the
1999 presentation.
2. Going Concern
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, the Company has
incurred substantial losses from operations and has not generated cash from
operating activities. Presently, the Company does not have sufficient cash
resources to meet its requirements in 2000. 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 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.
- --------------------------------------------------------------------------------
F-12
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Period From
Six Months Year November 15,
Year Ended Year Ended Ended Ended 1995 (Inception)
December 31, December 31, December 31, June 30, to December 31,
1999 1998 1997 1997 1999
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss $ (1,786) $ (3,629) $ (2,766) $ (3,171) $ (11,413)
Preferred stock
dividends - (300) (300) (138) (738)
Dividends on Series
A Preferred Stock
(not declared) (600) (300) - - (900)
Dividends on Series
E Prefered Stock
(not declared) (16) - - - (16)
-----------------------------------------------------------------------
Net loss applicable
to common
shareholders $ (2,402) $ (4,229) $ (3,066) $ (3,309) $ (13,067)
----------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding (basic) 11,516,000 11,514,000 11,502,000 10,375,000 10,786,000
Convertible Preferred Stock (*) (*) (*) (*) (*)
Warrants issued in initial
public offering (*) (*) (*) (*) (*)
Employee stock options (*) (*) (*) (*) (*)
-------------------------------------------------------------
Weighted average common
shares outstanding
(diluted) 11,516,000 11,514,000 11,502,000 10,375,000 10,786,000
-------------------------------------------------------------
Loss per share (basic) $ (.21) $ (.37) $ (.27) $ (.32) $ (1.21)
-------------------------------------------------------------
Loss per share (diluted) $ (.21) $ (.37) $ (.27) $ (.32) $ (1.21)
-------------------------------------------------------------
</TABLE>
(*) Due to the Company's loss from continuing operations the incremental shares
issuable in connection with these instruments are anti-dilutive and accordingly
not considered in the calculation.
- --------------------------------------------------------------------------------
F-13
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
4. Related Party Transactions
On September 28, 1998, Commodore Environmental Services LLC, a Delaware limited
liability company wholly owned by Commodore Environmental Services, Inc.
("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 Commodore Applied Technologies, Inc., (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.
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.
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 to the Company by
Environmental for the year ended December 31, 1999 or for the three months ended
December 31, 1998.
The Company owed advances of $179, $27 and $262 to Applied as of December 31,
1999, 1998 and 1997, respectively. At December 31, 1999, the Company also owed
Environmental $717 for uncollateralized advances to the Company.
- --------------------------------------------------------------------------------
F-14
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
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 1999 and 1998 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 which differs from federal income tax rates is
follows:
<TABLE>
<CAPTION>
Six Months Year Cumulative
Year Ended Year Ended Ended Ended Amounts
December 31, December 31, December 31, June 30, Since
1999 1998 1997 1997 Inception
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expected tax benefit
at federal
statutory rate $ (598) $ (1,234) $ (941) $(1,078) $ (3,880)
State income tax
benefits, net of
federal income tax
benefit (90) (218) (166) (190) (659)
Change in valuation
allowance 688 1,452 1,107 1,268 4,539
----------------------------------------------------------------
Income taxes $ - $ - $ - $ - $ -
----------------------------------------------------------------
</TABLE>
The components of the net deferred income tax as of December 31, are as follows:
Year Ended Year Ended
December 31, December 31,
1999 1998
------------------------------------
Net operating loss carryforward $ 4,539 $ 3,851
Less: Valuation allowance (4,539) (3,851)
------------------------------------
Net deferred tax asset $ - $ -
------------------------------------
- --------------------------------------------------------------------------------
F-15
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
5. Income Taxes
Continued
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. For the years ended December 31, 1999
and 1998, the Company has established a valuation allowance for the entire
amount of net deferred tax assets.
At December 31, 1999, the Company had tax loss carryforwards of approximately
$13,400. 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 the Company that took
place in September 1998 could limit the Company's ability to utilize all prior
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). No royalties have been accrued as of
December 31, 1999.
- --------------------------------------------------------------------------------
F-16
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
6. Royalty Agreements
Continued
The Company also has a license agreement with Lockheed Martin Energy Research
Corporation, manager of the Oak Ridge National Laboratory, a U.S. Department of
Energy national laboratory, 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, 1999.
7. Capital Structure
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
expense 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.
