UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11871
COMMODORE APPLIED TECHNOLOGIES, INC.
------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-3312952
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2121 Jamieson Avenue, Suite 1406
Alexandria, Virginia 22314
-------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (703) 567-1284
--------------
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
The number of shares the common stock outstanding at November 14, 2001
was 55,290,235.
COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page No.
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PART I FINANCIAL INFORMATION.................................................1
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
September 30, 2001 and December 31, 2000.................2
Condensed Consolidated Statement of Operations -
Three and Nine months ended September 30, 2001 and
September 30, 2000.......................................4
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 2001 and
September 30, 2000.......................................5
Notes to Condensed Consolidated Financial Statements.............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................11
PART II OTHER INFORMATION....................................................16
SIGNATURES....................................................................17
1
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
--------------------
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, except per share data)
Sept 30, December 31,
ASSETS 2001 2000
-------- ------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 1,612 $ 1,980
Accounts receivable, net 1,818 4,536
Prepaid assets and other current receivables 331 625
--------- -----------
Total Current Assets 3,761 7,141
Property and equipment, net 1,602 1,983
Other assets
Patents and completed technology, net of
accumulated amortization of $715 and
$613, respectively. 760 862
Covenants not to compete, net of
accumulated amortization of $569 and
$175, respectively. 2,056 2,450
Goodwill, net of accumulated amortization
of $1,368 and $419, respectively. 22,957 24,676
--------- -----------
Total Intangibles 25,773 27,988
Other Assets 378 361
--------- -----------
Total Assets $ 31,514 $ 37,473
========= ===========
2
See notes to condensed consolidated financial statements.
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, except per share data)
Sept 30, December 31,
LIABILITIES AND 2001 2000
STOCKHOLDERS' EQUITY -------- ------------
(unaudited)
Current Liabilities:
Accounts payable $ 1,577 $ 2,490
Related party payable 185 247
Current portion of long term debt 2,650 2,650
Line of credit 161 1,459
Notes payable 15,677 14,682
Other accrued liabilities 1,994 2,489
--------- -----------
Total Current Liabilities 22,244 24,017
Long term debt 4,268 5,182
--------- -----------
Total Liabilities 26,512 29,199
Minority interest 67 419
Commitments and contingencies -- --
Stockholders' Equity
Convertible Preferred Stock, Series E & F
Par value $0.001 per share,
5% to 12% cumulative dividends,
601,700 shares authorized, 445,200 and 556,700
shares issued and outstanding
as of September 30, 2001 and December 31,
2000, respectively.
The shares had an aggregate liquidation
value of $5,863 and $7,332 at
September 30, 2001 and December 31, 2000
Respectively. -- 1
Common Stock, par value $0.001 per share,
125,000,000 shares authorized, 55,086,153
and 48,330,385 issued and outstanding,
at September 30, 2001 and December 31,
2000, respectively. 55 48
Additional paid-in capital 66,550 66,495
Accumulated deficit (61,670) (58,689)
--------- -----------
Total Stockholders' Equity 4,935 7,855
--------- -----------
Total Liabilities and Stockholders' Equity $ 31,514 $ 37,473
========= ===========
See notes to condensed consolidated financial statements.
3
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited - Dollars in Thousands, except per share data)
Three months ended Nine months ended
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
---------- ---------- --------- ----------
Contract revenues $ 1,870 $ 4,250 $ 9,021 $ 13,120
Costs and expenses:
Cost of sales 890 3,856 2,824 11,714
Research and development 67 331 263 931
General and administrative 1,291 1,637 4,731 3,482
Depreciation and amortization 617 393 1,874 772
Minority interest (10) (36) 419 (36)
---------- ---------- --------- ----------
Total costs and expenses 2,855 6,181 10,111 16,863
---------- ---------- --------- ----------
Loss from operations (985) (1,931) (1,090) (3,743)
---------- ---------- --------- ----------
Other income (expense):
Interest income 14 11 35 50
Interest expense (549) (62) (1,926) (165)
Other expense -- (5) -- (5)
---------- ---------- --------- ----------
Net other income (expense) (535) (56) (1,891) (120)
---------- ---------- --------- ----------
Loss before income taxes (1,520) (1,987) (2,981) (3,863)
Income taxes -- -- -- --
---------- ---------- --------- ----------
Net loss $ (1,520) $ (1,987) $ (2,981) $ (3,863)
========== ========== ========= ==========
Loss per share - basic and diluted $ (0.03) $ (0.05) $ (0.06) $ (0.12)
========== ========== ========= ==========
Number of weighted average shares outstanding (000's) 55,086 36,272 52,605 33,344
========== ========== ========= ==========
See notes to condensed consolidated financial statements.
