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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
For the fiscal year ended December 31, 1997
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.)
150 EAST 58TH STREET, SUITE 3400
NEW YORK, NEW YORK 10155
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 308-5800
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $0.001 PER SHARE AMERICAN STOCK EXCHANGE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS AMERICAN STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act: NOT APPLICABLE
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 be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Non-affiliates of the registrant held shares of Common Stock as of
March 26, 1998 with an aggregate market value of approximately $55,608,000
(based upon the last sale price of the Common Stock on March 26, 1998 as
reported by the American Stock Exchange).
As of March 26, 1998, 23,103,200 shares of the registrant's Common
Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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COMMODORE APPLIED TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PART I................................................................................ 1
ITEM 1. BUSINESS................................................................... 1
General.................................................................... 1
Soil Decontamination--Commodore Solution Technologies, Inc................. 3
Liquid and Gas Waste Treatment--Commodore Separation Technologies, Inc..... 7
Environmental Management--Commodore Advanced Sciences, Inc................. 10
Markets and Customers...................................................... 11
Raw Materials.............................................................. 14
Backlog.................................................................... 14
Research and Development................................................... 14
Intellectual Property...................................................... 14
Competition................................................................ 15
Environmental Regulation................................................... 17
Employees.................................................................. 18
ITEM 2. PROPERTIES................................................................. 19
ITEM 3. LEGAL PROCEEDINGS.......................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................ 19
PART II............................................................................... 20
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................................ 20
Market Information......................................................... 20
Dividend Information....................................................... 20
Recent Sales of Unregistered Securities.................................... 21
ITEM 6. SELECTED FINANCIAL DATA.................................................... 24
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................ 25
Overview................................................................... 25
Results of Operations...................................................... 25
Liquidity and Capital Resources............................................ 26
Net Operating Loss Carryforwards........................................... 28
Year 2000 Considerations................................................... 28
Forward-Looking Statements................................................. 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.............................................. 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................ 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................ 30
PART III.............................................................................. 31
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................... 31
Executive Officers and Directors........................................... 31
Key Employees.............................................................. 35
Board Committees........................................................... 36
Compensation of Directors.................................................. 37
Compliance with Section 16(a) of the Exchange Act.......................... 37
ITEM 11. EXECUTIVE COMPENSATION..................................................... 38
Summary Compensation....................................................... 38
Stock Options.............................................................. 40
Employment Agreements...................................................... 41
Compensation Committee Interlocks and Insider Participation................ 42
Report of the Compensation Committee on Executive Compensation............. 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT........................................... 47
Security Ownership of Certain Beneficial Owners............................ 47
Security Ownership of Management........................................... 49
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 51
Organization and Capitalization of the Company............................. 51
Services Agreement......................................................... 52
Transactions with Lanxide.................................................. 52
Sale of Company Common Stock by Environmental.............................. 53
February 1998 Intercompany Note............................................ 54
September 1997 Intercompany Convertible Note............................... 54
Sale of Series D Preferred Stock by Environmental.......................... 55
License of SET Technology.................................................. 55
CFC Technology and Support Agreement....................................... 55
Future Transactions........................................................ 56
PART IV............................................................................... 57
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K................................................................... 57
SIGNATURES............................................................................ 62
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PART I
ITEM 1. BUSINESS.
GENERAL
Commodore Applied Technologies, Inc. (the "Company") is an
environmental treatment and services company which, through its operating
subsidiaries, provides a range of technologies and services directed principally
at remediating contamination in soils and other materials, protecting the
integrity of our nation's water and air and disposing or reusing certain waste
by-products through development of inert and environmentally sound technologies.
The Company believes it provides, through its wholly-owned subsidiary Commodore
Solution Technologies, Inc. ("Solution"), the only patented, non-thermal,
portable and scalable process, known as SET(TM) (solvated electron technology),
for treating and decontaminating soils and other materials containing PCBs,
pesticides, dioxins and other toxic contaminants. The Company, through its
publicly-traded subsidiary Commodore Separation Technologies, Inc.
("Separation"), also provides a system, known as SLiM(TM) (supported liquid
membrane), that has been proven in limited-scale tests to separate and recover
chromium, cadmium, silver, nickel, zinc, copper and other targeted substances
from aqueous and possibly gaseous waste streams. The Company, through Commodore
Advanced Sciences, Inc. ("Advanced Sciences"), also provides a full range of
services related to on-site waste containment, management of on-site and
off-site remediation and waste removal using environmentally safe methods and
through the use of the Company's technologies. The operations of Advanced
Sciences, which account for substantially all of the Company's current revenues,
also include engineering and technical services in connection with designing
production processes to minimize or eliminate the generation of hazardous
wastes. Additionally, the Company, through its wholly-owned subsidiary Commodore
CFC Technologies, Inc. ("CFC Technologies"), is engaged in separating mixed
refrigerants, chlorofluorocarbons and hydrochlorofluorocarbons so that they may
be returned to productive use at purity levels meeting industry standards.
The Company's SET technology is directed principally at treating and
decontaminating soils, as well as other materials and surfaces, by destroying
PCBs, pesticides, dioxins and other toxic contaminants to an extent sufficient
to satisfy current federal environmental guidelines for non-contamination. The
Company also believes that SET is capable of neutralizing chemical weapons and
warfare agents and concentrating certain radioactive wastes for more effective
disposal. In March 1997, Advanced Sciences entered into a teaming agreement with
ICF Kaiser Engineers, Inc. ("ICF Kaiser"), pursuant to which the Company's SET
technology will be used in connection with the remediation of mixed waste at Los
Alamos National Laboratory in New Mexico under ICF Kaiser's U.S. Department of
Energy ("DOE") contract. In December 1997, Advanced Sciences entered into a
memorandum of understanding with Lockheed Martin Advanced Environmental Systems,
Inc. to jointly pursue environmental remediation projects, and in August 1996,
the Company formed a 50/50 joint venture with a subsidiary of Allegheny
Teledyne, Inc., known as Teledyne-Commodore, LLC, to jointly pursue the chemical
weapons destruction and demilitarization market on a worldwide basis, in both
cases utilizing the SET technology. The Company operates under a Nationwide
Permit for PCB disposal (the "Nationwide Permit"), issued by the U.S.
Environmental Protection Agency ("EPA"), which allows the Company to use SET
on-site to treat PCB-contaminated soils and metallic surfaces anywhere in the
United States. Based on currently published lists of EPA national operating
permits, the Company believes that it possesses the only non-thermal PCB
treatment technology for multiple applications licensed by the EPA. The
Company's business strategy is to use SET on a select number of industrial and
governmental clean-up and related projects through collaborative working
arrangements with well-recognized companies in the environmental industry.
Separation's SLiM technology is directed at selectively extracting and
recovering 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
without any further treatment. In December 1997 and February 1998, Separation
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 the Baltimore Harbor and
potentially polluting the Chesapeake Bay. Prior to these awards, Separation 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, Separation 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.
Separation'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.
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The Company acquired Advanced Sciences in October 1996 for the purpose
of coordinating the Company's existing technologies and services, as well as
developing, acquiring and utilizing new technologies, for the treatment, reuse
and ultimate disposal of by-products generated as a result of industrial and
governmental activities. Advanced Sciences, to the extent possible, has sought
to utilize the Company's technologies in connection with its environmental,
remediation and technical services performed for industrial and governmental
customers (particularly the DOE and U.S. Department of Defense ("DOD")), with a
view to increasing the quality and scope of services offered and providing the
Company with a broader customer base for its technologies. Advanced Sciences was
founded in 1977 and its services include the identification, investigation,
remediation and management of hazardous, mixed and radioactive waste sites.
Advanced Sciences has been awarded environmental management contracts by the DOE
and DOD, as well as Bechtel, Westinghouse, ICF Kaiser, Lockheed Martin and Rust
Waste Management.
Demand for the Company's environmental technologies and services arises
principally from three sources:
o need for alternative environmental treatment and disposal methods
for toxic substances, such as the SET technology, which do not
involve safety risks with respect to air pollution and
transportation of hazardous materials, or result in large volumes of
residual waste that require further treatment prior to disposal;
o need for a low cost, on-site extraction/removal system, such as the
SLiM technology, which is capable of treating a wide variety of
elements and compounds in multiple industrial settings at great
speed and with a high degree of effectiveness, at various
contaminant concentrations and volumes; and
o stricter legislation and regulations mandating new or increased
levels of air and water pollution control and solid waste
management.
The Company's overall strategy is to provide a broad range of
"state-of-the-art" environmental technologies and services to solve its
customers' increasingly complex pollution and waste disposal problems. The
Company believes that its technological capabilities provide significant
marketing advantages to the Company and enable the Company to provide its
customers greater "value-added" services through the integration of its various
disciplines.
To finance the significant growth experienced by the Company, to
recapitalize its borrowings and to provide resources to invest in its
environmental markets, the Company raised a net amount equal to approximately
$30,500,000 from an initial public offering of its common stock, par value
$0.001 per share (the "Common Stock"), and redeemable Common Stock purchase
warrants (the "Warrants") in July 1996 (the "IPO") and approximately $4,000,000
from private placements of preferred stock and Common Stock in August and
October 1997, and an aggregate of approximately $11,100,000 from an initial
public offering of Separation preferred stock, common stock and warrants in
April and May 1997. The Company currently holds 87% of the outstanding common
stock of Separation. As of March 26, 1998, approximately 43% of the Common Stock
of the Company, in turn, was owned by Commodore Environmental Services, Inc.
("Environmental"). See "Market for Registrant's Common Equity and Related
Stockholder Matters--Recent Sales of Unregistered Securities," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions."
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The Company was incorporated in Delaware in March 1996. As used in this
Annual Report, and except as the context otherwise requires, the "Company" means
Commodore Applied Technologies, Inc. and its subsidiaries, including Solution,
Separation, CFC Technologies and Advanced Sciences. The Company's principal
executive offices are located at 150 East 58th Street, Suite 3400, New York, New
York 10155, and its telephone number at that address is (212) 308-5800.
SOIL DECONTAMINATION--COMMODORE SOLUTION TECHNOLOGIES, INC.
The Company, through Solution, has developed and is in the process of
commercializing its patented process known as SET. Based on the results of its
extensive testing, the Company believes that SET is capable of effectively
treating and decontaminating soils and other materials, including sludges,
sediments, oils and other hydrocarbon liquids, metals, clothing and porous and
non-porous structures and surfaces, by destroying PCBs, pesticides, dioxins,
chlorinated substances and other toxic contaminants to an extent sufficient to
satisfy current federal environmental guidelines. The Company also believes
that, based on the results of additional tests, SET is capable of neutralizing
substantially all known chemical weapons materials and warfare agents and
concentrating certain radioactive wastes for more effective disposal.
The SET Technology
The SET technology, which is based upon solvated electron chemistry,
mixes anhydrous liquid ammonia and/or other similar solvents with reactive
metals and contaminated elements to effect the selective destruction or
neutralization of organic compounds (such as PCBs, pesticides and dioxins). The
Company has demonstrated that SET can achieve consistently high levels of
contaminant destruction when working with PCBs, dioxins and pesticides. SET has
treated soils containing up to 10,000 ppm of contaminants, and oils containing
up to 250,000 ppm, leaving residual soils and oils with contamination levels of
less than one ppm. In addition, SET has been successfully applied to other
PCB-contaminated surfaces such as concrete. The SET process can be used in
conjunction with selected post-treatment processes such that no hazardous or
toxic residues will result from the use of SET, nor will there be any toxic
emissions into the air, water, soils or other surfaces. For example, most
contaminated soils treated with SET can (subject, in some instances, to
reblending the soil with organic matter) be used subsequently for planting or
for any other use for which non-contaminated soils are appropriate.
Equipment utilized in the SET process consists of tanks, pumps and
piping to handle anhydrous ammonia and other solvents in liquid and vapor forms,
and reactor vessels for holding contaminated materials and for the introduction
of solvating solutions. The system can be transported to field sites and
configured in numerous sizes.
The SET process requires placing the contaminated materials into a
reactor where they are mixed with a solvent and charged with a base metal. The
chemical reaction produces metal salts such as calcium chloride, calcium
hydroxide and non-halogenated inert organics. The ammonia within the reactor is
then removed to a discharge tank for later reuse. The materials are removed,
sampled for residual traces of PCB or other halogenated organic compounds, and
placed in storage for disposal. In many cases, the decontaminated soil and
metals can be replaced in their original location, recycled or reused. The
solvents do not enter the chemical reaction, but merely serve as the solute for
the solvated electron solution.
Operational Characteristics. Substantially all existing systems in use
for the destruction of PCBs and other halogenated compounds involve incineration
or other thermal processes, and either the permanent installation of highly
complex and expensive incinerators and waste disposal equipment at the affected
site, or the removal of contaminated materials to off-site facilities. The
Company believes that SET represents an approach to resolving serious
environmental remediation issues that does not create or entail the safety risks
of air pollution and transportation of hazardous materials. The Company believes
that SET is more effective than incineration and other destruction processes for
toxic substances in that:
o SET does not emit toxic fumes into the atmosphere, as is sometimes
the case with thermal or incineration methods;
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o SET is portable and can be moved directly to the contaminated site,
thereby reducing the risk of off-site contamination;
o SET equipment can be customized and configured to address various
treatment applications;
o SET has been shown to neutralize or destroy all chemical weapons
material and warfare agents in the United States stockpile, and
Lewisite (the primary chemical weapons material and warfare agent of
the former Soviet Union), in tests conducted by an independent,
federally certified surety laboratory;
o SET's reaction time is substantially less than that of alternative
processes, such as thermal destruction and other forms of chemical
treatment;
o SET equipment can be installed and operated inside industrial plant
facilities to treat hazardous wastes on line as a continuation of
the manufacturing process; and
o SET, when used to treat soils, yields nitrogen-enriched soils that
can be reused on-site, avoiding replacement and the post-treatment
costs of off-site disposal.
The Company believes that SET is the only technology currently
available which possesses all of these features and is capable of treating a
wide variety of contaminants.
EPA Nationwide Permit. In order to treat PCBs within the United States
on all non-Superfund sites, a treating entity must obtain a permit from the EPA.
Most EPA permits granted to date for PCB destruction are solely for single-site
incineration treatment centers. In August 1995, SET was demonstrated to the EPA
in order to obtain the Nationwide Permit, which was issued to the Company in
March 1996. The Nationwide Permit allows the Company to use SET on-site to treat
PCB-contaminated soil at any location in the United States. In addition to soil
treatment, the Nationwide Permit allows the Company to treat PCB-contaminated
metallic surfaces. The Nationwide Permit covers only the destruction of PCBs in
soils and on metallic surfaces.
Based on currently published lists of EPA national operating permits,
the Company believes that it possesses the only non-thermal PCB treatment
technology for multiple applications permitted under the EPA's Alternate
Destruction Technology Program. EPA regulations governing permitting have been
in effect for more than 15 years, and according to the latest EPA published list
of non-thermal destructive processes, only seven companies have met EPA's
stringent requirements for commercial operation. Of these, only the Company is
permitted to remediate PCB-contaminated soils and metallic surfaces. The EPA's
Alternative Destruction Technology Program is designed to encourage remediation
technologies as an alternative to incineration.
The Nationwide Permit expires in March 2001, and may be renewed subject
to providing any requested additional information to the EPA at the time of
renewal. The Nationwide Permit imposes certain continuing obligations on the
Company, including notification of all job sites, periodic reporting to the EPA
as to activities at the job sites, prior notification to and approval by the EPA
with respect to any single-site centralized remediation facility that the
Company may seek to establish, and certain restrictions on the disposal of
by-products from the use of SET. The Nationwide Permit further specifies that
the Company must continue to comply with all otherwise applicable federal, state
and local laws regarding the handling and disposition of hazardous substances.