- --------------------------------------------------------------------------------
F-17
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
7. Capital Structure
Continued
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. Since June of 1998 the Company
has not paid dividends, and therefore has adjusted the effective conversion
price from $6.00 to $3.75 per share. Accumulated and unpaid dividends at
December 31, 1999 and 1998 amounted to $900 and $300, an amount equal to $1.50
and $.50 per share, respectively. Dividends will not be declared until there is
sufficient accumulated earnings.
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.
- --------------------------------------------------------------------------------
F-18
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
7. Capital Structure
Continued
Preferred Stock, Series A - Continued
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. The Company has not paid any
dividends on these shares. Accumulated and unpaid dividends at December 31, 1999
amounted to approximately $16, an amount equal to $4.50 per share.
- --------------------------------------------------------------------------------
F-19
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
7. Capital Structure
Continued
Preferred Stock, Series B - Continued
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.
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.
- --------------------------------------------------------------------------------
F-20
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
7. Capital Structure
Continued
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.
8. Non Qualified Stock Option Plan
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.
Under the 1998 Non-Qualified Stock Option Plan, (the Option Plan), a maximum of
2,000,000 options may be granted to purchase common stock at prices generally
not less than the fair market value of common stock at the date of grant. Under
the Option Plan, grants of options may be made to employees, officers, and
directors without regard to any performance measures. The options may be
immediately exercisable or may vest over time as determined by the Board of
Directors.
- --------------------------------------------------------------------------------
F-21
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
8. Non Qualified Stock Option Plan
Continued
Information regarding the option plan is summarized below:
Weighted
Average
Number of Exercise
Options Price
-----------------------------------
Outstanding at year ended
June 30, 1997 $ 996,689 $ 4.42
Granted 1,042,252 $ 4.31
Exercised -
Forfeited -
Rescinded (996,689) $ 4.42
------------------
Outstanding at six months ended
December 31, 1997 1,042,252 $ 4.31
Granted 1,461,950 $ 0.19
Exercised -
Forfeited -
Rescinded (1,092,252) $ 4.14
------------------
Outstanding at year ended
December 31, 1998 1,411,950 $ 0.19
Granted -
Exercised -
Forfeited (80,900) $ 0.10
Rescinded -
------------------
Outstanding at year ended
December 31, 1999 $ 1,331,050 $ 0.19
------------------
Options exercisable and available for future grant are as follows:
December 31, December 31, December 31, June 30,
1999 1998 1997 1997
-----------------------------------------------------
Options exercisable 1,066,460 950,890 384,313 217,564
- --------------------------------------------------------------------------------
F-22
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
8. Non Qualified Stock Option Plan
Continued
In December 1998, the Company terminated the 1996 Plan and all of the
outstanding options granted were surrendered to the Company for cancellation.
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.
9. Stock Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the financial
statements. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1999, 1998,
and 1997 consistent with the provisions of SFAS No 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:
Six Months Cumulative
Year Ended Year Ended Ended Year Ended Amounts
December 31, December 31, December 31, June 30, Since
1999 1998 1997 1997 Inception
------------------------------------------------------------------
Net loss -
as reported $ (1,786) $ (3,629) $ (2,766) $ (3,171) $ (11,413)
Net loss -
pro forma $ (1,791) $ (4,303) $ (3,114) $ (3,706) $ (12,914)
Loss per
share - as
reported $ (.21) $ (.37) $ (.27) $ (.32) $ (1.21)
Loss per
share - pro
forma $ (.21) $ (.43) $ (.30) $ (.37) $ (1.35)
- --------------------------------------------------------------------------------
F-23
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
9. Stock Based Compensation
Continued
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 9 years for the year ended December 31, 1999, 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.
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Average
Exercise Outstanding Contractual Life Exercise Number Exercise
Prices at 12/31/99 (Years) Price Exercisable Price
- -------------------------------------------------------------------------------
$ 5.00 25,000 6.97 $ 5.00 25,000 $ 5.00
$ 0.09 1,306,050 8.96 $ .09 1,041,460 $ 0.09
- -------------------------------------------------------------------------------
$ 0.09 - 5.00 1,331,050 8.92 $ .19 1,066,460 $ 0.21
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-24
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
10. Commitments and Contingencies Leases
The Company is committed under a non-cancelable lease for office space. Future
obligations under the lease are as follows:
Operating
Lease
Fiscal Year Ended Payments
-----------------
2000 $ 132
2001 132
-----------------
$ 264
-----------------
Rent expense approximated $114 for the years ended December 31, 1999 and 1998,
$56 for the six months ended December 31, 1997 and $72 for the year ended June
30, 1997.