4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - Dollars in Thousands, except per share data)
Nine months ended
Sept 30, Sept 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $ (2,981) $ (3,863)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,874 772
Amortization of debt discount 1,563 --
Other non-cash charges 167 174
Minority interest 419 (36)
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable 2,718 745
Prepaid assets 127 (20)
Other assets (17) (70)
Accounts payable (913) 54
Payables to related parties (62) 541
Other liabilities (1,005) (579)
----------- -----------
Net cash provided/(used) in operating activities 1,890 (2,282)
Cash flows from investing activities:
Purchase of equipment (48) (112)
Acquisition of patents -- (37)
Advances to related parties -- 50
Other investments -- (325)
Purchase of DRM, net of cash acquired -- 587
----------- -----------
Net cash provided/(used) in investing activities (48) 163
Cash flows from financing activities:
Increase in (repayment of) line of credit (1,298) 305
Increase (decrease) in notes and loans payable 1,000 (45)
Payments on notes payable (2,162) --
Preferred stock dividends -- (475)
Proceeds from sale of preferred stock and warrants -- 1,858
Proceeds from sale of common stock 250 598
----------- -----------
Net cash provided/(used) in financing activities (2,210) 1,631
Decrease in cash (368) (488)
Cash, beginning of period 1,980 1,797
----------- -----------
Cash, end of period $ 1,612 $ 1,309
=========== ===========
See notes to condensed consolidated financial statements.
5
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2001
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Commodore Applied Technologies, Inc. and subsidiaries (the "Company" or
"Applied") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
financial statement information was derived from unaudited financial statements
unless indicated otherwise. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's annual report on Form 10-K/A for the year ended
December 31, 2000.
Certain prior-year amounts have been reclassified to conform to the
current year presentation.
The accompanying financial statements have been prepared under the
assumption that Applied will continue as a going concern. Such assumption
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. For the period ended September 30, 2001, and the
years ended December 31, 2000, 1999 and 1998, Applied incurred losses of
$2,981,000, $11,441,000, $3,985,000 and $13,353,000, respectively. Applied's
continuation as a company is dependent upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis, to obtain additional
financing as may be required, and ultimately to attain profitability. Potential
sources of cash include new contracts, external debt, and the sale of new shares
of company stock or alternative methods such as mergers or sale transactions. No
assurances can be given, however, that Applied will be able to obtain any of
these potential sources of cash.
Anticipated losses on contracts are provided for by a charge to income
during the period such losses are identified. Changes in job performance, job
conditions, estimated profitability (including those arising from contract
penalty provisions) and final contract settlements may result in revisions to
cost and income and are recognized in the period in which the revisions are
determined. Allowances for anticipated losses totaled $76,000 at December 31,
2000 and September 30, 2001.
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated. The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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.
6
Note B - Segment Information
Using the guidelines set forth in SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", the Company has identified
three reportable segments in which it operates, based on the services it
provides. The reportable segments are as follows: (i) Commodore Advanced
Sciences, Inc., which primarily provides various engineering, legal, sampling,
and public relations services to Government agencies on a cost plus basis; (ii)
Commodore Solutions, Inc., which is commercializing technologies to treat mixed
and hazardous waste; and (iii) Dispute Resolution Management, Inc., which was
acquired (81%) on August 30, 2000, provides a package of services to help
companies recover financial settlements from insurance policies to defray costs
associated with environmental liabilities.
Applied evaluates segment performance based on the segment's net income
(loss). Applied's foreign and export sales and assets located outside of the
United States are not significant. Summarized financial information concerning
Applied's reportable segments is shown in the following table.