Test Results. In more than 1,000 tests using SET, various high levels
of PCB contamination were reduced to levels approaching non-detectable, with the
destruction process occurring in a matter of minutes. The following table is a
summary of the results of these tests.
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PCB Level
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Soil Type/Material Before Treatment After Treatment
------------------ ---------------- ---------------
High PCBs
---------
Clay 290 ppm less than 1 ppm
Organic 660 ppm less than 1 ppm
Sandy 6,200 ppm less than 1 ppm
Oil 250,000 ppm less than 1 ppm
Low PCBs
--------
Clay 29 ppm less than 1 ppm
Organic 83 ppm less than 1 ppm
Sandy 130 ppm less than 1 ppm
These tests were conducted on limited quantities of contaminated
material, and there can be no assurance that SET will be able to replicate any
of these test results on a large-scale commercial basis or on any specific
project.
In September 1995 and December 1995, Geomet, an independent surety
laboratory licensed by the U.S. Government, conducted two series of laboratory
tests on SET's ability to neutralize chemical weapons materials and warfare
agents. Such tests, conducted on a small scale, demonstrated destruction
efficiencies of more than 99.99999% on nerve agents and chemical mustards. Such
tests are not necessarily indicative of results that would be obtained from
testing on a larger scale. The Company is continuing to test SET on chemical
weapons by-products, as well as on larger quantities of these chemical weapons
materials.
Joint Ventures
Teledyne Environmental Joint Venture. In August 1996, Commodore
Government Environmental Technologies, Inc. ("Government Technologies"), a
wholly-owned subsidiary of Solution, entered into a joint venture agreement with
Teledyne Environmental, Inc. ("Teledyne Environmental"), a subsidiary of
Allegheny Teledyne, Inc., as the exclusive means by which each party (and their
affiliates) will pursue the chemical weapons destruction and demilitarization
market on a worldwide basis. Teledyne Environmental is a major provider of
contract services to the DOD and DOE. The purpose of the joint venture, known as
Teledyne-Commodore, LLC, a Delaware limited liability company, encompasses all
phases of chemical weapons demilitarization including design, engineering, field
work, ordinance and residue (heel) neutralization and demilitarization, disposal
and reclamation through the use, application and commercialization of the SET
process.
Each of Government Technologies and Teledyne Environmental owns 50% of
the equity, profit and losses of the joint venture company, has made capital
contributions of approximately $3.0 million as of March 26, 1998, and has
budgeted additional capital contributions of $500,000 for the remainder of
1998. Under the terms of the joint venture, Government Technologies' role
concentrates on engineering and site operations relating to the SET process and
related equipment. Teledyne Environmental is primarily responsible for site
development, facilities engineering, facilities construction and maintenance,
utility connections, materials recovery, transportation, waste management and
transport and site decommissioning. In addition, each of the parties will
jointly coordinate the engineering, construction, installation and
decommissioning of the SET process controls and monitoring instrumentation.
In consideration for the Company's interest in the joint venture, the
Company licensed SET and corresponding know-how to the joint venture. The
Company also licensed the SET process and corresponding know-how to Teledyne
Brown Engineering, Inc. ("TBE"), a subsidiary of Allegheny Teledyne, Inc. for
use in TBE's existing United States Department of Army Small Burials Contract
(the "Small Burials Contract"). TBE's Small Burials Contract is an existing
contract covering demilitarization of non-stockpile caches of chemical munitions
at up to 25 sites to be designated by the United States Army. Under the terms of
such license, the Company receives a royalty equal to 8% of TBE's net sales
revenues derived from the Small Burials Contract.
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New Bedford Harbor Project. The New Bedford, Massachusetts harbor and
waterfront area contains some of the highest concentration of PCBs in the nation
and, in 1982, this 18,000-acre site was placed on the EPA's Superfund national
priorities list. The contaminated sediments and sludges from this site were to
be disposed of by incineration. However, public and political opposition related
to the risks associated with incineration has caused the EPA to stop these
plans.
As a result, the EPA, the Commonwealth of Massachusetts and the New
Bedford Citizens' Forum have been evaluating non-incineration technologies for
the extraction and destruction of the PCBs at the storage site. In August 1995,
the Company and RCC-Ionics submitted a proposal to conduct a feasibility study
in support of their respective technologies for the extraction (utilizing the
RCC technology) and destruction (utilizing the SET technology) phases of this
$80.0 million project. By the end of 1997, the Citizens' Forum, working with the
EPA and the commonwealth, completed the evaluation of a number of competing
technologies and selected the SET technology as one of two destruction phase
technologies that will be recommended for further evaluation for the project.
The RCC technology was selected as one of two extraction phase technologies that
will be recommended for further evaluation for the project. The EPA is expected
to issue its final report in mid-1998 with respect to the technologies
recommended for the project, and the bidding and contracting process is expected
to be complete by the end of 1998.
Contracts
ICF Kaiser Teaming Agreement. In March 1997, Advanced Sciences entered
into a teaming agreement with ICF Kaiser to utilize the Company's SET technology
to remediate mixed waste at Los Alamos National Laboratory ("LANL") in New
Mexico and provide support services. Under ICF Kaiser's primary contract with
the DOE, ICF Kaiser is investigating and cleaning-up soils at LANL and on former
LANL property that may contain hazardous and radioactive materials. The teaming
agreement specifies that Advanced Sciences will provide the SET technology under
a subcontractual arrangement along with environmental engineering and other
services, including remediation and safety services, technical task support and
health physics for implementation of tasks. Pursuant to the terms of the teaming
agreement, Advanced Sciences will be reimbursed for time and materials expended
on projects completed pursuant to the agreement and will receive fees averaging
5.5% of its costs.
Lockheed Martin Memorandum of Understanding. In December 1997, Advanced
Sciences also entered into a memorandum of understanding with Lockheed Martin
Advanced Environmental Systems, Inc. to jointly pursue environmental remediation
projects utilizing the Company's SET technology. Under the memorandum, the
companies have agreed, beginning in late January 1998, to employ the SET
technology at Lockheed Martin's laboratory in Las Vegas, Nevada to treat certain
mixed waste streams. Following completion of the Las Vegas project, which is
funded by Lockheed Martin up to $50,000, the companies have agreed to pursue
projects at the DOE's Oak Ridge Reservation and Portsmouth, Ohio facilities for
remediating mixed waste.
Refrigerant (CFC) Capabilities
Through CFC Technologies, the Company has developed and patented a
process which has been able to separate commercial quantities of mixtures of
refrigerants, chlorofluorocarbons ("CFCs") and hydrochlorofluorocarbons through
selective destruction of unwanted fractions so that they may be returned to
productive use at purity levels meeting industry standards. CFC Technologies has
also licensed a patented technology from Refrigerant Services, Inc., a Canadian
corporation located near Halifax, Nova Scotia, which can effectively separate
several refrigerant and Halon mixtures in a cost-effective manner, and employs
this technology through an operating joint venture with Solvents Australia
Limited.
The Company's processes employ fundamental chemical principles in novel
combinations to deal with two aspects of the CFC problem: (i) they separate
mixtures of CFCs that have become cross-contaminated during use, thereby
returning acceptable purity, high-valued CFCs to economic and productive use,
and (ii) they permit destruction of low-value CFCs, and mixtures thereof, that
do not merit recycling. The destruction process is accomplished using the SET
technology, which is believed to have considerable cost advantage over
alternative destruction processes.
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To date, the separation, selective destruction and full destruction
technologies have proven effective in applications of significant quantities of
CFCs.
LIQUID AND GAS WASTE TREATMENT--COMMODORE SEPARATION TECHNOLOGIES, INC.
The Company, through Separation, has developed and is in the process of
commercializing its separation technology and recovery system known as SLiM.
Based on the results of more than 100 laboratory and field tests to date, 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 without any 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.
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 on the manufacturing site at ambient temperatures and
pressures.
SLiM involves passing a contaminated aqueous or gaseous feedstream
through a hollow, porous 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,
cadmium, silver, mercury, platinum, lead, zinc and nickel) and, with refinement,
radionuclides, gas, organics and biochemicals.
The typical SLiM module is cylindrical in shape. The module casing is
typically constructed of plastic and contains the fibers through which the
targeted element or compound is separated from the contaminated feedstream.
Pumps and pipes feed the contaminated feedstock from its point of origin (such
as a metal plating tank or bath) into the module. Additional pumps and pipes
recycle the strip solution which concentrates the contaminant that is being
deposited continuously by Separation's proprietary chemicals resident in the
membrane. Separation is exploring alternative design and sourcing of modules
that will perform equal to or better than those presently in service in order to
decrease the risk of supply interruptions. Separation 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 Separation, which will
monitor the equipment and process while in operation, or Separation will enter
into service contracts with the customer to operate the equipment at the
customer's site.
7
<PAGE>
Operational Characteristics. The most common alternative methods for
metals separation from solubilized process streams presently include ion
exchange, reverse osmosis, precipitation, ultrafiltration, nanofiltration and
chromatography. The Company believes that most of these methods have certain
drawbacks, including lack of selectivity in the separation process, inability to
handle certain metals in the process streams and the creation of sludges and
other harmful by-products which require further post-treatment prior to
disposal. For example, reverse osmosis and ultrafiltration are incapable of
separating chrome and chromium materials from wastewater streams, and
precipitation results in the production of sludge that requires dewatering,
drying and disposal in a landfill. Certain of these other technologies also
entail long process times and are relatively expensive. The Company believes
that SLiM is a superior and cost-effective alternative to other existing forms
of membrane filtration technology in that it:
o requires lower initial capital costs and lower operating costs;
o has the capability of treating a variety of elements and compounds
in industrial settings at greater speed and with a higher degree of
effectiveness, with varying contaminant concentrations and volume
requirements;
o is environmentally safe, in most instances producing no sludges or
other harmful by-products which would require additional
post-treatment prior to disposal;
o can selectively extract target substances while extracting
substantially fewer unwanted substances;
o can typically operate on-site and in less space than competing
technologies;
o can extract metals, organic chemicals and other elements and
compounds in degrees of concentration and purity which permit their
reuse; and
o has the capability of selectively removing more than one element
from a mixed process stream by incorporating SLiM systems in series.
Test Results. In more than 100 laboratory and field tests to date, SLiM
has demonstrated the ability to successfully separate a variety of metals and
other substances from aqueous and possibly gaseous process streams. In each
instance, the process stream was reduced to levels approaching federal
guidelines under the Federal Clean Water Act for the disposal of the reacted
process stream as normal wastewater effluent, and the recovered materials were
of sufficient quantity and purity as to economically permit the reuse thereof in
most commercial applications. Test results included the following:
<TABLE>
<CAPTION>
Applicable
Material Before Treatment After Treatment Federal Guideline
- -------- ---------------- --------------- -----------------
<S> <C> <C> <C>
Metals:
Zinc 2,700 ppm Less than 2 ppm (after 30 Less than 2 ppm
minutes)
Nickel 1,500 ppm Less than 1.0 ppm (after 30 Less than 2 ppm
minutes)
Chromium (hexavalent) 400 ppm 0.05 ppm (field test) Less than 0.05 ppm
Aluminum 290 ppm Less than 20 ppm (after 15 Less than 30 ppm
minutes)
Silver 3,150 ppm Less than 2 ppm Less than 2 ppm
Cobalt 200 ppm Less than 1.1 ppm Less than 1.5 ppm
Copper 4,500 ppm Less than 0.3 ppm Less than 1.0 ppm
Radionuclides:
Rhenium 5 ppm Less than 5 parts per billion Less than 10 ppb
(ppb)
</TABLE>
8
<PAGE>
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 Separation's tests involving the separation and
recovery of zinc, nickel and chromium, no other tests conducted by Separation
have been independently verified.
Contracts
Port of Baltimore Contracts. In November 1997, Separation 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 Separation 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. Separation 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 Hawkins Point Contract followed Separation's successful completion
of several on-site demonstrations of SLiM at the Port of Baltimore. During
Separation's first on-site demonstration in August 1996, a single SLiM unit, in
a single pass-through of feedstream, processed 90 gallons of water containing
more than 630 ppm of hexavalent chromium and reduced the hexavalent chromium
concentration level to 0.7 ppm. The results of this test were verified by
Artesian Laboratories, Inc., an independent testing laboratory. Separation was
invited to conduct an additional demonstration at the Port of Baltimore in
February 1997. During this demonstration, approximately 1,500 gallons from the
same source were processed. Hexavalent chromium was reduced to 0.03 ppm, well
below the federal guidelines for unregulated discharge. Due to the success of
these demonstrations, the State of Maryland included the SLiM process as an
eligible technology in the bid documents to remediate chromium leachate at the
Port of Baltimore. Separation then engaged a professional engineering company to
design and build commercial-scale units capable of processing larger volumes of
contaminated water. A commercial unit was mobilized to the Port of Baltimore and
commenced operation in June 1997. The demonstration culminated with a non-stop,
48-hour run in late August 1997. During this final test, the SLiM equipment
processed approximately 12,000 gallons of leachate and successfully met the
federal discharge standards for hexavalent chromium.
In February 1998, Separation 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 Separation will lease a SLiM unit
to MES for a one-time, lump-sum lease payment of $350,000, and will license its
proprietary SLiM technology to MES in exchange for a royalty equal to one-half
of any savings which MES realizes by using the SLiM technology as opposed to
conventional non-proprietary remediation technology. As in the case of the
Hawkins Point Contract, the Dundalk Contract provides that Separation 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.
9
<PAGE>
Lockheed License Agreement. In January 1997, Separation entered into a
license agreement (the "Lockheed License Agreement") with Lockheed Martin Energy
Research Corporation, 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, Separation 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. Separation also received under the
Lockheed License Agreement the right to exploit the technology for other
commercial applications. Pursuant to the Lockheed License Agreement, Separation
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, Separation 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 Separation, has a term
which will last until the end of the life of all patents or patentable claims
described in or ultimately arising out of the provisional patent filed jointly
by Separation and three colleagues of Srinivas Kilambi, Ph.D., Separation'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 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.
ENVIRONMENTAL MANAGEMENT--COMMODORE ADVANCED SCIENCES, INC.
The Company, through Advanced Sciences, provides specialized technical
and project management products and services primarily to government-sector
customers, including the DOE and DOD, and also to private-sector domestic and
foreign industrial customers. Advanced Sciences engages in all aspects of
environmental regulation and compliance, as well as access to leading
technologies and innovative skills related to the identification, investigation,
remediation and management of hazardous, mixed and radiological waste sites.
Advanced Sciences currently operates a network of eight offices located in six
states, with its principal executive offices located in Albuquerque, New Mexico.
The Company's strategy in acquiring Advanced Sciences was to
incorporate its process technology into the products and services offered to
Advanced Sciences' customers, with a view to increasing the quality and scope of
services offered and providing the Company with a broader customer base for its
technology.
Services
Environmental Services. Advanced Sciences' analytic and scientific
abilities enable it to become involved in environmental issues and problems at
their outset. Initially, Advanced Sciences provides its customers with a broad
outline of the types of environmental problems, health risks and liabilities
associated with a particular activity. Advanced Sciences also conducts
environmental audits and assessments, underground storage tank site
investigations, remedial investigations/feasibility studies, environmental
impact assessments, and statements and studies to identify any potential
environmental hazards.