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.
- --------------------------------------------------------------------------------
F-25
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
Notes to Financial Statements
Continued
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
11. Comparative Financial Information (Unaudited)
The selected financial data included in the following table for the year ended
December 31, 1997 is unaudited and, in the opinion of the management, includes
all adjustments consisting of only normal recurring adjustments necessary for a
fair presentation of such data.
(Unaudited)
Year Ended
December 31,
1997
-------------------
Cost and expenses $ (5,369)
Revenues -
Interest income 294
Interest expense (8)
Income taxes -
-------------------
Net loss $ (5,083)
-------------------
Net loss per share $ (.46)
-------------------
- --------------------------------------------------------------------------------
F-26
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
---------------------------------------
On August 17, 1999, the Company dismissed its former auditors,
PricewaterhouseCoopers LLP ("PwC"). Additionally as of August 17, 1999, the
Company retained Tanner + Co. ("Tanner") to serve as their independent auditors.
The decision to terminate its relationship with PwC was approved by the Board of
Directors of the Company.
For the year ended December 31, 1998, for the six-month period ended
December 31, 1997 and for the year ended June 30, 1997, PwC reports on the
Company's financial statements (a development stage company) neither contained
any adverse opinions or disclaimers of opinions nor were qualified or modified
as to uncertainty, audit scope or accounting principle, except that PwC's
auditors report on the Company's consolidated financial statements for the year
ended December 31, 1998 contained an additional paragraph relating to the
Registrant continuing as a going concern due to the Company's recurring losses
from operations and net cash outflows from operations.
15
<PAGE>
In connection with the audits for the year ended December 31, 1998, for
the six month period ended December 31, 1997 and for the year ended June 30,
1997 and through August 17, 1999, there were no disagreements with PwC on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PwC, would have caused it to make reference to the subject
matter of the disagreements in connection with its report.
No "reportable events" as described under Item 304(a)(1)(v) of
Regulation S-K occurred during the year ended December 31, 1998, during the
six-month period ended December 31, 1997 and during the year ended June 30,
1997.
Prior to engaging Tanner, the Company did not consult Tanner regarding
any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K.
16
<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 28, 2000, are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Paul E. Hannesson..................... 59 Chairman of the Board and Chief Executive Officer
Carl O. Magnell...................... 57 President and Chief Operating Officer
James M. DeAngelis.................... 39 Senior Vice President - Sales & Marketing
Bentley J. Blum....................... 58 Director
- -----------------------
</TABLE>
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.
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.
17
<PAGE>
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.
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.
On March 28, 2000, Herbert A. Cohen, David L. Mitchell, William R.
Toller and Kenneth L. Adelman resigned from the Board of Directors 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 22, 2000, are as follows:
Name Age Position
- ---- --- --------
Michael D. Kiehnau, P.E....... 38 Vice President - Finance & Operations
Andrew P. Oddi................ 38 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.
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.
18
<PAGE>
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 3, 2000, 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 3, 2000, 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
3, 2000, 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, 1999, 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 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, 1999.
19
<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 years ended December 31, 1999 and 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 Officer whose total salary and bonus compensation exceeded $100,000
during any such period.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------------------------------------- --------------------------------------------------
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying LTIP Compen-
Name and Principal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------------ ---- ------ ----- ------ ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul E. Hannesson 1999 -0- -0- -0- -0- -0- -0- -0-
Chief Executive Officer 1998 94,504(3) -0- 2,610(5) -0- 280,000 -0- -0-
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 1999 -0- -0- -0- -0- -0- -0- -0-
Senior Vice President 1998 107,005 -0- -0- -0- 187,500 -0- -0-
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) 1999 -0- -0- -0- -0- -0- -0- -0-
Former President & Chief 1998 100,243 -0- -0- -0- -0- -0- -0-
Operating Officer 1997(1) 90,000 27,000 -0- -0- -0- -0- -0-
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.
(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.
20
<PAGE>
STOCK OPTIONS
No stock options were granted in 1999. The Company has no outstanding
stock appreciation rights and granted no stock appreciation rights during the
year ended December 31, 1999.
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 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.
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. 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. Consequently, the Company, Applied and Environmental paid $32,770,
$63,356 and $3,874, respectively, of such bonus.
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, 1999 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,
1999.
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
21
<PAGE>
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, 1999, 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, 1999. 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. On March 28, 2000, Messrs. Toller, Mitchell and Cohen
resigned from the Board of Directors of the Company. 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. During the year ended December 31, 1999, the
Compensation, Stock Option and Benefits Committee did not convene nor take any
action relating to compensation of any of the executive officers of the Company.