Three Months Ended September 30, 2001
(Dollars in Thousands)
--------------------------------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 1,870 $ 1,071 $ -- $ 799 $ --
Costs and expenses
Cost of sales 890 890 -- -- --
Research and development 67 -- 67 -- --
General and administrative 1,291 259 161 856 15
Depreciation and amortization 617 20 115 11 471
Minority interest (10) -- -- -- (10)
-------- --------- --------- --------- ----------
Total costs and expenses 2,855 1,169 343 867 476
-------- --------- --------- --------- ----------
Income (loss) from operations (985) (98) (343) (68) (476)
Interest income 14 -- -- 13 1
Interest expense (549) 25 -- -- (574)
Income taxes -- -- -- -- --
-------- --------- --------- --------- ----------
Net income (loss) $ (1,520) $ (73) $ (343) $ (55) $ (1,049)
======== ========= ========= ========= ==========
Total assets $ 31,514 $ 1,537 $ 1,489 $ 3,091 $ 25,397
Expenditures for long-lived assets $ 9 $ -- $ -- $ 9 $ --
7
Nine Months Ended September 30, 2001
(Dollars in Thousands)
--------------------------------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 9,021 $ 3,370 $ 185 $ 5,466 $ --
Costs and expenses
Cost of sales 2,824 2,625 199 -- --
Research and development 263 -- 263 -- --
General and administrative 4,731 698 401 3,263 369
Depreciation and amortization 1,874 59 346 31 1,438
Minority interest 419 -- -- -- 419
-------- --------- --------- --------- ----------
Total costs and expenses 10,111 3,382 1,209 3,294 2,226
-------- --------- --------- --------- ----------
Income (loss) from operations (1,090) (12) (1,024) 2,172 (2,226)
Interest income 35 -- -- 31 4
Interest expense (1,926) (11) -- -- (1,915)
Income taxes -- -- -- -- --
-------- --------- --------- --------- ----------
Net Income (loss) $ (2,981) $ (23) $ (1,024) $ 2,203 $ (4,137)
======== ========= ========= ========= ==========
Total assets $ 31,514 $ 1,537 $ 1,489 $ 3,091 $ 25,397
Expenditures for long-lived assets $ 48 $ -- $ -- $ 48 $ --
8
Three Months Ended September 30, 2000
(Dollars in Thousands)
--------------------------------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 4,250 $ 4,138 $ 12 $ 100 $ 0
Costs and expenses
Cost of sales 3,856 3,739 117 -- --
Research and development 331 -- 331 -- --
General and administrative 1,637 411 16 280 930
Depreciation and amortization 393 21 121 3 248
Minority interest (36) -- -- (36) --
-------- --------- --------- --------- ----------
Total costs and expenses 6,181 4,171 585 247 1,178
-------- --------- --------- --------- ----------
ncome (Loss) from operations (1,931) (33) (573) (147) (1,178)
Interest income 11 -- -- 4 7
Interest expense (62) (36) (23) (3) --
Other expense (5) -- -- (5) --
-------- --------- --------- --------- ----------
Net income (loss) $ (1,987) $ (69) $ (596) $ (151) $ (1,171)
======== ========= ========= ========= ==========
Total assets $ 42,442 $ 2,879 $ 2,099 $ 791 $ 36,673
Expenditures for long-lived assets $ 27,671 $ 9 $ 18 $ -- $ 27,644
9
Nine Months Ended September 30, 2000
(Dollars in Thousands)
--------------------------------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 13,120 $ 12,913 $ 82 $ 100 $ 25
Costs and expenses
Cost of sales 11,714 11,442 272 -- --
Research and development 931 -- 1,074 -- (143)
General and administrative 3,482 1,107 35 280 2,060
Depreciation and amortization 772 62 259 3 448
Minority interest (36) -- -- (36) --
-------- --------- --------- --------- ----------
Total costs and expenses 16,863 12,611 1,640 247 2,365
-------- --------- --------- --------- ----------
Income (Loss) from operations (3,743) 302 (1,558) (147) (2,340)
Interest income 50 -- -- 4 46
Interest expense (165) (92) (70) (3) --
Income tax expense (5) -- -- (5) --
-------- --------- --------- --------- ----------
Net Income (loss) $ (3,863) $ 210 $ (1,628) $ (151) $ (2,294)
======== ========= ========= ========= ==========
Total assets $ 42,442 $ 2,879 $ 2,099 $ 791 $ 36,673
Expenditures for long-lived assets 27,756 $ 28 $ 82 $ -- $ 27,646
Note C - Contingencies
Applied has matters of litigation arising in the ordinary course of
business, which in the opinion of management, will not have a material adverse
effect on its financial condition or results of operations.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Overview
Commodore Applied Technologies, Inc. and subsidiaries (the "Company" or
"Applied"), is engaged in providing a range of engineering, technical, and
financial services to the public and private sectors related to (i) remediating
contamination in soils, liquids and other materials and disposing of or reusing
certain waste by-products by utilizing SET, (ii) the settlement of complex,
long-tail and latent insurance claims by utilizing a series of tools including
an internally developed risk modeling program, FOCUS, and (iii) providing
services related to, environmental management for on-site and off-site
identification, investigation remediation and management of hazardous, mixed and
radioactive waste.