Remediation Services. Having already established a competitive market
position in the consulting and front-end analysis phase, Advanced Sciences has
been able to follow market demand into remediation services. After an
environmental problem is identified, Advanced Sciences offers alternative
remediation approaches which may involve providing on-site waste containment or
management of on-site/off-site remediation and waste removal. Advanced Sciences
can also redesign its customers' ongoing production processes and develop
engineering plans and technical specifications to minimize or eliminate the
generation of hazardous waste. The Company believes that Advanced Sciences'
integration of engineering and environmental skills, plus its access to
innovative technologies, provide Advanced Sciences with a competitive advantage
in redesigning production processes.
10
<PAGE>
Technical Services. New technologies play a critical role in both the
remediation of existing waste sites and in the reduction of waste generated by
ongoing production processes. Advanced Sciences has access to key technologies
that can help minimize waste, reduce costs and improve the quality of a finished
product. Advanced Sciences has also retained what it believes are among the most
qualified professionals in the environmental consulting business. Advanced
Sciences' scientists have participated on national boards for risk assessment
and quality assurance, were instrumental in the development of environmental
regulations for the DOE and DOD, and have served as expert witnesses before the
U.S. Congress and the Nuclear Regulatory Commission. To maintain its competitive
position, Advanced Sciences intends to continue to develop viable remediation
technologies and attract and retain qualified personnel.
Contracts
Waste Isolation Pilot Plant Contract. Advanced Sciences is currently
in the third year of a $52.0 million contract to provide technical
and management support services to the DOE for the opening and operation of the
Waste Isolation Pilot Plant near Carlsbad, New Mexico (the "WIPP Contract"),
of which approximately $32.0 million in contract budgeted funds remains.
Pursuant to the WIPP Contract, Advanced Sciences manages the efforts of
approximately 80 personnel who provide support covering functional areas such as
regulatory assurance, waste packaging and transportation, and facility
operations. The WIPP Contract is structured as a cost plus 5.25% fee agreement.
Advanced Sciences' billings under the WIPP Contract are approximately $900,000
per month. The WIPP Contract provides for an initial three-year term, which
expires on September 30, 1998, and an option to extend the term of the contract
for two additional one-year terms which may be exercised, in whole or in part,
by the DOE at its discretion.
Rocky Flats Contract. Under a basic ordering agreement from Kaiser-Hill
Company, LLC, the site operating contractor, Advanced Sciences is currently
providing technical, engineering and scientific support for the closedown and
cleanup of the DOE facility at Rocky Flats, Colorado (the "Rocky Flats
Contract"). Pursuant to the Rocky Flats Contract, approximately 40 Advanced
Sciences personnel are involved in activities such as environmental monitoring,
health monitoring, engineering design and documentation support with respect to
the facility. The Rocky Flats Contract, which extends through 1999, is
structured as a time and materials contract that provides for a fee averaging
5.5% of costs. Advanced Sciences' billings under the Rocky Flats Contract are
approximately $400,000 per month.
MARKETS AND CUSTOMERS
General
The Company markets its services and technologies to governmental and
industrial customers throughout the United States. The Company also plans to
target customers in markets abroad, particularly in the Far East. A majority of
the Company's sales are technical in nature and involve senior technical and
management professionals, supported by the Company's marketing groups. During
the year ended December 31, 1997, sales of approximately 5% of the Company's
environmental management services were to private sector customers and sales of
approximately 95% were to governmental customers.
Approximately 95% of the Company's sales during the year ended December
31, 1997 were derived from contracts with federal, state and municipal
governmental agencies which generally may be terminated at any time at the
option of the customer. In 1997, Advanced Sciences' WIPP Contract and Rocky
Flats Contract accounted for approximately 65% and 15%, respectively, of the
Company's sales. No other project accounted for more than 10% of the Company's
sales for such period. The Company benefits substantially from its long-term
relationships with many of its customers which result in a significant amount of
repeat business.
11
<PAGE>
Soil Decontamination
The Company anticipates that the initial market for commercial private
sector applications of SET will be the hazardous and non-hazardous waste and
industrial by-products treatment and disposal market. Currently, the most common
methods of treatment and disposal of hazardous and non-hazardous wastes and
industrial by-products include landfilling, deep-well injection, chemical and
biological treatment and incineration. Most of the current treatment and
disposal methods entail air pollution and transportation risks. In addition,
they may not provide a permanent solution. Certain of these treatment and
disposal methods result in large volumes of residual waste which may require
further treatment prior to disposal. As a result, a number of these methods are
encountering increased public resistance and added regulatory oversight.
As with any new technology or process, there has been initial
resistance to the use of SET on a large scale, especially in connection with a
strong vested interest on the part of the United States military (based on
substantial expenditures and commitments previously made) to use incineration
for the destruction of weapons. In addition, other prospective projects for the
Company have already been committed to other forms of destruction technology,
including incineration, plasma arc, vitrification, molten metal, molten salt,
chemical neutralization, biological treatment, catalytic electrochemical
oxidation and supercritical wet oxidation. The Company and its collaborative
partners have been attempting to overcome such competition by introducing SET in
smaller clean-up projects and through feasibility studies demonstrating its
applicability to larger projects, such as the clean-up of a portion of the New
Bedford, Massachusetts harbor.
It may also be anticipated that, over an extended period, the market
for decontamination of hazardous materials will continue to decline as past
environmental degradation is corrected, and as the private and public sectors
limit further pollution through the prohibition on the production and use of a
broad range of hazardous materials and through the modification and improved
efficiency of varied manufacturing processes.
Water and Gas Waste Treatment
During its initial commercialization phase, Separation will be leasing
its equipment to customers, with the lease payments being due and payable after
installation and successful start-up of the equipment. When replacement modules
are required, Separation will supply these modules at a reasonable mark-up over
their cost. As new patents are filed and issued, Separation may, for certain
applications, determine to make a direct sale of the equipment with additional
long-term royalty payment provisions. Separation also expects to obtain revenues
through servicing the SLiM equipment, including periodic replacement of the
membrane component. In addition to leasing and selling its equipment, Separation
will charge its customers based on a percentage of the customer's actual cost
savings derived from reduced disposal costs and recovered reusable materials. In
applications in which reusable materials are not recovered, Separation's ongoing
charges may be based on the volume of materials processed. Although Separation
is focusing its initial marketing efforts on domestic businesses, Separation 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. Separation's initial marketing efforts
are in the industrial sector, in which the separation and recovery of
metal-bearing aqueous solutions present a substantial market. Primary among the
potential customers in this area are metal plating and metal finishing
operations, which generate substantial volumes of mixed metals process streams
for which a limited number of partially effective technologies are available to
effect proper separation.
In September 1997, Separation installed a demonstration SLiM unit at a
metal plating company. The unit operated in a batch mode for one week, and,
based on operating data results, successfully separated and recovered nickel and
zinc effluent streams with concentrations of up to 2,800 ppm. An independent
testing laboratory verified the results.
Based on management studies and discussions with metals industry
executives, the Company believes that the major competitive technologies in this
area are precipitation and ion exchange. Precipitation generates a metallic
sludge by-product requiring further treatment prior to landfill disposal. Ion
exchange captures anions or cations, but offers no selectivity within a group.
Further, ion exchange is only approximately 90% efficient. By contrast, SLiM
does not generate harmful metallic sludges and, in some cases, enables process
water recycling while also enabling recovery of valuable raw materials to
approximately 99% efficiency. As costs of environmental compliance continue to
mount, the Company expects SLiM to become a preferred alternative to some
existing metals separation methods.
12
<PAGE>
Environmental Remediation and Restoration. The Company believes that
SLiM has significant potential for application to environmental remediation and
restoration. In November 1997 and February 1998, Separation was awarded its
first two commercial contracts for the removal of chromium-contaminated leachate
at the Baltimore Harbor. In the case of a project such as the Baltimore Harbor
project, it is expected that the remediation technology will be applied
continuously over a period of many years, until the subject contamination (in
the case of the Baltimore Harbor, chromium leaching from underlying soil into
the aquifer) has abated for a significant period of time.
In contrast to other remediation technologies, the Company believes
that SLiM has the attributes of lower initial capital costs, lower operating
costs and the ability to recover heavy metals for reuse.
To speed its entry in this market, Separation intends to enter into
collaborative joint working and marketing arrangements with established
engineering and environmental service organizations which are expected to
provide technical and professional expertise, market presence and credibility.
Radionuclide/Mixed Waste Separation. In the United States, there are
numerous sites operated or maintained by the DOE and/or the DOD at which there
are present "mixed wastes" containing radionuclides intermingled with other
hazardous wastes. These sites are also contaminated with other compounds
associated with nuclear weapons testing and energy. SLiM may have capabilities
in the separation of radionuclides such as 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. Separation anticipates pursuing this market area in
collaboration with established engineering and environmental service
organizations, who can provide technical and professional expertise, market
presence and credibility.
Gas Separation. The SLiM equipment and technology can possibly be
utilized to separate and recover valuable gases from mixed gaseous and liquid
compounds. For example, nitrogen is used for a wide variety of process
applications, including oil recovery, food processing, metal heat treatment, and
pharmaceutical testing and development.
Nitrogen is typically obtained by separating it from oxygen, using
processes such as cryogenic distillation, absorption, catalytic removal, and
permselective polymeric membrane separation. However, each of these processes
has disadvantages, which can include high energy usage, high pressure and
temperature requirements, and/or relatively low purity of the recovered gas. The
SLiM process may overcome these disadvantages by yielding relatively pure
nitrogen in a low-energy, lower capital cost process conducted at ambient
temperature and pressure. Separation has not developed a strategy or targeted a
market for commercialization of the gas separation application.
Biochemicals Separation and Recovery. SLiM may have capabilities in the
separation and recovery of biochemicals, including phenylalanine (an amino
acid). Separation 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 Separation intends to emphasize both the value of the recovered
materials and the enhanced and speedier environmental compliance attributes of
SLiM in its marketing efforts.
Currently, the primary competing technology in this area is
chromatography, which requires substantially greater time to treat significant
volumes of material, and is substantially less selective in the types of
materials that can be separated from the liquid feedstream.
13
<PAGE>
Environmental Management
Based on market data compiled by Advanced Sciences, the largest market
for environmental services today is the United States government, which is
expected to increase its annual spending level for environmental services to
approximately $11.2 billion by 1999. The DOD and DOE are expected to account for
approximately 66% of such expenditures. Advanced Sciences currently occupies a
position in the waste management and environmental services arena by virtue of
its long-term record for providing environmental services to the United States
government.
RAW MATERIALS
While the Company has historically experienced no difficulty in
obtaining raw materials used in its operations and relies on a broad range of
suppliers for the components used in the SET process, Separation 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, Separation has been able to obtain
adequate supplies of these strategic components. However, as it develops its
commercial activities, Separation may experience a rapid and substantial
increase in its requirements for these components. If Separation 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 Separation 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, 1997, total backlog for the Company was approximately
$109,250,000, as compared with approximately $130,000,000 as of December 31,
1996. Approximately $56,250,000 of the total 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. The remaining backlog of approximately $53,000,000 represents the
Company's current estimate of work for which the Company has been notified that
it has been chosen for a project but where a contract has not yet been
finalized. The Company estimates that approximately $21,625,000 of the total
backlog represents work which will be completed in the next 12 months. Backlog
amounts have historically resulted in revenue; however, no assurance can be
given that all amounts included in backlog will ultimately be realized, even if
covered by written contracts or work orders.
RESEARCH AND DEVELOPMENT
Research and development activities are ongoing and utilize internal
technical staff, as well as independent consultants retained by the Company and
its subsidiaries. All such activities are company-sponsored. Research and
development expenditures for the Company and its subsidiaries were $3,074,000
and $2,022,000 for the years ended December 31, 1997 and 1996, respectively.
INTELLECTUAL PROPERTY
Solution has fifteen United States patents which were issued between
1987 and 1998, and which relate to SET, electrochemistry of halogenated organic
compounds, separation and destruction of CFCs and decontamination of soils
containing mercury and radioactive metals. Solution also has one Canadian and
one Japanese patent relating to its SET technology. The Company has filed
additional United States patent applications relating to SET and removal of
heavy metals from soil. In 1997, the Company filed a patent application relating
to the destruction of chemical warfare agents and explosives.
14
<PAGE>
In September 1997, Separation filed two U.S. continuation-in-part
("CIP") provisional patent applications and one international patent application
covering the principal features of its SLiM technology. One of the CIP
provisional patent applications covers the joint inventions of Dr. Kilambi,
Separation's former Senior Vice President--Technology, and Lockheed Martin. The
other CIP provisional patent application and the international patent
application cover the sole inventions of Dr. Kilambi.
CFC has one patent and one patent filing as of the date of this Annual
Report, and CFC is licensed to utilize SET for CFC applications. The Company is
pursuing foreign patent protection where it deems appropriate.
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
Soil Decontamination. The Company anticipates that the initial market
for commercial private sector applications of SET will be the hazardous and
non-hazardous waste and industrial by-products treatment and disposal market.
This market is characterized by several large domestic and international
companies and numerous small companies, many of whom have substantially greater
financial and other resources than the Company. Although the Company believes
that it possesses the only Nationwide Permit for destroying PCBs, any one or
more of the Company's competitors or other enterprises not presently known may
develop technologies which are superior to the technologies utilized by the
Company. To the extent that the Company's competitors are able to offer
comparable services at lower prices or of higher quality, or more cost-effective
remediation alternatives, the Company's ability to compete effectively could be
adversely affected.
The domestic and international governmental public sector of the market
is dominated by many large multinational corporations who are presently engaged
in providing incineration and other conventional technologies in decontaminating
chemical weapons and warfare agents, concentration of nuclear wastes and the
decontamination of military vessels and other hardware. These competitors
include Raytheon Corporation (the current general contractor for the Johnston
Atoll incinerator), EG&G, Inc. (the general contractor for the Tooele Army
Depot), Mason and Hanger (the general contractor for the Newport News naval
facility), Waste Management Corporation (a bidder for domestic "large burial"
stockpile weapons decontamination), and others, including Browning-Ferris
Industries, Inc., Jacobs Engineering, Inc., Fluor Daniel Corporation and
Lockheed Martin Marietta Corporation. All of these corporations have
substantially greater financial, personnel and other resources than the Company.
In addition, many prospective users of SET have already committed substantial
resources to other forms of environmental remediation technology, including
incineration, plasma arc, vitrification, molten metal, molten salt, chemical
neutralization, catalytic electrochemical oxidation and supercritical wet
oxidation.
The Company believes that its ability to compete in both the commercial
private and governmental public sectors is dependent upon SET being a superior,
more cost-effective method to achieve decontamination of a variety of materials.
Water and Gas Waste Treatment. 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.
15
<PAGE>
By contrast, SLiM is capable of handling a broad range of compounds in
a faster and relatively inexpensive manner. Furthermore, the by-products of the
SLiM process consist primarily of wastewater, which can be discharged as normal
wastewater effluent, and to a substantially lesser extent and in only rare
circumstances, materials requiring landfill disposal.
Separation technologies are currently utilized by a wide variety of
domestic and international companies, including several large companies having
substantially greater financial and other resources than Separation. Although
the Company believes that SLiM has substantial advantages over many other known
separation technologies, any one or more of Separation's competitors, or other
enterprises not presently known, may develop technologies which are superior to
SLiM. To the extent Separation's competitors are able to offer comparable
services at lower prices or of higher quality, or more cost-effective
alternatives, Separation's ability to compete effectively could be materially
adversely affected. The Company believes that Separation's 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
Separation is unable to demonstrate that SLiM is a technologically superior and
cost-effective alternative to other separation technologies on a commercial
scale, Separation may not be able to compete successfully.