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 28, 2000 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 Common Percentage of Outstanding
Name and Address Stock Beneficially Common Stock
of Beneficial Owner(1) Owned(2) Beneficially Owned
- ---------------------- -------------------------- -------------------------
<S> <C> <C>
Commodore Environmental Services, Inc....... 12,380,000(3) 89.1%
Bentley J. Blum............................. 12,430,000(4) 89.1%
Paul E. Hannesson........................... 1,516,727(5) 10.7%
James M. DeAngelis.......................... 303,844(6) 2.6%
All executive officers and directors
as a group (3 persons)...................... 12,899,500 89.5%
- ------------------------
</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) 10,000,000 shares of the Company's Common Stock held
by Commodore Environmental Services LLC, a wholly owned subsidiary of
Commodore Environmental Services, Inc.; and (b) 2,380,000 shares of the
Company's Common Stock underlying 3,570 shares of the Company's Series
B preferred stock held by Commodore Environmental Services, Inc.
(4) 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.
22
<PAGE>
(5) Consists of: (a) 280,000 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) 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.
(6) Consists of: (a) 1,000 shares of Common Stock; (b) 1,000 shares of
Common Stock underlying currently exercisable warrants; (c) 187,500
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.
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."
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. In addition,
Environmental received 3,570 shares of the Company's Series B Preferred Stock
which converts into 2,380,000 shares of the Company's common stock in exchange
for indebtedness to the Company of $357,000. The acquisition was consummated on
December 25, 1998. Environmental currently owns approximately 49% of the
outstanding shares of Applied common stock. Bentley J. Blum, a director of COES
and the beneficial owner of approximately 52% of the outstanding shares of
Environmental common stock, is also a director of Applied and the Company.
23
<PAGE>
By virtue of the foregoing transaction, the Company had 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, maintained their current management
positions in the Company. The acquisition of the Company by Environmental was
accounted for under the purchase method of accounting.
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.
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.
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.
24
<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:
COMMODORE SEPARATION TECHNOLOGIES, INC.
Index
- --------------------------------------------------------------------------------
Page
Report of Tanner + Co. F-1
Report of PricewaterhouseCoopers LLP F-2
Balance Sheet as of December 31, 1999 and 1998 F-3
Statements of Operations for the years ended December 31, 1999 and 1998,
for the six months ended December 31, 1997, for the year ended
June 30, 1997 and cumulative amounts since inception F-4
Statements of Stockholders' (Deficit) Equity
Period November 15, 1995 (date of inception)
through December 31, 1999 F-5
Statements of Cash Flows for the years ended December 31, 1999 and 1998,
for the six months ended December 31, 1997, the year ended
June 30, 1997 and cumulative amounts since inception F-7
Notes to Financial Statements F-9
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)
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)
25
<PAGE>
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)
10.19 Equipment Lease, dated as of November 25, 1997, between the
Company and Maryland Environmental Service.(8)
26
<PAGE>
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)
10.23 Debt repayment agreement, dated as of September 28, 1998
between Environmental and Applied.(9)
22.1 Subsidiaries of the Company.(1)
*27.1 Financial Data Schedule.
- --------------------------
* 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.
27
<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: March 29, 2000 COMMODORE SEPARATION TECHNOLOGIES, INC.
By: /s/ Paul Hanneson
----------------------------------------
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 DeAngelis Senior Vice President, Sales and March 29, 2000
- ------------------------------------------
James M. DeAngelis Marketing (principal financial and
accounting officer)
/s/ Paul Hanneson Chairman of the Board and Chief March 29, 2000
- ------------------------------------------
Paul E. Hannesson Executive Officer (principal executive
officer)
/s/ Bentley Blum Director March 29, 2000
- ------------------------------------------
Bentley J. Blum
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 10
<ALLOWANCES> 0
<INVENTORY> 519
<CURRENT-ASSETS> 765
<PP&E> 2,104
<DEPRECIATION> 1,141
<TOTAL-ASSETS> 1,908
<CURRENT-LIABILITIES> 1,589
<BONDS> 0
0
1
<COMMON> 11
<OTHER-SE> (609)
<TOTAL-LIABILITY-AND-EQUITY> 1,908
<SALES> 337
<TOTAL-REVENUES> 337
<CGS> 541
<TOTAL-COSTS> 2,141
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,786)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,786)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,786)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