The Company is currently working on the commercialization of these
technologies through development efforts, licensing arrangements and joint
ventures. Through Commodore Advanced Sciences, Inc. ("ASI") formerly Advanced
Sciences, Inc., a subsidiary acquired on October 1, 1996, the Company has
contracts with various government agencies and private companies in the United
States. As some government contracts are funded in one-year increments, there is
a possibility for cutbacks. These contracts constitute a major portion of ASI's
revenues, and such a reduction would materially affect the operations. However,
management believes its existing client relationships will allow the Company to
obtain new contracts in the future. Through Dispute Resolution Management, Inc.
("DRM"), an 81% owned subsidiary acquired August 30, 2000, the Company has
several engagements with various industrial, manufacturing and mining companies
in the U.S. and in Europe for the recovery of insurance claims.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2001 Compared to Three and Nine Months
Ended September 30, 2000
Revenues were $1,870,000 and $9,021,000 for the three and nine months
ended September 30, 2001, compared to $4,250,000 and $13,120,000 for the three
and nine months ended September 30, 2000. Such revenues were primarily from the
Company's two subsidiaries, ASI and DRM.
In the case of DRM, revenues were $799,000 and $5,466,000 respectively
for the three and nine months ended September 30, 2001. The Company purchased
its 81% interest in DRM on August 30, 2000 and was able to consolidate DRM's
revenues and earnings as of that date. Revenues in DRM were primarily from
completed settlement agreements between their clients and major insurers.
Settlements are the result of 18 to 24 months of effort by various employees of
DRM, of which the expenses are captured in general and administrative costs as
incurred. Anticipated losses on engagements, if any, will be provided for by a
charge to income during the period such losses are first identified.
In the case of ASI, revenues were $1,071,000 and $3,370,000
respectively for the three and nine months ended September 30, 2001 as compared
with $4,138,000 and $12,913,000 for the three and nine months ended September
30, 2000. The decrease in revenues is primarily due to the completion of a
five-year contract to provide technical management support services to the
Department of Energy for the opening and operation of the Waste Isolation Pilot
Plant near Carlsbad, New Mexico, which ended on December 31, 2000. ASI has been
unsuccessful with replacing this contract volume to date. The revenues from ASI
consisted of engineering and scientific services performed for the United States
government under a variety of contracts, most of which provide for reimbursement
of cost plus fixed fees. Revenue under cost-reimbursement contracts is recorded
11
under the percentage of completion method as costs are incurred and include
estimated fees in the proportion that costs to date bear to total estimated
costs. Currently, ASI has two major customers, each of which represent more than
10% of total revenue. The combined revenue for these two customers was
$1,071,000 and $3,370,000 respectively (100% of total revenues) for the three
and nine months ended September 30, 2001. Cost of sales was $890,000 and
$2,625,000 respectively for the three and nine months ended September 30, 2001
compared to $3,739,000 and $11,442,000 respectively for the three and nine
months ended September 30, 2000. The decrease in cost of sales is due to a
decrease in sales volume in the three and nine months ended September 30, 2001.