The Company believes that the market for CFC separation, selective
destruction, and full destruction will continue to be fragmented due to existing
technologies in the marketplace and inconsistent supplies of products to be
separated and destroyed. In the case of full destruction, incineration is the
main competition. In several countries, incineration is not permitted, which
gives the SET technology an operating advantage. In the area of CFC separation,
the Company believes that CFC Technologies holds one of the most efficient and
portable technologies in the world for the effective separation of CFCs and
halons. Although several companies have entered into this market in the past 12
months with other forms of non-portable technology, the Company and its joint
venture partners believe the mobility and ease of use of CFC Technologies'
technologies make them more attractive then the alternatives in the marketplace.
Environmental Management. Advanced Sciences has been primarily engaged
in providing environmental engineering and scientific support services to United
States government agencies, such as the DOE and DOD. Based on market data
compiled by Advanced Sciences, the largest market for environmental services
today is the United States government, which is expected to increase its
spending level for environmental services to approximately $11.2 billion by
1999. The DOE and DOD are expected to account for approximately 66% of such
expenditures. Advanced Sciences currently occupies a position in the waste
management and environmental services arena by virtue of its long-term record
for providing environmental services to the United States government.
External developments and forces affecting Advanced Sciences include
competition from its competitors, as well as demographic and technological
trends that influence the composition and needs of its customer base and the
usefulness and competitive position of its services. In addition, in order to
maintain its position in its market, Advanced Sciences must be able to respond
to economic trends and regulatory actions that affect the usefulness and
accessibility of its services and control its costs of doing business.
16
<PAGE>
In the hazardous waste management market, Advanced Sciences'
competitors include such firms as Roy F. Weston, Jacobs Engineering, Science
Applications International Corp., CH2M Hill, and CDM. In providing environmental
impact assessment services, Advanced Sciences' principal competition in this
market sector include Tetra Tech, The Earth Technology Corp., Dames & Moore and
Woodward-Clyde. Primary factors affecting Advanced Sciences' competitiveness in
this market are its ability to continue to attract and retain qualified
technical and professional staff with quality project performance records and to
control its costs of doing business.
In an effort to maintain its competitive position, Advanced Sciences
has developed a solid infrastructure, acquired a qualified professional staff,
and developed aggressive marketing objectives to provide hazardous waste
management and environmental sciences to the United States government and
private sector industrial customers. The Company believes its competitive
position with the United States government is enhanced by the physical proximity
of Advanced Sciences' plants to DOE and DOD sites, its skilled professional
staff, prior project experience with the United States government, numerous
existing multi-year contracts with the United States government, integrated
services, and high quality performance.
ENVIRONMENTAL REGULATION
The environmental legislation and policies which the Company believes
are applicable to SET in the United States primarily include the Toxic
Substances Control Act ("TSCA"), and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"), and may include, on a case
by case basis, the Clean Air Act of 1970, as amended (the "Clean Air Act").
These laws regulate the management and disposal of toxic and hazardous
substances, provide for the protection of land and groundwater resources, and
control the discharge of pollutants into the air. Many of these laws have
international counterparts, particularly in Europe and elsewhere in North
America.
TSCA regulates the manufacture, distribution, and sale of chemical
substances, and requires testing of new chemicals and new uses of known
chemicals that may present an unreasonable risk of injury to health or the
environment. The EPA, through TSCA, has adopted comprehensive regulations for
PCB's and other halogenated substances, as part of a vast regulatory program
covering thousands of chemicals.
CERCLA and subsequent amendments under SARA (often referred to
collectively as Superfund) impose strict, retroactive liability upon persons who
generated, transported or arranged for the transportation of hazardous
substances or owned or operated the vessels or facilities at which such
substances were disposed. CERCLA provides for the investigation and remediation
of hazardous substance sites and mandates that any hazardous substances
remaining on-site must meet certain regulatory requirements, with a preference
for innovative technology. These program regulations may create an incentive to
utilize environmental-friendly technologies such as SET, which destroy targeted
wastes without creating additional residual waste product. Moreover, to the
extent hazardous substances are effectively destroyed, potential liability can
be eliminated or significantly reduced.
The Clean Air Act empowered the EPA to establish and enforce ambient
air quality standards and limitations on emissions of air pollutants from
specific facilities. In 1987, the EPA began to enforce stricter standards for
incineration emissions. With more stringent regulations on waste reduction
technologies, the Company believes that SET could obtain a desired market share
since, in most cases, it produces little or no air emissions.
CERCLA imposes strict, joint and several liability upon owners or
operators of facilities when a release or threatened release of a hazardous
substance has occurred, upon parties who generated hazardous substances that
were released at such facilities and upon parties who arranged for the
transportation of hazardous substances to and from such facilities. The
Company's plans to own and operate SET at on-site installations expose the
Company to potential liability under CERCLA for releases of hazardous substances
at those sites. In the event that off-site treatment, storage or disposal
facilities utilized by the Company for final disposition of residues from SET
are targeted for investigation and clean-up under CERCLA, the Company could
incur liability as a generator of such materials or by virtue of having arranged
for their transportation and disposal.
In light of such potential liability, the Company has designed the SET
technology to minimize the potential for release of hazardous substances into
the environment. In addition, the Company has developed plans to manage the risk
of CERCLA liability, including training of operators, use of operational
controls and structuring of its relationships with the entities responsible for
the handling of waste materials and by-products. The Company also maintains
insurance with respect to environmental claims, although there can be no
assurance that such insurance will be adequate.
17
<PAGE>
The Clean Air Act Amendments of 1990 impose strict requirements upon
owners and operators of facilities that discharge pollutants into the
environment. These amendments may require that certain air emission control
technology be installed on the SET systems in the event that there is any
discharge of non-recovered gases into the environment. Such additional air
emission controls can be costly and require an air permit to construct and
operate.
In April 1996, the Company was selected by the White House as one of
nine companies to participate in the Rapid Commercialization Initiative ("RCI"),
which is a component of the Clinton Administration's efforts to streamline the
commercialization process for new environmental technologies, and to build
cooperative interactions between business and government to bring environmental
technologies to market more rapidly and efficiently. Under the RCI, the Company
intends to form "working partnerships" with the EPA and other governmental
agencies for the purpose of developing and implementing policies and strategies
for the commercialization of SET. Although there is no funding through the RCI,
it is expected that the EPA and other governmental agencies will provide
permitting and siting assistance under the program to facilitate and expedite
the issuance of permits for site specific demonstrations of SET, as well as
assistance to certify and publish the on-site test results of such
demonstrations.
In March 1996, the EPA lifted a ban dating to 1980 on the import of
waste materials containing certain high concentrations of PCBs. The new
regulations are expected to make disposal capacity in the United States
available to waste generators in Mexico and Canada, where PCB waste disposal
capacity is less available. The EPA has estimated that these regulations may
create an additional market for United States-based PCB disposers of between
$50.0 million and $100.0 million per year for the next five years.
The Company possesses a Nationwide Permit issued by the EPA under the
Alternative Destruction Technology Program that allows it to use SET on-site to
treat PCB-contaminated soils and metallic surfaces. The Nationwide Permit
contains numerous conditions for maintaining the Nationwide Permit and there can
be no assurance that the Company will be able to comply with such conditions to
maintain and/or secure renewal of the Nationwide Permit. In addition, if
environmental legislation or regulations are amended, or are interpreted or
enforced differently, the Company may be required to meet stricter standards of
operation and/or obtain additional operating permits or approvals. Failure to
obtain such permits or otherwise comply with such regulatory requirements could
have a material adverse effect on the Company and its operations.
Separation'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 Separation'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 Separation.
Any such claims against Separation could materially adversely affect the
Company's business, financial condition and results of operations.
Separation maintains environmental liability insurance with limits of
$1.0 million per occurrence and $2.0 million in the aggregate. The Company, on
behalf of itself and its subsidiaries, also maintains contractor's pollution
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 and its
subsidiaries (even if covered by an insurance policy) for amounts substantially
in excess of applicable policy limits. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations.
EMPLOYEES
As of March 26, 1998, the Company (including all of its direct and
indirect subsidiaries) had a total of 169 full-time employees, of which
approximately 121 are engineers, scientists and other professionals. None of
such employees are covered by collective bargaining agreements, and the
Company's relations with its employees are believed to be good.
18
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal executive offices are 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, Solution, Separation, Advanced Sciences and certain other
subsidiaries and affiliates of the Company. Such space also serves as the
principal executive offices of Environmental and certain of its affiliates. The
lease for the New York City space expires in December 1998. The Company pays an
allocable portion of the rent per year under such lease.
The Company maintains marketing offices located in approximately 2,200
square feet of office space in McLean, Virginia under a lease expiring in May
2002. Such space also serves as marketing offices of Environmental and
Separation. The Company pays $2,500 per month under the lease.
The Company leases approximately 21,000 square feet of space in
Houston, Texas, for testing, additional research and development, equipment
demonstration and assembly, and executive and administrative offices. Such space
also serves as the principal accounting offices of Solution. The Company pays
$6,800 per month under the lease for the Houston space, which expires in June
2000.
Separation'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 it began occupying in March 1997. Such space
also serves as Separation's administrative offices and research and testing
laboratories.
Advanced Sciences' principal executive and administrative offices are
located in approximately 7,500 square feet of space in Albuquerque, New Mexico
under a lease expiring in November 2001. Advanced Sciences also leases small
space for field operations in Carlsbad and Los Alamos, New Mexico, Oak Ridge,
Tennessee and Lakewood, Colorado.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth fiscal quarter of the year ended December 31, 1997.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock and Warrants began trading publicly on June
28, 1996 at initial public offering prices of $6.00 per share and $0.10 per
Warrant and are traded on the American Stock Exchange ("Amex") under the symbols
CXI and CXIW, respectively. On March 26, 1998, there were 96 holders of record
of Common Stock and 35 holders of record of Warrants.
The following table sets forth, for the fiscal periods shown, the high
and low sale prices (rounded to the nearest cent) for the Common Stock and
Warrants as reported on the Amex.
<TABLE>
<CAPTION>
Common Stock Warrants
----------------------------------------------
High Low High Low
------- ----- ------ ------
<S> <C> <C> <C> <C>
Fiscal 1996
Third Quarter....................... $ 11.63 $5.56 $ 5.00 $ 1.75
Fourth Quarter...................... 7.13 4.75 2.25 0.94
Fiscal 1997
First Quarter....................... 9.00 4.00 3.75 1.00
Second Quarter...................... 8.25 5.25 2.88 1.13
Third Quarter....................... 5.94 4.13 1.63 0.81
Fourth Quarter...................... 5.25 1.50 1.63 0.31
</TABLE>
DIVIDEND INFORMATION
The holders of the Company's 7% Series A Convertible Redeemable
Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock"),
were entitled to receive if, when and as declared by the Board of Directors out
of funds legally available therefor, cumulative dividends at the rate of $7.00
per share per annum, payable at the time of conversion, either in cash or, at
the election of the Company, by delivery of shares of Common Stock at the
conversion price then in effect. As of March 26, 1998, the Company had issued
15,173 shares of Common Stock as dividends in kind with respect to the Series A
Preferred Stock, the total dollar value of which is approximately $37,318. See
"-- Recent Sales of Unregistered Securities -- August 1997 Private Placement of
Series A Preferred Stock."
The Company has never paid cash dividends on its capital stock. 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. The Company currently intends to retain its earnings to finance the
growth and development of its business and to repay outstanding indebtedness and
does not anticipate paying cash dividends on its capital stock in the
foreseeable future.
20
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
February 1998 Intercompany Note
In February 1998, Environmental provided a $5,450,000 unsecured loan
to the Company, evidenced by the Company's 8% non-convertible note (the
"Intercompany Note"). Pursuant to the terms of the Intercompany Note, interest
on the unpaid principal balance of the Intercompany Note is payable at the rate
of 8% per annum, semiannually in cash. The unpaid principal amount of the
Intercompany Note is due and payable, together with accrued and unpaid interest,
on the earlier to occur of (a) December 31, 1999, or (b) consummation of any
public offering or private placement of securities of the Company with net
proceeds aggregating in excess of $6.0 million, other than in respect of working
capital financing or secured financing of assets received by the Company in the
ordinary course of business from any bank or other lending institution, subject
to certain conditions. The Company will use the net proceeds of the loan solely
for working capital and general corporate purposes and not for the satisfaction
of any portion of Company debt or to redeem any Company equity or
equity-equivalent securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Certain Relationships and Related Transactions--February 1998 Intercompany
Note."
In connection with the loan, the Company amended and restated in its
entirety a five-year warrant to purchase 7,500,000 shares of Common Stock issued
to Environmental on December 2, 1996 to, among other things, reduce the exercise
price of the warrant from $15.00 per share to $10.00 per share. In addition, the
Company issued to Environmental an additional five-year warrant to purchase
1,500,000 shares of Common Stock at an exercise price of $10.00 per share. See
"Certain Relationships and Related Transactions--February 1998 Intercompany
Note."
October 1997 Private Placement of Common Stock
In October 1997, the Company sold 700,000 shares (the "Private
Placement Shares") of Common Stock (of which 600,000 shares were sold at $3.675
per share and 100,000 shares were sold at $3.93125 per share) for an aggregate
purchase price of approximately $2.6 million in a private placement (the
"October 1997 Private Placement") to certain "accredited investors" as such term
is defined in Rule 501 under the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to the terms of such sale, if, during the 12-month
period ending September 30, 1998 (the "Reset Period"), the Company (i) sells any
shares of Common Stock, (ii) issues any securities convertible into or
exercisable for Common Stock, or (iii) issues any shares of Common Stock during
such Reset Period (but not thereafter) upon conversion of the Series A Preferred
Stock, in each case, for a selling price, conversion price or exercise price per
share which shall be lower than the per share purchase price of the Private
Placement Shares (such lower price being the "Reset Price"), the per share
purchase price will be adjusted downward at the end of the Reset Period to equal
the Reset Price.
In December 1997, an aggregate of 326,760 shares of Common Stock were
issued by the Company to investors upon conversion of certain of their shares of
Series A Preferred Stock at a conversion price of $2.00 per share. See "--August
1997 Private Placement of Series A Preferred Stock." As a result, the per share
purchase price of the Private Placement Shares will be adjusted downward at the
end of the Reset Period to equal $2.00. Pursuant to the terms of the October
1997 Private Placement, the Company is required either to refund approximately
$1.2 million (representing the difference between the aggregate purchase price
of the Private Placement Shares and the aggregate purchase price of such shares
based on a $2.00 Reset Price), or to issue approximately 600,000 additional
shares of Common Stock (representing the number of additional shares of Common
Stock the investors would have received in October 1997 had the purchase price
thereof been $2.00 per share) to the investors in the October 1997 Private
Placement, for no additional consideration, at the end of the Reset Period. The
Company has recorded a liability of approximately $1.2 million to reflect the
cost of such price reset.
Affiliates of the placement agent in connection with the October 1997
Private Placement received warrants to purchase an aggregate of 60,000 shares of
Common Stock at $3.675 per share. The Company has an effective registration
statement on file with the Securities and Exchange Commission (the "Commission")
covering the 700,000 shares of Common Stock issued in the October 1997 Private
Placement, as well as the 60,000 shares of Common Stock issuable upon exercise
of the foregoing warrants. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
21
<PAGE>
August 1997 Private Placement of Series A Preferred Stock
In August 1997, the Company sold 18,000 shares of its Series A
Preferred Stock for an aggregate purchase price of $1.8 million in a private
placement (the "August 1997 Private Placement") to "accredited investors" as
such term is defined in Rule 501 under the Securities Act. The Series A
Preferred Stock was convertible into that number of shares of Common Stock equal
to $100 divided by the Conversion Price. The "Conversion Price" was defined as
the amount equal to the lesser of (i) $4.64, representing 100% of the average of
the closing sale prices of the Common Stock for the five consecutive trading
days preceding the issuance date of the Series A Preferred Stock, or (ii) 88% of
the average of the closing sale prices of the Common Stock for the five
consecutive trading days immediately prior to the date of conversion. Subject to
customary anti-dilution provisions, the minimum conversion price was $2.00 per
share; provided that if the average of the closing sale prices of the Common
Stock for any 60 consecutive calendar days was less than $2.00, such investors
had the right either to demand mandatory redemption of their shares of Series A
Preferred Stock (at $100 per share plus accrued and unpaid dividends) or convert
their shares of Series A Preferred Stock into shares of Common Stock without
regard to such minimum $2.00 conversion price.
As of March 26, 1998, all 18,000 shares of Series A Preferred Stock had
been converted into an aggregate of 753,200 shares of Common Stock, based upon
Conversion Prices ranging from $2.00 to $3.685 per share.
The placement agent in connection with the August 1997 Private
Placement received warrants to purchase 19,407 shares of Common Stock at $5.80
per share. The Company has an effective registration statement on file with the
Commission covering the 753,200 shares of Common Stock into which the Series A
Preferred Stock were converted, as well as the 19,407 shares of Common Stock
issuable upon the exercise of the foregoing warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
September 1997 Intercompany Convertible Note
In September 1997, Environmental provided a $4.0 million unsecured loan
to the Company, evidenced by the Company's 8% convertible subordinated note (the
"Convertible Note"). Pursuant to the terms of the Convertible Note, the Company
is obligated to pay Environmental interest only at the rate of 8% per annum,
payable quarterly. Unless converted into Common Stock at any time, the unpaid
principal amount of the Convertible Note is due and payable, together with
accrued and unpaid interest, on August 31, 2002. Payment of principal and
accrued interest under the Convertible Note is subordinated to all other
indebtedness for money borrowed of the Company. Environmental has the right to
convert the Convertible Note into shares of Common Stock at a conversion price
of $3.89 per share. Such conversion price was fixed at approximately 85% of the
five-day average closing bid price of Common Stock ($4.575 per share) prior to
August 22, 1997, the date that the Executive and Finance Committees of the
respective Boards of Directors of the Company and Environmental authorized such
loan. In connection with the $4.0 million loan, the Company issued Environmental
a five-year warrant to purchase 1,000,000 shares of Common Stock at an exercise
price of $5.0325 per share (approximately 110% of the $4.575 five-day average
closing bid price of Common Stock prior to August 22, 1997).
22
<PAGE>
In March 1998, the Company prepaid $2.0 million of the Convertible Note
by (i) paying Environmental the sum of $500,000 in cash and (ii) transferring to
Environmental a promissory note, dated August 30, 1996, in the principal amount
of $1.5 million (the "LPM Note") from Lanxide Performance Materials, Inc.
("LPM"), a wholly-owned subsidiary of Lanxide Corporation, a Delaware
corporation ("Lanxide"). Lanxide, which specializes in the manufacture of
ceramic bonding and refractory materials, is related to the Company by
significant common beneficial ownership. To induce Environmental to accept the
Company's prepayment of $2.0 million of the Convertible Note (and thereby give
up the right to convert $2.0 million of the Convertible Note into Common Stock),
the Company issued to Environmental an additional warrant to purchase up to
514,000 shares of Common Stock at an exercise price of $4.50 per share. Such
exercise price was fixed at approximately 110% of the closing sale price of
the Common Stock on February 20, 1998, the trading day immediately prior to
the date the Board of Directors of the Company approved such prepayment.
The estimated fair value of such warrant is approximately $340,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions--September 1997 Intercompany Note."
The above transactions were deemed exempt from the registration
requirements of the Securities Act in reliance on Section 4(2) thereof as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate restrictive legends were affixed
to the warrants and the certificates representing the shares issued in such
transactions. The Company made available to all recipients of securities written
information about the Company in accordance with Rule 502 of the Securities Act
and advised such recipients of the limitations on resale of such securities. In
addition, all recipients were offered the opportunity, prior to purchasing any
securities, to ask questions of, and receive answers from, the Company
concerning the terms and conditions of the transactions and to obtain additional
relevant information about the Company.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected financial data of the Company, as
of December 31, 1997, for the fiscal years ended December 31, 1993, 1994, 1995,
1996 and 1997. The following selected historical data is derived from the
Company's Consolidated Financial Statements and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report.
(in thousands, except per share data)
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------
1993(1) 1994 1995 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Contract revenue............... $ 154 $ -- $ -- $ 5,123 $ 19,493
Cost of sales:
Cost of sales.................. -- -- -- 4,136 16,325
Research and development....... 171 380 1,815 2,022 3,074
General and administrative..... 173 1,369 1,773 3,412 12,196
Depreciation and amortization.. -- -- -- 561 1,282
Minority interests............. -- -- -- -- (82)
Write-off of in-process
technology.................... -- 2,424 -- -- --
----- -------- -------- -------- ---------
Loss from operations............... (190) (4,173) (3,588) (5,008) (13,302)
Interest income................ 6 7 6 477 745
Interest expense............... (290) (551) (274) (617) (1,310)
Income taxes................... -- -- -- -- --
Equity in net losses of
subsidiary.................... -- -- -- (495) (1,827)
Net loss........................... $(474) $(4,717) $(3,856) $(5,643) $(15,694)
====== ======== ======== ======== =========
Net loss per share-- basic and
diluted........................... -- $ (0.31) $ (0.26) $ (0.31) $ (0.73)
======== ======== ======== =========
Weighted average number of shares.. -- 15,000 15,000 18,100 21,844
Consolidated Balance Sheet Data:
December 31,
----------------------------------------------------------------------
1993(1) 1994 1995 1996 1997
------- ------- ------- ------- --------
Cash and cash equivalents......... $ 50 $ -- $ 4 $12,076 $ 13,151
Total assets...................... 331 856 1,091 33,456 29,696
Long term debt.................... -- -- -- 29 19
Total liabilities................. 1,189 5,542 9,633 13,380 10,521
Minority interests................ -- -- -- -- 6,645
Redeemable securities............. -- -- -- -- --
Stockholders' equity.............. (858) (4,686) (8,542) 20,076 11,654
</TABLE>
- -----------------------------
(1) The selected financial data of the Company at and for the year ended
December 31, 1993 is that of Commodore Laboratories, Inc. (formerly
A.L. Sandpiper Corporation), which is the predecessor of the Company,
and the selected financial data for subsequent periods reflects the
cost of the acquisition of Commodore Labs pushed down from
Environmental.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
Through its operating subsidiaries, the Company provides a range of
technologies and services directed principally at treating soil contamination,
protecting the integrity of our nation's water and air and the disposal or reuse
of certain waste by-products through development of inert and environmentally
sound technologies. The Company is currently in the process of commercializing
these technologies through various acquisitions, licensing agreements and joint
ventures.
Since Environmental's acquisition of the Company's predecessor,
Commodore Laboratories, Inc. (formerly A.L. Sandpiper Corporation), in December
1993, the Company has not generated material revenues, except from the
operations of Advanced Sciences, or any profits. Prior to the Company's
acquisition of Advanced Sciences, the Company was considered to be a development
stage company. See "Certain Relationships and Related Transactions--Organization
and Capitalization of the Company."
RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to Year ended December 31, 1996
Revenues were $19,493,000 for the year ended December 31, 1997,
compared to $5,123,000 for the year ended December 31, 1996. 1997 revenues were
primarily due to the Company's acquisition of Advanced Sciences in October 1996
and 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-reimbursements
contracts is recorded under the percentage of completion method as costs
incurred and includes estimated fees in the proportion that costs to date bear
to total estimated costs. Cost of sales increased to $16,325,000 for 1997 from
$4,136,000 for 1996. Anticipated losses on contracts are provided for by a
charge to income during the period such losses are first identified.
For the year ended December 31, 1997, the Company incurred research and
development costs of $3,074,000, as compared to $2,022,000 for the year ended
December 31, 1996. Research and development costs include salaries, wages, 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 that 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. Research and
development increased for the year ended December 31, 1997, as compared to the
year ended December 31, 1996, primarily due to the continued use of independent
consultants in the development of SET. In addition, the Company hired additional
technical and operational personnel to develop the SET and SLiM processes.
General and administrative expenses for the year ended December 31,
1997 were $12,196,000, as compared to $3,412,000 for the year ended December 31,
1996. The increase was primarily due to hiring executives and staff to support
the increased activities of the Company caused by its and Separation's change to
"public" status and efforts to commercialize its technologies. Approximately
$5,696,000 of the increase relates to expenses incurred by Advanced Sciences and
Separation. In 1997, the Company recorded an $800,000 valuation reserve for the
LPM Note receivable which is included in general and administrative expenses. In
April 1997, Separation completed an initial public offering of its equity
securities which reduced the Company's ownership interest from 100% to 87%.
Interest income was $745,000 for the year ended December 31, 1997, as
compared to $477,000 for the year ended December 31, 1996. The increase resulted
from the investment of the proceeds of the Company's and Separation's initial
public offerings.
Interest expense for the year ended December 31, 1997 was $1,310,000,
as compared to $617,000 for the year ended December 31, 1996. Interest charges
in 1996 result from indebtedness to Environmental for advances made to the
Company and from indebtedness by Separation. Interest expense in 1997 was due to
the debt assumed in connection with the acquisition of Separation. In addition,
$750,000 of interest expense was recognized in September 1997 related to the
beneficial conversion privilege attached to the Convertible Note payable to
Environmental.
25
<PAGE>
Equity in losses of unconsolidated subsidiary for the year ended
December 31, 1997 were $1,827,000, as compared to $495,000 for the year ended
December 31, 1996. The Company's Commodore-Teledyne, LLC joint venture commenced
operations in October 1996.
Year ended December 31, 1996 compared to Year ended December 31, 1995
Revenues were $5,123,000 for the year ended December 31, 1996, compared
to no revenues for the year ended December 31, 1995. 1996 revenues were
primarily due to the Company's acquisition of Advanced Sciences in October 1996
and 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. Cost of sales totaled $4,136,000 for
1996.
For the year ended December 31, 1996, the Company incurred research and
development costs of $2,022,000, as compared to $1,815,000 for the year ended
December 31, 1995. 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 that those costs related to the design of
construction of an asset having an economic useful life are capitalized, and
then depreciated over the estimated useful life of the asset. Research and
development increased for the year ended December 31, 1996 as compared to the
year ended December 31, 1995 primarily due to the continued use of independent
consultants in the development of SET. Also, the Company hired additional
technical and operational personnel to develop the SET process.
General and administrative expenses for the year ended December 31,
1996 were $3,412,000, as compared to $1,773,000 for the year ended December 31,
1995. The increase was primarily due to hiring executives and staff to support
the increased activities of the Company caused by its change to "public" status
and its efforts to commercialize its SET technology. Approximately $1,038,000 of
the increase relates to expenses incurred at the newly acquired Advanced
Sciences subsidiary.
Annual interest income was $477,000 for the year ended December 31,
1996, as compared to $6,000 for the year ended December 31, 1995. This increase
resulted from the investment of the proceeds of the Company's IPO during the
last six months of 1996.
Interest expense for the year ended December 31, 1996 was $617,000, as
compared to $274,000 for the year ended December 31, 1995. Interest charges
result from indebtedness to Environmental for advances made to the Company and
from indebtedness to a bank by a wholly-owned subsidiary. Interest expense
increased due to the increased outstanding balance due to Environmental
throughout the year ended December 31, 1996 as compared to year ended December
31, 1995, and the addition of debt of its wholly-owned subsidiary during the
last three months of 1996.
Equity in losses of unconsolidated subsidiary for the year ended
December 31, 1996 was $495,000, as compared to none for the year ended December
31, 1995. The Company's Commodore-Teledyne, LLC joint venture commenced
reporting results of operations in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
From its inception through the second quarter of 1996, the Company's
operations were financed principally by loans and investments from its
stockholders. In June 1996, the Company successfully completed its IPO from
which it received net proceeds of approximately $30,500,000. The Company
allocated approximately $12.0 million of the net proceeds for the funding of
proposed collaborative joint ventures, $2.0 million of which was allocated to
Commodore-Teledyne, LLC. See "Certain Relationships and Related
Transactions--Organization and Capitalization of the Company."
26
<PAGE>
In July 1996, the Company utilized a portion of the net proceeds from
its IPO to repay an outstanding line of credit of $2.0 million, as well as a
$5,925,426 promissory note to its principal stockholder (the "Environmental
Funding Note"). The Company set aside $1.0 million cash collateral to support a
loan made by a commercial bank to the Company's principal stockholder in
December 1993. In September 1996, such cash collateral was released by the bank.
See "Certain Relationships and Related Transactions--Organization and
Capitalization of the Company."
In August 1997, the Company completed the August 1997 Private Placement
from which it received net proceeds of approximately $1.6 million. In connection
with the sale, the Company incurred cash transaction costs of approximately
$117,000 and issued warrants, expiring on August 15, 2002, to the placement
agent. See "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities."
In October 1997, the Company completed the October 1997 Private
Placement from which it received aggregate net proceeds of approximately $2.4
million. In connection with the October 1997 Private Placement, the Company
incurred cash transaction costs of approximately $209,000 and issued warrants,
expiring on September 30, 2002, to the placement agent. See "Market for
Registrant's Common Equity and Related Stockholder Matters--Recent Sales of
Unregistered Securities."
In September 1997, Environmental provided the Company with a $4.0
million unsecured loan, evidenced by the Convertible Note due August 31, 2002.
In connection with the Convertible Note, the Company issued warrants to purchase
1,000,000 shares of Common Stock to Environmental valued at $660,000 and
provided a beneficial conversion privilege with an intrinsic value of $750,000
as of the date of the transaction. See "Market for Registrant's Common Equity
and Related Stockholder Matters--Recent Sales of Unregistered Securities" and
"Certain Relationships and Related Transactions."
At December 31, 1997 and 1996, the Company had a $1,199,000 and
$7,042,000 outstanding balance on a revolving line of credit, respectively. This
decrease in debt was attributable to the line of credit resulting from
collections on accounts receivable balances and a $2.8 million pay-down on a
$9,250,000 revolving line of credit due September 30, 1997. The Company
refinanced that portion of the line of credit secured by receivables, which was
due March 31, 1998. The Comopany has obtained an extension through May 30, 1998.
The Company is pursuing various options to finance its anticipated capital
expenditures for 1998 and to refinance its line of credit secured by
receivables.
In February 1998, Environmental provided the Company with a $5,450,000
unsecured loan, evidenced by the Intercompany Note due on the earlier to occur
of (a) December 31, 1999, or (b) consummation of any public offering or private
placement of securities of the Company with net proceeds aggregating in excess
of $6.0 million, other than in respect of working capital financing or secured
financing of assets received by the Company in the ordinary course of business
from any bank or other lending institution, subject to certain conditions. The
Company will use the net proceeds of the loan solely for working capital and
general corporate purposes and not for the satisfaction of any portion of
Company debt or to redeem any Company equity or equity-equivalent securities.