In the case of Commodore Solution, Inc. ("Solution"), revenues were $0
and $185,000 respectively for the three and nine months ended September 30, 2001
as compared with $12,000 and $82,000 respectively for three and nine months
ended September 30, 2000. The decrease in the three-month period is a result of
the time necessary to mobilize the equipment to a new site. The increase in the
nine-month period is primarily due to the increase in feasibility studies and
commercial processing. Revenues were primarily from remediation services
performed for engineering and waste treatment companies in the United States
under a variety of contracts. Solution has two major customers, each of whom
represents more than 10% of the revenue for the three and nine months ended
September 30, 2001. The combined revenue for these two customers was $0 and
$185,000 respectively (100% of the Solution's total revenue) for the three and
nine months ended September 30, 2001. Cost of sales was $0 and $199,000
respectively for the three and nine months ended September 30, 2001 as compared
to $117,000 and $272,000 respectively for the three and nine months ended
September 30, 2000. The decrease for the three-month period is attributable to
lower sales and marketing expenses as the Company was in the process of
demobilization, shipping and installing its machinery at a new location. The
overall increase in the nine-month period for cost of sales is attributable to
greater sales and marketing expenses for the SET technology, which the Company
anticipates will result in additional revenues from Solution in the remainder of
2001 and into 2002. Anticipated losses on engagements, if any, will be provided
for by a charge to income during the period such losses are first identified.
For the three and nine months ended September 30, 2001, the Company
incurred research and development costs of $67,000 and $263,000 respectively as
compared to $331,000 and $931,000 respectively for the three and nine months
ended September 30, 2000. Research and development costs include salaries,
wages, and other related costs of personnel engaged in research and development
activities, contract services and materials, test equipment and rent for
facilities involved in research and development activities. Research and
development costs are expensed when incurred, except those costs related to the
design or construction of an asset having an economic useful life are
capitalized, and then depreciated over the estimated useful life of the asset.
The decrease in research and development expense is due to the continued
commercialization focus of the Company.
General and administrative expenses for the three and nine months ended
September 30, 2001 were $1,291,000 and $4,731,000 respectively as compared to
$1,637,000 and $3,482,000 respectively for the three and nine months ended
September 30, 2000. This difference is due to DRM's salaries and other expenses.
Interest income was $14,000 and $35,000 respectively for the three and
nine months ended September 30, 2001, as compared to $11,000 and $50,000
respectively for the three and nine months ended September 30, 2000.
Interest expense for the three and nine months ended September 30, 2001
was $549,000 and $1,926,000 respectively as compared to $62,000 and $165,000
respectively for the three and nine months ended September 30, 2000. The
increase in interest expense is primarily related to amortization of non-cash
interest costs associated with the Company's purchase of 81% of DRM on August
30, 2000, the amortization of non-cash interest costs associated with the Brewer
Promissory Note, the amortization of non-cash interest costs associated with the
Bridge Loan Notes, and the amortization of non-cash interest costs associated
with the Milford/Shaar Bridge Loan Notes.
12
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001 and December 31, 2000 ASI had a $161,000 and
$1,459,000 outstanding balance, respectively, on its revolving lines of credit.
In October 2001, ASI refinanced their line of credit with Commerce
Funding Corporation (the "Commerce Credit Line"). The Commerce Credit Line is
not to exceed 85 percent of eligible receivables or $1,000,000 and is due
October 2002 with interest payable monthly at prime plus 2 percent (7.0 percent
as of November 12, 2001). The Commerce Credit Line is collateralized by the
receivables of ASI and is guaranteed by the Company. The Commerce Credit Line
contains certain financial covenants and restrictions including minimum ratios
that ASI must satisfy. ASI was in compliance with the covenants of the Commerce
Credit Line at November 12, 2001.
In addition, the Commerce Credit Line agreement stipulates that no
payments shall be made by ASI to the Company other than monthly scheduled
payments of principal with respect to the $8,280,000 subordinated indebtedness
owed by ASI to the Company (which is eliminated in consolidation) and
intercompany indebtedness not to exceed $20,000 in any month. In addition, ASI
shall not incur indebtedness in excess of $25,000, other than trade payables,
the above subordinated indebtedness and other contractual obligations to
suppliers and customers incurred in the ordinary course of business.
In October 2001, ASI repaid their line of credit with KBK Financial,
Inc. (the "KBK Credit Line"). The KBK Credit Line was not to exceed 85 percent
of eligible receivables or $2,500,000 and was due October 2002 with interest
payable monthly at prime plus 2 percent (8.00 percent as of September 30, 2001).
The KBK Credit Line was collateralized by the assets of ASI and was guaranteed
by the Company. The KBK Credit Line contained certain financial covenants and
restrictions including minimum ratios that ASI must satisfy. ASI was in
compliance with the covenants of the KBK Credit Line through the repayment in
October 2001.
For the three and nine months ended September 30, 2001, the Company
incurred a net loss of $1,520,000 and $2,981,000 respectively as compared to a
net loss of $1,987,000 and $3,863,000 respectively for the three and nine months
ended September 30, 2000. For the years ended December 31, 2000, 1999, and 1998,
the Company incurred losses and also experienced net cash outflows from
operating activities. At September 30, 2001 the Company had working capital
deficit of $18,483,000 and shareholders' equity of $4,935,000.
In March 2000, the Company completed $2.0 million in financing through
a private placement. The Company issued 226,000 shares of a new Series F
Convertible Preferred Stock, convertible into common stock of the Company at the
market price, after September 30, 2000 and up through April 30, 2003 at which
time it automatically converts to Common Stock. The Series F Convertible
Preferred Stock has a variable rate dividend averaging 8.15% over the term of
the security.
On September 15, 2000, the Company issued to S. Brewer Enterprises,
Inc. (the "SB Enterprises") a 9.75% Secured Promissory Note (the "Brewer
Promissory Note") in the aggregate principal amount of $500,000. In connection
with the Brewer Promissory Note, Commodore Environmental Services, Inc., pledged
to SB Enterprises 500,000 shares of our common stock owned by Commodore
Environmental Services, Inc. as security for the Brewer Promissory Note. The
Company shall pay SB Enterprises the interest on a monthly basis in arrears and
pay the outstanding principal amount on the earliest to occur (the "Maturity
13
Date") of (i) the sale of the Company's interest in the Teledyne-Commodore, LLC;
or (iii) on March 15, 2001. The Brewer Promissory Note may be prepaid at any
time without penalty.
On March 15, 2001, SB Enterprises executed an Amended and Restated
Promissory Note (the "Restated Brewer Note"), which extended the Maturity Date
of the note until December 31, 2001. Additionally, the conversion feature of the
Restated Brewer Note was changed to the 5-day average closing price of the
Company's common stock prior to a conversion notice. On April 9, 2001 SB
Enterprises issued a conversion notice for $250,000 of the outstanding principal
of the Brewer Restated Note. The Company issued SB Enterprises 1,041,667 shares
of common stock of the Company as a result of the conversion notice.
On November 13, 2000, the Company issued and sold to certain investors
(the "Investors") 12% Senior Secured Promissory Notes (the "Bridge Loan Notes")
in the aggregate principal amount of $500,000. In connection with the Bridge
Loan Notes, Commodore Environmental Services, Inc. issued and sold to the
Investors 1,000,000 shares of our common stock owned by Commodore Environmental
Services, Inc, at a purchase price of $.01 per share. We shall pay each Investor
the outstanding principal amount, together with all accrued and unpaid interest
on the earliest to occur (the "Maturity Date") of (i) the prepayment of the
Bridge Loan Notes out of one hundred percent (100%) of the first proceeds
received by us as a cash distribution (whether in the form of an intercompany
dividend, bonus, loan or otherwise) from DRM, or (ii) on February 12, 2001. The
Bridge Loan Notes may be prepaid at any time, on five (5) business days prior
notice, without penalty. The Company did not pay the Bridge Loan Notes as of the
Maturity Date.
On April 16, 2001, the Investors executed a Memorandum of Understanding
to extend the payment date of the $500,000 of Bridge Loan Notes. Three of the
holders of the Bridge Loan Notes have granted payment extensions until June 30
and July 31, 2001, while the fourth holder of the Bridge Loan Notes has extended
only until May 1, 2001. The Company made the June 30, 2001 payment to three of
the holders of the Bridge Loan Notes and made a partial payment to the fourth
holder of the Bridge Loan Notes on June 19, 2001. The Company did not make the
July 31, 2001 payment to three of the holders of the Bridge Loan Note and has
not paid the balance owed to the fourth holder of the Bridge Loan Notes. As of
November 14, 2001, the principal balance on the Bridge Loan Notes aggregates to
$225,000.
If the fourth holder of the Bridge Loan Notes declared a default on or
after May 1, 2001, the other three holders of the Bridge Loan Notes also are
permitted to declare a default. As of November 12, 2001 the Company has not been
notified of the holder's intent to declare a default on the Bridge Loan Notes.
In connection with the bridge loan extension, the Company issued to the
Investors warrants for 500,000 shares of the Company's common stock at an
exercise price of $0.22 per share.