See "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities" and "Certain Relationships and
Related Transactions."
For the year ended December 31, 1997, the Company incurred a net loss
of $15,694,000. At December 31, 1997 and 1996, the Company had working capital
of $11,170,000 and $8,838,000 respectively.
In August 1996, the Company loaned $1.5 million to LPM, a wholly-owned
subsidiary of Lanxide, evidenced by the LPM Note. Lanxide is related to the
Company by significant common beneficial ownership. The LPM Note is
collateralized by the assets of LPM and guaranteed by Lanxide. The LPM Note
became due on February 28, 1998. In March 1998, the Company transferred the LPM
Note to Environmental, together with $500,000 in cash, as partial prepayment of
the $4.0 million unsecured loan from Environmental to the Company in September
1997. See "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities--September 1997 Intercompany
Convertible Note" and "Certain Relationships and Related Transactions--September
1997 Intercompany Convertible Note."
27
<PAGE>
In October 1996, the Company acquired all of the outstanding shares of
capital stock of Advanced Sciences. In consideration for all of the outstanding
shares of capital stock of Advanced Sciences, the former shareholders of
Advanced Sciences received an aggregate of 450,000 shares of Common Stock.
Simultaneously, the Company also acquired of all of the outstanding shares of
capital stock of A.S. Environmental, Inc. ("ASE"). ASE, a newly formed entity
with no history of operations, had an option to purchase all of the outstanding
capital stock of Advanced Sciences and was acquired by the Company for the
purpose of enabling the Company to effect its acquisition of Advanced Sciences.
The former shareholders of ASE received, in consideration for all of the
outstanding shares of capital stock of ASE, an aggregate of 450,000 shares of
Company Common Stock. See "Certain Relationships and Related
Transactions--Organization and Capitalization of the Company."
In December 1996, the Company transferred certain of its operating
assets related to its SET technology to Solution, subject to certain liabilities
related to such assets, in exchange for all of the issued and outstanding shares
of capital stock of Solution. Solution agreed to assume all of the net assets of
the Company relating to its SET technology at December 1, 1996, which assets had
an aggregate value of approximately $4.0 million at such date, and all known or
unknown contingent or unliquidated liabilities of and claims against the Company
and its subsidiaries to the extent they relate to or arise out of the
transferred assets. The Company retained, among other things, (a) all temporary
cash investments of the Company at December 1, 1996, aggregating approximately
$14.1 million, and (b) the principal executive offices and related assets of the
Company which, at the time, were located in McLean, Virginia. See "Certain
Relationships and Related Transactions--Organization and Capitalization of the
Company."
In December 1996, the Company acquired (i) all of the outstanding
capital stock of Separation and (ii) all of the outstanding capital stock of CFC
Technologies from Environmental, as part of a corporate restructuring of
Environmental to consolidate all of its current environmental technology
businesses with the Company. In addition, Environmental assigned to the Company
outstanding Separation notes aggregating $976,200 at December 2, 1996,
representing advances previously made by Environmental to Separation, which the
Company has contributed to the equity of Separation. In consideration for the
transfer of all of the outstanding capital stock of Separation and CFC
Technologies to the Company, the Company paid Environmental $3.0 million in cash
and issued to Environmental a warrant expiring December 2, 2003 to purchase
7,500,000 shares of Company Common Stock at an exercise price of $15.00 per
share, valued at $2.4 million. Such warrant was subsequently amended to, among
other things, reduce the exercise price thereof to $10.00 per share. See
"Certain Relationships and Related Transactions--Organization and Capitalization
of the Company" and "--February 1998 Intercompany Note."
In April 1997, Separation completed an initial public offering of its
equity securities, from which it received net proceeds of approximately
$11,100,000. Such funds were used primarily to finance Separation's operations
through 1997.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards of approximately
$28,000,000 which expire in the years 2000 through 2012. The amount of net
operating loss carryforward that can be used in any one year will be limited by
the applicable tax laws which are in effect at the time such carryforward can be
utilized. A valuation allowance of $11,200,000 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.
YEAR 2000 CONSIDERATIONS
Many existing computer programs use only two digits to identify a year
in the date datum field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If uncorrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
28
<PAGE>
The Company is currently evaluating Year 2000 issues and their
potential impact on its information systems and computer technologies. All
evaluation costs will be expensed as incurred. The Company does not expect that
the cost of addressing any Year 2000 issue will be a material event or
uncertainty that would cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition, or that the costs or consequences of incomplete or untimely
resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.
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
Pursuant to the General Instructions to Item 305 of Regulation S-K, the
Company is not required to comply with the disclosure provisions of Item 305 of
Regulation S-K because the Company's market capitalization was less than $2.5
billion at January 28, 1997, and this Annual Report does not contain financial
statements for fiscal years ended after June 15, 1998.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company are included on
pages F-1 through F-21 of this Annual Report and are incorporated herein by
reference.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On December 11, 1996, the Company and its former auditors, Tanner + Co.
("Tanner"), mutually agreed to terminate the client-auditor relationship between
the Company and Tanner effective as of such date. Additionally, as of December
19, 1996, the Company retained Price Waterhouse LLP to serve as independent
accountants. The decision to terminate the Company's client-auditor relationship
with Tanner and to retain Price Waterhouse LLP was recommended by the Audit
Committee of the Board of Directors and unanimously approved by the Board of
Directors of the Company.
During the Company's fiscal year ended December 31, 1995, Tanner's
report on the Company's financial statements neither contained any adverse
opinion or disclaimer of opinion, nor were qualified or modified as to any
uncertainty, audit scope or accounting principles, except that Tanner's auditors
reports on the Company's consolidated financial statements for the year ended
December 31, 1995 contained an additional paragraph relating to the Company
continuing as a going concern, due to significant losses and a deficit in
working capital.
During the Company's fiscal year ended December 31, 1995, there were no
disagreements between the Company and Tanner on any matters of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Tanner,
would have caused Tanner 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 Company's fiscal year ended December 31,
1995.
Prior to engaging Price Waterhouse LLP, the Company did not consult
Price Waterhouse LLP regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the executive officers and directors of the
Company, and their positions with the Company as of March 26, 1998, are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Paul E. Hannesson 57 Chairman of the Board, President and Chief Executive Officer
Kenneth L. Adelman, Ph.D. 49 Executive Vice President--Marketing and International Development
and Director of the Company, and President and Chief Operating
Officer of Solution
Michael D. Fullwood 51 Senior Vice President, Chief Financial and Administrative
Officer, Secretary and General Counsel
Ed L. Romero 64 Director of the Company and Chief Executive Officer of Advanced
Sciences
Peter E. Harrod, P.E. 48 President of Advanced Sciences
Kenneth J. Houle 59 President and Chief Operating Officer of Separation
Bentley J. Blum 56 Director
Jeane J. Kirkpatrick, Ph.D. 71 Director
Herbert A. Cohen 64 Director
David L. Mitchell 76 Director
Thomas E. Noel 59 Director
Tom J. Fatjo, Jr. 57 Director
William R. Toller 66 Director
</TABLE>
- ----------------------
Paul E. Hannesson has been a director of the Company since March 1996
and was appointed Chairman of the Board in November 1996. Mr. Hannesson also
served as Chief Executive Officer of the Company from March to October 1996 and
as President from March to September 1996, and was re-appointed Chief Executive
Officer 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 Separation, Solution and
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 served as Chairman of the Board of
Lanxide, a research and development company developing metal and ceramic
materials, from 1983 to February 1998. Mr. Hannesson is the brother-in-law of
Bentley J. Blum, a director of the Company.
31
<PAGE>
Kenneth L. Adelman, Ph.D. joined the Board of Directors of the Company
and Environmental in July 1996 and was appointed Executive Vice
President--Marketing and International Development of the Company in May 1997.
Dr. Adelman was appointed President and Chief Operating Officer of Solution in
November 1997. Dr. Adelman also joined the Board of Directors of Separation in
April 1997. Since 1987, Dr. Adelman has been an independent consultant on
international issues to various corporations, including Lockheed Martin Marietta
Corporation and Loral Corporation. Previously, Dr. Adelman held positions of
responsibility in arms control during most of the Reagan Administration. From
1983 to the end of 1987, he was Director of the United States Arms Control and
Disarmament Agency. Dr. Adelman was a Professor at Georgetown University and
writer for Washingtonian Magazine from 1987 to 1991. Dr. Adelman accompanied
President Ronald Reagan on summits with Mikhail Gorbachev, and negotiated with
Soviet diplomats on nuclear and chemical weapons control issues, from 1985 to
1987. He also headed the United States team on annual arms control discussions
with top-level officials of the People's Republic of China from 1983 through
1986. From 1981 to 1983, he served as Deputy United States Representative to the
United Nations with the rank of Ambassador Extraordinary and Plenipotentiary.
Dr. Adelman holds M.A. and Ph.D. degrees from Georgetown University.
Michael D. Fullwood was appointed Senior Vice President, Chief
Financial and Administrative Officer, Secretary and General Counsel of the
Company, Environmental, Solution, Separation and CFC Technologies in May 1997.
Mr. Fullwood served as a director and the Senior Vice President, Chief Financial
and Administrative Officer and General Counsel of Lanxide from July 1997 to
February 1998. From 1987 to August 1996, Mr. Fullwood held numerous positions
ranging from Senior Attorney to Executive Vice President and Chief Financial
Officer of Witco Corporation, a worldwide specialty chemicals company. From 1983
to 1987, Mr. Fullwood served as Senior Attorney at Scallop Corporation (Royal
Dutch/Shell Group), where he specialized in corporate matters, mass tort
litigation and international law. Mr. Fullwood also previously served as Senior
Attorney of Caltex Petroleum and Arabian American Oil Company, handling
corporate, contractual and transnational matters. Mr. Fullwood holds a law
degree from Harvard Law School.
Ed L. Romero has served as a director of the Company since October 1996
and as the Chief Executive Officer of Advanced Sciences since its inception. Mr.
Romero founded Advanced Sciences in 1977 and was its controlling stockholder
from 1977 to October 1996. Mr. Romero served as a director of TransAmerican
Waste Industries, Inc. from November 1991 to April 1992 and was re-appointed a
director in December 1992. Mr. Romero is currently the owner of the Professional
Developers, a New Mexico-based real estate and development company, and is a
prominent member of many veteran groups and Hispanic business organizations. He
is President of the Hispanic Culture Foundation and also a member of the board
of the Democratic National Committee's Finance Committee. Mr. Romero is the
father-in-law of Peter E. Harrod, the President of Advanced Sciences and Senior
Vice President of Solution.
Peter E. Harrod, P.E. has served as an executive officer of Advanced
Sciences since 1991 and as its President since October 1996. Mr. Harrod has also
served as Senior Vice President of Solution since November 1997. Prior to such
time, Mr. Harrod held numerous executive positions in environmental engineering,
hazardous waste remediation, design engineering and construction management
companies, including ABB Environmental Services, Inc. from 1983 to 1991, Neill &
Gunter, Inc. from 1981 to 1983 and E.C. Jordan Co. from 1975 to 1981. Mr. Harrod
is currently a member of the National Society of Professional Engineers and the
American Society of Civil Engineers, and is the author of several environmental,
remediation and design engineering publications. Mr. Harrod received M.S. and
B.S. degrees in Civil Engineering from the University of Vermont. Mr. Harrod is
the son-in-law of Ed L. Romero, a director of the Company and the Chief
Executive Officer of Advanced Sciences.
Kenneth J. Houle was elected President and Chief Operating Officer of
Separation in January 1997. Mr. Houle previously served as the President of The
Hall Chemical Company, a manufacturer of inorganic metal catalysts and
compounds, from March 1995 to September 1996. Prior to such time, Mr. Houle had
served as Vice President and Business Director of the Personal Care Business
Unit of International Specialty Products, Inc., a producer of specialty
chemicals, from March 1992 to December 1994, and the President and Chief
Executive Officer of Ruetgers - Nease Chemical Company, a manufacturer of
organic chemical intermediates and surfactants, from February 1990 to January
1991. Mr. Houle was an independent consultant in the chemical industry from
October 1996 to January 1997. Mr. Houle is a graduate of Siena College, with a
Bachelor's degree in Chemistry, and the Accounting and Financial Management
Program at Columbia University. Mr. Houle also participated in the Masters
degree program in Organic Chemistry at Iowa State University. He is a member of
the Board of Trustees of The Chemists' Club (New York, New York) and a member of
the American Chemical Society, American Institute of Chemical Engineers and
Societe de Chemie Industrielle (American section). Mr. Houle is also a trustee
and board member of the Ohio Center of Science and Industry.
32
<PAGE>
Bentley J. Blum has served as a director of the Company 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 Separation, 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 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. Mr. Blum is the brother-in-law of Paul E. Hannesson, the Chairman
of the Board, President and Chief Executive Officer of the Company.
Jeane J. Kirkpatrick, Ph.D. has served as a director of the Company and
Separation since December 1997. Dr. Kirkpatrick has a distinguished career which
includes being awarded the Medal of Freedom (the nation's highest civilian
honor) in May 1995, and the Department of Defense Distinguished Public Service
Medal (the highest civilian honor in the Department of Defense) in December
1992. Dr. Kirkpatrick served for more than four years as the United States
Representative to the United Nations and as a member of the Cabinet of President
Ronald Reagan. Dr. Kirkpatrick also served as a member of President Reagan's
Foreign Intelligence Advisory Board from 1985 to 1990, and of the Defense Policy
Review Board from 1985 to 1993, and chaired the Secretary of Defense Commission
on Fail Safe and Risk Reduction of the nuclear command and control system in
1992. Dr. Kirkpatrick is the author of a number of books and now serves on the
faculty of Georgetown University as Leavey Professor of Government. She is also
a Senior Fellow of the American Enterprise Institute. In addition to her
responsibilities at Georgetown and the American Enterprise Institute, Dr.
Kirkpatrick writes and speaks widely on foreign policy and security affairs. A
noted academic, Dr. Kirkpatrick received an A.B. degree from Barnard College,
M.A. and Ph.D. degrees from Columbia University, and has been awarded honorary
degrees from a number of universities.
Herbert A. Cohen has served as a director of the Company and
Environmental since July 1996 and joined the Board of Directors of Separation in
March 1998. Mr. Cohen has been a practicing negotiator for the past three
decades acting in an advisory capacity in hostage negotiations and crisis
management. He has been an advisor to Presidents Carter and Reagan in the
Iranian hostage crisis, the government's response to the skyjacking of TWA
Flight 847 and the seizure of the Achille Lauro. Mr. Cohen's clients have
included large corporations and government agencies such as the Department of
State, the Federal Bureau of Investigation, the Conference of Mayors, the Bureau
of Land Management, Lands and Natural Resources Division in conjunction with the
EPA, and the United States Department of Justice. In addition, Mr. Cohen was an
advisor and consultant to the Strategic Arms Reduction Talks negotiating team.
Mr. Cohen holds a law degree from New York University School of Law, and has
lectured at numerous academic institutions.
David L. Mitchell has served as a director of the Company and
Environmental since July 1996 and as a director of Separation since April 1997.
Mr. Mitchell has also served as a consultant to the Company since July 1997. For
the past thirteen years, Mr. Mitchell has been President and co-founder of
Mitchell & Associates, Inc., a banking firm providing financial advisory
services in connection with corporate mergers, acquisitions and diversities.
Prior to forming Mitchell & Associates in 1982, Mr. Mitchell was a Managing
Director of Shearson/American Express Inc. from 1979 to 1982, a Managing
Director of First Boston Corporation from 1976 to 1978, and a Managing Director
of the investment banking firm of S.G. Warburg & Company from 1965 to 1976. Mr.
Mitchell holds a bachelor's degree from Yale University.
Thomas E. Noel has served as a director of the Company since October
1996 and served as the Company's President and Chief Executive Officer from
October to November 1996. Mr. Noel served as President and Chief Operating
Officer of Solution from December 1996 to September 1997. Mr. Noel has held
numerous executive positions in hazardous, non-hazardous and low-level nuclear
waste industries. He previously served as the President of TransAmerican Waste
Industries, Inc., a non-hazardous waste disposal company, from January 1996 to
November 1996, and as President of Ecova Corporation, an Amoco subsidiary in the
environmental services business, from August 1993 to August 1995. From 1984 to
1992, he was at Chemical Waste Management, Inc., where he served as Senior Vice
President of operations, managing that company's core business with more than
6,000 employees and $1.5 billion in annual revenues. He also previously served
as President of Pakhoed, USA and DSI Terminals, Inc. After graduating from the
United States Military Academy at West Point, New York, he served 14 years in
the Army, including two years as an aide to General Creighton Abrams, Commander
of all U.S. forces in Vietnam and Army Chief of Staff. Mr. Noel was a
presidential appointee as Assistant Secretary of the DOE, responsible for the
U.S. Strategic Petroleum Reserve, a $20 billion federal program created
following the Arab oil boycott in the early 1970's.
33
<PAGE>
Tom J. Fatjo, Jr. has served as a director of the Company since
November 1996. Mr. Fatjo has served as the Chairman of the Board and Chief
Executive Officer of TransAmerican Waste Industries, Inc., a Houston-based solid
waste management company, since April 1992 and served as its President from
April 1994 to January 1996. He was the founder and served as Chairman of the
Board and Chief Executive Officer of Republic Waste Industries, Inc., a
publicly-held company in the waste management business, from January 1990 to
August 1991. Mr. Fatjo is also the developer of The Houstonian, a 22-acre
fitness and preventative medicine complex and luxury condominium. Mr. Fatjo has
served on the boards of several other public companies including Western Waste,
Inc., Rolm Corporation, Consolidated Fibers, Inc., Health Resources Corporation
of American, Criterion Capital Corporation, Advanced Sciences and American
Title, Inc., among others. He holds a B.S. from Rice University. He has also
co-authored a book, With No Fear of Failure (1981), a treatise on his personal
business philosophy.
William R. Toller joined the Board of Directors of the Company in March
1998. Mr. Toller has also served as a member of the Board of Directors of
Separation since April 1997 and has served as a consultant to Environmental
since July 1997. Mr. Toller served as the Vice Chairman of Lanxide from July
1997 to February 1998. Mr. Toller also currently serves as Chairman and Chief
Executive Officer of Titan Consultants, Inc. Mr. Toller had been the Chairman
and Chief Executive Officer of Witco Corporation since October 1990 and retired
in July 1996. Mr. Toller joined Witco in 1984 as an executive officer when it
acquired the Continental Carbon Company of Conoco, Inc., where he had been its
President and an officer since 1955. Mr. Toller is a graduate of the University
of Arkansas with a Bachelor's degree in Economics, and the Stanford University
Graduate School Executive Program. Mr. Toller serves on the board of directors
of Chase Industries, Inc., Fuseplus, Inc., where he is also Chairman of the
Organization and Compensation Committee, and the United States Chamber of
Commerce, where he is also a member of the Labor Relations and International
Policy Committees. Mr. Toller is also a member of the Board of Trustees and the
Executive and Finance Committees of the International Center for the Disabled, a
member of the Board of Associates of the Whitehead Institute for Biomedical
Research, a member of the National Advisory Board of First Commercial Bank in
Arkansas, a member of the Dean's Executive Advisory Board and the International
Business Committee at the University of Arkansas, College of Business
Administration, and a member of the Board of Presidents of the Stamford Symphony
Orchestra.
Each director is elected to serve for a term of one year or until his
or her 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, and Mr. Harrod is the son-in-law of Mr. Romero. No family
relationship exists among any other directors or executive officers of the
Company.
34
<PAGE>
KEY EMPLOYEES
The names and ages of the key employees of the Company, and their
positions with the Company as of March 26, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Carl O. Magnell, P.E.* 55 Vice President--Technology & Sales
Rayburn Hanzlik* 59 Vice President--Business Development
Andrew P. Oddi* 36 Vice President and Treasurer
William E. Ingram* 52 Vice President and Controller
Vincent Valeri 62 Senior Vice President and Chief Engineer
Gerry D. Getman, Ph.D. 50 Vice President and Director of Research and Development
</TABLE>
- ----------------------
* Officer of the Company.
Carl O. Magnell, P.E. has served as Vice President of the Company since
June 1996, was appointed Vice President--Technology & Business Development in
June 1997 and was appointed Vice President--Technology & Sales in February 1998.
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.
Rayburn Hanzlik has served as Vice President of the Company since
January 1997, was appointed Vice President--Marketing in June 1997 and was
appointed Vice President--Business Development in February 1998. Mr. Hanzlik has
also served as Vice President--Strategic Planning and Marketing of Solution
since November 1997. Mr. Hanzlik served as General Counsel, Chief Administrative
Officer and Secretary of the Company, and as Vice President, General Counsel and
Secretary of Environmental, Solution, Separation and CFC Technologies, from
January to April 1997. During the previous five years, he founded and was
chairman of Lanxide Sports International, Inc. and Stealth Propulsion
International, Ltd., two San Diego-based technology companies in the sporting
goods and boating industries. Mr. Hanzlik has held other senior executive
positions in business and government, including partner and director of Heidrick
& Struggles, Inc. from 1985 through 1990; Administrator of the Department of
Energy's Economic Regulatory Administration from 1981 through 1985; and, White
House staff from 1970 through 1975. He has also been a member of several law
firms in Washington, D.C. and Los Angeles, California. Mr. Hanzlik holds J.D.
and M.A. degrees from the University of Virginia.
Andrew P. Oddi was appointed Vice President and Treasurer of the
Company, Environmental, Separation, Solution and CFC Technologies in June 1997.
Mr. Oddi has 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 the Company 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, as a director of Environmental from
December 1990 to July 1996, and as the Vice President--Finance of Separation
from September 1996 to May 1997. 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.
35
<PAGE>
William E. Ingram served as the Company's Vice President and Controller
from October 1996 to March 1997, as its Vice President--Finance from March to
May 1997, and was re-appointed Vice President and Controller in June 1997. Mr.
Ingram was also appointed Vice President and Controller of Environmental,
Separation, Solution and CFC Technologies in June 1997. Prior to that Mr. Ingram
was Chief Financial Officer of HydroChem Industrial Services, Inc., a privately
owned, $160 million company providing high pressure water and chemical cleaning
services primarily to the petrochemical industry, from January 1995 to September
1996. Mr. Ingram was Vice President and Region Controller for Chemical Waste
Management, Inc. (CWM) from September 1983 to December 1994. CWM, a subsidiary
of Waste Management, Inc., provides hazardous waste treatment and disposal
services to a wide range of government and industrial customers. Mr. Ingram also
spent two years with the solid waste operations of WMX Technologies. Mr. Ingram
is a Certified Public Accountant and has an M.B.A. from the University of
Florida and a B.S. in Accounting from Florida Southern College.
Vincent Valeri, P.E. has served as Senior Vice President and Chief
Engineer of the Company since June 1996 and as Vice President and Chief Engineer
of Solution since November 1997. From July 1993 to November 1994, he was a
private consultant for Environmental. From 1992 to July 1993, Mr. Valeri served
as Vice President of Manufacturing at Moen, Inc., a manufacturer of faucets and
plumbing parts, and for five years prior thereto was Vice President and a
co-founder of General Management Technologies, Inc., a management consulting
firm. From 1965 to 1987, Mr. Valeri served in various capacities with
Westinghouse Electric Corporation, and was Director and General Manager of its
Factory Automation Systems Division from 1984 to 1987.
Gerry D. Getman, Ph.D. has served as Vice President and Director of
Research and Development of the Company since June 1996 and of Solution since
November 1997. Prior to that he was employed by Calgon Corporation from 1991 to
1995 as Director of Research. From January to March 1996, he was a private
consultant for Environmental. From 1982 to 1991, Dr. Getman served in various
capacities at Calgon including ISO 9000 Director, Quality Assurance Director,
and Analytical Laboratory Manager. From 1975 to 1981, he was employed by
Velsicol Chemical Corporation in several capacities including Manager of
Analytical Research. Dr. Getman received his Ph.D. in Chemistry from Rensselaer
Polytechnic Institute.
BOARD COMMITTEES
The Company's Board of Directors has (i) an Audit Committee, (ii) a
Compensation, Stock Option and Benefits Committee and (iii) an Executive and
Finance Committee. The responsibilities of the Audit Committee, which, as of
March 26, 1998, was composed of David L. Mitchell (Chairman), Herbert A. Cohen
and William R. Toller, include recommending to the Board of Directors the firm
of independent accountants to be retained by the Company, reviewing with the
Company's independent accountants the scope and results of their audits,
reviewing with the independent accountants and management the Company's
accounting and reporting principles, policies and practices, as well as the
Company's accounting, financial and operating controls and staff, supervising
the Company's policies relating to business conduct and dealing with conflicts
of interest relating to officers and directors of the Company. The Compensation,
Stock Option and Benefits Committee, which, as of March 26, 1998, was composed
of Herbert A. Cohen (Chairman), David L. Mitchell and William R. Toller, 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 (Chairman), Bentley J. Blum and David L. Mitchell
as of March 26, 1998, 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.
36
<PAGE>
COMPENSATION OF DIRECTORS
Non-management directors of the Company receive director's fees of $500
per meeting for attendance at Board of Directors meetings, and are reimbursed
for actual expenses incurred in respect of such attendance. The Company does not
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 the Company's Common Stock, to file initial reports of beneficial ownership
and reports of changes in beneficial ownership of shares of Common Stock with
the Commission and the Amex. 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, 1997, and upon a
review of Forms 5 and amendments thereto furnished to the Company with respect
to the year ended December 31, 1997, 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 outstanding shares of Common Stock 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, 1997, except the
following: (i) Herbert A. Cohen, a director of the Company, who inadvertently
failed to file a Form 4 with respect to a transaction that occurred in November
1997 (such transaction was reported on a Form 5 timely filed with the Commission
on February 17, 1998); (ii) Environmental, a principal stockholder of the
Company, which inadvertently failed to file (a) a Form 4 with respect to two
transactions that occurred in September 1997, (b) a Form 4 with respect to three
transactions that occurred in October 1997, (c) a Form 4 with respect to nine
transactions that occurred in November 1997, and (d) a Form 4 with respect to 11
transactions that occurred in December 1997 (all of such transactions were
reported on a Form 5 timely filed with the Commission on February 17, 1998);
(iii) Bentley J. Blum, a director of the Company, who inadvertently failed to
file (a) a Form 4 with respect to two transactions that occurred in September
1997, (b) a Form 4 with respect to three transactions that occurred in October
1997, (c) a Form 4 with respect to nine transactions that occurred in November
1997, and (d) a Form 4 with respect to 11 transactions that occurred in December
1997 (all of such transactions were reported on a Form 5 timely filed with the
Commission on February 17, 1998); and (iv) Jeane J. Kirkpatrick, Ph.D., a
director of the Company, who inadvertently failed to timely file (a) a Form 3
with respect to her election as a director of the Company in December 1997 (such
Form 3 was filed late with the Commission on March 17, 1998) and (b) a Form 5
with respect to a transaction that occurred in December 1997 (such transaction
was reported on a Form 5 filed late with the Commission on March 17, 1998).
37
<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 each of 1997, 1996, and 1995 to the person serving as
the Company's current Chief Executive Officer, to each of the Company's most
highly compensated executive officers other than the Chief Executive Offer whose
total salary and bonus compensation exceeded $100,000 during any such year, and
to two additional individuals who served as executive officers of the Company
during 1997, but not at December 31, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------------------------------------- ------------------------------------
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying LTIP Compen-
Name and Principal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------- ---- ---------- -------- --------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul E. Hannesson 1997 250,256(1) 63,356(2) 15,205(3) -0- -0- -0- -0-
Chief Executive 1996 265,836(1) 50,000(2) -0- -0- 400,000 -0- -0-
Officer 1995 186,476 -0- 96,000(4) -0- -0- -0- -0-
Kenneth L. 1997 83,444(5) 54,937(6) -0- -0- 150,000 -0- -0-
Adelman, Ph.D. 1996 -0- -0- -0- -0- 67,500(7) -0- -0-
Executive Vice 1995 -0- -0- -0- -0- -0- -0- -0-
President
Michael D. 1997 68,620(8) 38,463(9) -0- -0- 125,000 -0- -0-
Fullwood 1996 -0- -0- -0- -0- -0- -0- -0-
Senior Vice 1995 -0- -0- -0- -0- -0- -0- -0-
President
Edwin L. Harper, 1997 236,048(11) 97,221(12) -0- -0- -0- -0- -0-
Ph.D.(10) 1996 -0- -0- -0- -0- 162,375 -0- -0-
Former President 1995 -0- -0- -0- -0- -0- -0- -0-
and
Chief Operating
Officer
Rayburn 1997 79,123(14) 16,481(15) -0- -0- 75,000 -0- -0-
Hanzlik(13) 1996 -0- -0- -0- -0- -0- -0- -0-
Vice President 1995 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
- --------------------------------
(1) Represents the amount of Mr. Hannesson's base salary allocated to the
Company. Mr. Hannesson's total base salary for 1996 and 1997 was
$310,627 and $395,000, respectively. Certain portions of such base
salaries were also allocated to Environmental and Separation. See
"Certain Relationships and Related Transactions--Services Agreement."
(2) Represents the amount of Mr. Hannesson's annual incentive bonus
allocated to the Company. Mr. Hannesson's total annual incentive bonus
for 1996 and 1997 was $200,000 and $100,000, respectively. Certain
portions of such annual incentive bonuses were also allocated to
Environmental and Separation.
(3) Represents the amount of Mr. Hannesson's automobile allowance allocated
to the Company. Mr. Hannesson's total automobile allowance for 1997 was
$24,000, certain portions of which were also allocated to Environmental
and Separation.
38
<PAGE>
(4) Represents the amount paid by the Company to Mr. Hannesson as an
allowance for living expenses in the New York metropolitan area.
(5) Represents the amount of Dr. Adelman's base salary allocated to the
Company. Dr. Adelman's total base salary for 1997 was $151,980. Certain
portions of such base salary were also allocated to Environmental and
Separation.
(6) Represents the amount of Dr. Adelman's annual incentive bonus allocated
to the Company. Dr. Adelman's total annual incentive bonus for 1997 was
$100,000. Certain portions of such annual incentive bonus were also
allocated to Environmental and Separation.
(7) Represents shares of Common Stock underlying stock options granted to
Dr. Adelman by the Company in his capacity as a director of the
Company.
(8) Represents the amount of Mr. Fullwood's base salary allocated to the
Company. Mr. Fullwood's total base salary for 1997 was $133,805.
Certain portions of such base salary were also allocated to
Environmental and Separation.
(9) Represents the amount of Mr. Fullwood's annual incentive bonus
allocated to the Company. Mr. Fullwood's total annual incentive bonus
for 1997 was $75,000. Certain portions of such annual incentive bonus
were also allocated to Environmental and Separation.