On May 23, 2001, a private investor purchased $250,000 of the Company's
common stock at the market price. The Company issued the private investor
1,923,077 shares of common stock of the Company as a result of the equity
purchase. In connection with the purchase of the shares of the Company's common
stock, the Company issued the private investor a 2-year warrant for 500,000
shares of the Company's common stock at an exercise price of $0.22 per share.
On June 13, 2001, the Company issued and sold to Milford Capital
Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar")
one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan
Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year
warrant for 333,333 shares of the Company's common stock at an exercise price of
$0.22 per share. The Company pledged its equipment and SET related intellectual
property as collateral for the Milford/Shaar Bridge Loan Notes. The Company
shall pay Milford/Shaar principal and interest on a monthly basis in arrears.
The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty.
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The Company has an irrevocable obligation to repurchase from the former
shareholders of DRM, by August 30, 2001, that number of 9.5 million shares of
the Company's common stock (at a per share price equal to the greater of $1.50
or the closing price of our common stock 30 days prior to purchase) as shall be
necessary to provide the holders of such shares with a total of $14.5 million.
The original repurchase obligation deadline of August 30, 2001, initially
extended to September 29, 2001, subsequently extended to October 29, 2001, has
now been further extended to January 16, 2002. As partial security for the
payment of such obligation, all of the shares of DRM common stock owned by the
Company have been pledged to Messrs. William J. Russell and Tamie P. Speciale,
the former sole stockholders of DRM. In the event the Company is unable to make
such $14.5 million payment, when due, the pledgees may foreclose on the DRM
stock; in which event the Company would lose its entire equity ownership in the
DRM subsidiary.
The Company originally intended to meet its repurchase obligation to
the former shareholders of DRM by reacquiring their shares and selling those
shares to generate the cash necessary to meet the obligation; however, the
Company's ability to effect the repurchase obligation in this manner is heavily
dependent on the stock price of the Company's common stock at the time of the
repurchase. At November 12, 2001, the closing price of the Company's common
stock on the American Stock Exchange, Inc. was $0.11 per share.
The Company currently requires additional cash to sustain existing
operations and meet the Company's ongoing capital requirements. Excluding the
Company's DRM subsidiary, the Company's current monthly operating expenses
exceed its cash revenues by approximately $200,000. The continuation of the
Company's operations is dependent in the short term upon its ability to obtain
additional financing and, in the long term, to generate sufficient cash flow to
meet its obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain profitability.
The Company intends to meet its long term capital needs through
obtaining additional contracts that will generate funds from operations and
obtaining additional debt or equity financing as necessary or engaging in merger
or sale transactions. There can be no assurance that such sources of funds will
be available to the Company or that it will be able to meet its short or long
term capital requirements.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards of approximately
$39,000,000. The amount of net operating loss carryforward that can be used in
any one year will be limited by the applicable tax laws which are in effect at
the time such carryforward can be utilized. A full valuation allowance has been
established to offset any benefit from the net operating loss carryforwards. It
cannot be determined when or if the Company will be able to utilize the net
operating losses.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Quarterly 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
15
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 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
There have been no material legal proceedings to which the Company is a
party which have not been disclosed in previous filings with the Securities and
Exchange Commission. There are no material developments to be reported in any
previously reported legal proceedings.
ITEM 2. Change in Securities
Not applicable.
ITEM 3. Defaults among Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Events
Not applicable.
ITEM 6. Exhibits and Reports on Form 8 - K
(a) Exhibits - None.
(b) Reports on Form 8-K.
1. The Company filed a Current Report on Form 8-K, dated September
26, 2001, regarding a 30-day extension to its Stock Purchase
Agreement with Dispute Resolution Management, Inc., until October
29, 2001.
2. The Company filed a Current Report on Form 8-K, dated October 31,
2001, regarding an 80-day extension to its Stock Purchase
Agreement with Dispute Resolution Management, Inc., until January
16, 2002.
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SIGNATURES
Pursuant to the requirements 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: November 14, 2001 COMMODORE APPLIED TECHNOLOGIES, INC.
(Registrant)
By /s/ James M. DeAngelis
-----------------------------------------------------
James M. DeAngelis - Senior Vice President and Chief
Financial Officer (as both a duly authorized officer
of the registrant and the principal financial officer
of the registrant)
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