(10) Dr. Harper served as a director of the Company and Environmental from
November 1996 to March 1998, as the President and Chief Operating
Officer of both the Company and Environmental from November 1996 to
April 1997, and as Vice Chairman of the Company and Environmental from
April to December 1977. Dr. Harper also served as Chairman of the Board
and Chief Executive Officer of Separation, Solution and CFC
Technologies from January to April 1997, and as a private consultant to
the Company and certain of its affiliates from May to December 1997.
(11) Represents the amount of Dr. Harper's base salary allocated to the
Company. Dr. Harper's total base salary for 1997 was $354,076. Of such
base salary, $257,512 was paid to Dr. Harper in his capacity as a
consultant to the Company and its affiliates. Certain portions of such
base salary were also allocated to Environmental and Separation.
(12) Represents the amount of Dr. Harper's annual incentive bonus allocated
to the Company. Dr. Harper's total annual incentive bonus for 1997 was
$145,833. Of such annual incentive bonus, $106,064 was paid to Dr.
Harper in his capacity as a consultant to the Company and its
affiliates. Certain portions of such annual incentive bonus were also
allocated to Environmental and Separation.
(13) Mr. Hanzlik served as General Counsel, Chief Administrative Officer and
Secretary of the Company from January to April 1997.
(14) Represents the amount of Mr. Hanzlik's base salary allocated to the
Company. Mr. Hanzlik's total base salary for 1997 was $144,025. Certain
portions of such base salary were also allocated to Environmental and
Separation.
(15) Represents the amount of Mr. Hanzlik's annual incentive bonus allocated
to the Company. Mr. Hanzlik's total annual incentive bonus for 1997 was
$30,000. Certain portions of such annual incentive bonus were also
allocated to Environmental and Separation.
39
<PAGE>
STOCK OPTIONS
The following table sets forth certain information concerning options
granted during the year ended December 31, 1997 to the individuals listed in the
Summary Compensation Table pursuant to the Company's 1996 Stock Option Plan (the
"Plan"). The Company has no outstanding stock appreciation rights and granted no
stock appreciation rights during the year ended December 31, 1997.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------
Percent of Potential Realizable Value at
Number of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation for
Underlying Granted Exercise of Option Term
Options To Employees Base Price Expiration -----------------------------
Name Granted (#) In Fiscal Year(3) ($/Sh) Date 5% ($) 10% ($)
- ---------------------------- ------------ ----------------- ----------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth L. Adelman, Ph.D.... 150,000(1) 11.6% 6.69 05/31/07 -0- -0-
Michael D. Fullwood......... 125,000(1) 9.7% 6.69 05/31/07 -0- -0-
Rayburn Hanzlik............. 75,000(2) 5.8% 6.69 06/30/07 -0- -0-
</TABLE>
- -----------------------
(1) Options to purchase 150,000 and 125,000 shares of Common Stock were
granted to Dr. Adelman and Mr. Fullwood, respectively, in May 1997
pursuant to the Plan and are exercisable at the rate of 20% in each of
calendar year 1997 through 2001, inclusive, beginning in May 1997 and,
unless exercised, expire on May 31, 2007 (subject to prior termination
in accordance with the applicable stock option agreements). Upon
announcement of a Change in Control (pursuant to and as defined in the
Plan), such options will become immediately exercisable. Upon
consummation of a Change in Control, all unexercised options will
terminate.
(2) Options to purchase 75,000 shares of Common Stock were granted to Mr.
Hanzlik in June 1997 pursuant to the Plan and are exercisable at the
rate of 20% in each of calendar year 1997 through 2001, inclusive,
beginning in June 1997 and, unless exercised, expire on June 30, 2007
(subject to prior termination in accordance with the applicable stock
option agreements). Upon announcement of a Change in Control (pursuant
to and as defined in the Plan), such options will become immediately
exercisable. Upon consummation of a Change in Control, all unexercised
options will terminate.
(3) Percentages based on 1,295,000 stock options granted during the year
ended December 31, 1997. Such number does not include 275,000 stock
options granted to Dr. Adelman and Mr. Fullwood in May 1997, which were
rescinded in June 1997.
40
<PAGE>
The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the Plan at
December 31, 1997 by the individuals listed in the Summary Compensation Table.
Aggregated Option Exercises In Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number Of Value Of
Securities Unexercised
Underlying In-The-Money
Unexercised Options
Options At Fiscal Year-
Shares Value At Fiscal Year-End(#) End($)
Name Acquired On Realized Exercisable/ Exercisable/
Exercise (#) ($)(1) Unexercisable Unexercisable(2)
- ---------------------------- ------------ --------- --------------------- ----------------
<S> <C> <C> <C> <C>
Paul E. Hannesson........... -0- -0- 160,000/240,000 -0-/-0-
Kenneth L. Adelman, Ph.D.... -0- -0- 75,000/142,500 -0-/-0-
Michael D. Fullwood......... -0- -0- 25,000/100,000 -0-/-0-
Edwin L. Harper, Ph.D....... -0- -0- 162,375/-0- -0-/-0-
Rayburn Hanzlik............. -0- -0- 15,000/60,000 -0-/-0-
</TABLE>
- ------------------
(1) Represents the difference between the last reported sale price of the
Common Stock on December 31, 1997, and the exercise price of the option
multiplied by the applicable number of options exercised.
(2) Represents the difference between the exercise price and the closing price
on the date of exercise, multiplied by the number of shares acquired.
EMPLOYMENT AGREEMENTS
Paul E. Hannesson, the Company's Chairman of the Board, President and
Chief Executive Officer, entered into an employment agreement with Environmental
on 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 subsidiaries at the time, 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 certain of 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) 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 Separation 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.
41
<PAGE>
Kenneth L. Adelman, Ph.D., the Company's Executive Vice
President--Marketing and International Development, entered into an employment
agreement with the Company on May 7, 1997 for a term expiring on April 30, 2000.
Pursuant to such employment agreement, Dr. Adelman agreed to devote his business
and professional time and efforts to the business of the Company as its
Executive Vice President--Marketing and International Development. The
employment agreement provides that Dr. Adelman shall receive, among other
things, a fixed base salary at an annual rate of $250,000 for services rendered
to the Company. Pursuant to the employment agreement, Dr. Adelman received
options to purchase an aggregate of 150,000 shares of Common Stock of the
Company, exercisable in installments over a period of five years commencing on
the date of his employment agreement. Dr. Adelman also received options to
purchase 700,000 shares of common stock of Environmental, exercisable in
installments over a period of five years commencing on the date of his
employment agreement. Dr. Adelman is also eligible to receive incentive
compensation of up to $150,000 per year for achieving certain goals, but in no
event less than $100,000, regardless of whether such goals are attained.
Michael D. Fullwood, the Company's Senior Vice President, Chief
Financial and Administrative Officer, Secretary and General Counsel, entered
into an employment agreement with Environmental on May 7, 1997 for an initial
term expiring on April 30, 1999. Pursuant to such employment agreement, Mr.
Fullwood agreed to devote his business and professional time and efforts to the
business of Environmental as its Senior Vice President, Chief Financial and
Administrative Officer, Secretary and General Counsel, and to serve as a senior
executive officer of certain of Environmental's subsidiaries at the time,
including the Company. The employment agreement provides that Mr. Fullwood shall
receive, among other things, a base salary at an annual rate of $225,000 for
services rendered to Environmental and certain of its affiliates, including the
Company, which base salary shall be increased by not less than 5% per year
during the term of his agreement. Pursuant to the employment agreement, Mr.
Fullwood received options to purchase an aggregate of 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. Fullwood also
received options to purchase 125,000 shares of Common Stock of the Company and
67,500 shares of common stock of Separation, exercisable in installments over a
period of five years commencing on the date of his employment agreement. Mr.
Fullwood is also eligible to receive incentive compensation of up to $75,000 per
year for achieving certain goals, which incentive compensation shall be
increased by 5% per year during the term of his agreement.
All of the foregoing employment agreements require the full-time
services of the employees, subject to permitted service with
professional-related service organizations and other outside activities that do
not materially interfere with the individual's duties to the Company. The
agreements also contain covenants (a) restricting the employee from engaging in
any activities competitive with the business of the Company during the term of
such employment agreements and one year thereafter, (b) prohibiting the employee
from disclosure of confidential information regarding the Company, and (c)
confirming that all intellectual property developed by the employee and relating
to the business of the Company constitutes the sole property of the Company.
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, 1997 were Herbert A. Cohen (Chairman), David L. Mitchell, Kenneth
L. Adelman, Ph.D. and Edwin L. Harper, Ph.D. At December 31, 1997, the members
of the Compensation Committee were Messrs. Cohen (Chairman), Mitchell and
Harper. Dr. Adelman resigned as a member of the Compensation Committee effective
May 1, 1997, upon his appointment as the Company's Executive Vice
President--Marketing and International Development, and was not replaced. Dr.
Harper was appointed to the Compensation Committee on December 16, 1997. Messrs.
Cohen, Mitchell and Harper also constituted the Compensation, Stock Option and
Benefits Committee of Environmental, and Messrs. Mitchell and Harper also
constituted two-thirds of the Compensation, Stock Option and Benefits Committee
of Separation at December 31, 1997. Dr. Harper served as the President and Chief
Operating Officer of the Company and Environmental from November 1996 to April
1997, as Vice Chairman of the Company and Environmental from April to December
1997, and as the Chairman of the Board and Chief Executive Officer of Solution,
Separation and CFC Technologies from January to April 1997. Dr. Harper also
served as a consultant to the Company and its affiliates from May to December
1997. Dr. Harper resigned as an executive officer of, and as a consultant to,
the Company and each of its subsidiaries and affiliates effective upon his
appointment to the Compensation Committee on December 16, 1997, and resigned as
a director of the Company and each of its affiliates on March 13, 1998. Mr.
Mitchell has served as a consultant to the Company since July 15, 1997 and
receives compensation in the amount of $10,000 per month for services rendered
to the Company in such capacity.
42
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee was established in November 1996 and is
responsible for, among other things, establishing the compensation policies
applicable to executive officers of the Company. The Compensation Committee was
composed of Herbert A. Cohen (Chairman), David L. Mitchell and Edwin L. Harper,
Ph.D. at December 31, 1997, all of whom were non-employee directors of the
Company. Messrs. Cohen, Mitchell and Harper also constituted the Compensation,
Stock Option and Benefits Committee of Environmental, and Messrs. Mitchell and
Harper also constituted two-thirds of the Compensation, Stock Option and
Benefits Committee of Separation at December 31, 1997. Decisions on compensation
of the executives officers of Environmental and Separation were made by such
individuals in their capacities as members of the Compensation, Stock Option and
Benefits Committees of such companies. All decisions of the Compensation
Committee relating to the compensation of the Company's executive officers are
reviewed by, and are subject to the final approval of, the full Board of
Directors of the Company. Set forth below is a report prepared by Messrs. Cohen,
Mitchell and Harper, in their capacities as members of the Compensation
Committee at December 31, 1997, addressing the Company's compensation policies
for 1997 as they affected the Company's executive officers.
Overview and Philosophy
The Company's executive compensation program is designed to be linked
to corporate performance and returns to stockholders. Of particular importance
to the Company is its ability to grow and enhance its competitiveness for the
rest of the decade and beyond. Shorter-term performance, although scrutinized by
the Compensation Committee, stands behind the issue of furthering the Company's
strategic goals. To this end, the Company has developed an overall compensation
strategy and specific compensation plans that tie a significant portion of
executive compensation to the Company's success in meeting specified performance
goals.
The objectives of the Company's executive compensation program are to:
o attract, motivate and retain the highest quality executives;
o motivate them to achieve tactical and strategic objectives in a
manner consistent with the Company's corporate values; and
o link executive and stockholder interest through equity-based plans
and provide a compensation package that recognizes individual
contributions as well as overall business results.
To achieve these objectives, the Company's executive compensation
program is designed to:
o focus participants on high priority goals to increase stockholder
value;
o encourage behavior that exemplifies the Company's values relating to
customers, quality of performance, employees, integrity, teamwork
and good citizenship;
o assess performance based on results and pre-set goals that link the
business activities of each individual to the goals of the Company;
and
o increase stock ownership to promote a proprietary interest in the
success of the Company.
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Executive Officer Compensation
Each year the Compensation Committee conducts a full review of the
Company's executive compensation program. This review includes a comprehensive
evaluation of the competitiveness of the Company's compensation program and a
comparison of the Company's executive compensation to certain other public
companies which, in the view of the Compensation Committee, represent the
Company's most direct competitors for executive talent. It is the Compensation
Committee's policy to target overall compensation for executive officers of the
Company taking into account the levels of compensation paid for such positions
by such other public companies. A variety of other factors, however, including
position and time in position, experience, and both Company performance and
individual performance, will have an impact on individual compensation amounts.
The key elements of the Company's executive compensation program in
1997 consisted of base salary, annual incentive compensation and long-term
incentive compensation in the form of stock options. The Compensation
Committee's policies with respect to each of these elements, including the basis
for the compensation awarded to the Company's Chief Executive Officer, are
discussed below.
Base Salaries. Base salaries for executive officers are established by
evaluating, on an annual basis, the performance of such individuals (which
evaluation involves management's consideration of such factors as
responsibilities of the positions held, contribution toward achievement of the
Company's strategic plans, attainment of specific individual objectives and
interpersonal managerial skills), and by reference to the marketplace for
executive talent, including a comparison to base salaries for comparable
positions at other similar public companies.
In 1997, total compensation was paid to executives primarily based upon
the terms of their employment agreements with the Company, if any, and upon
individual performance and the extent to which the business plans for their
areas of responsibility were achieved or exceeded. On balance, performance goals
were substantially met or exceeded and therefore compensation was paid
accordingly.
Mr. Hannesson, the Chairman of the Board, President and Chief Executive
Officer of the Company and Environmental, and the Chairman of the Board and
Chief Executive Officer of Solution, Separation and CFC Technologies, receives
annual compensation based upon, among other things, the terms of his employment
agreement with Environmental. Pursuant to the terms of his employment agreement,
Mr. Hannesson is entitled to receive a base salary at an annual rate of not less
than $395,000 through December 31, 1997, not less than $434,500 through December
31, 1998 and not less than $477,950 through December 31, 1999 for services
rendered to Environmental and certain of its affiliates, including the Company.
The amount actually received by Mr. Hannesson each year as base salary
for services rendered to the Company and its affiliates is established by the
members of the Compensation Committee who, as set forth above, also constituted
the Compensation, Stock Option and Benefits Committee of Environmental at
December 31, 1997. In establishing Mr. Hannesson's base salary for 1997, the
Compensation Committee took into account the salaries of chief executive
officers at other similar public companies, future objectives and challenges,
and Mr. Hannesson's individual performance, contributions and leadership. The
Compensation Committee reviewed in detail Mr. Hannesson's achievement of his
1996 goals and his individual contributions to the Company and its affiliates.
The Compensation Committee concluded that he had achieved his 1996 goals and had
provided a leadership role in achieving the Company's and its affiliates'
strategic priorities for 1996. The Compensation Committee also considered Mr.
Hannesson's decisive management of operational and strategic issues, his drive
to reinforce a culture of innovation and his ability and dedication to enhance
the long-term value of the Company and its affiliates for their respective
stockholders. In making its salary decisions with respect to Mr. Hannesson, the
Compensation Committee exercised its discretion and judgement based on the above
factors, and no specific formula was applied to determine the weight of each
factor.
Mr. Hannesson's base salary increased from $310,627 for 1996 to
$395,000 for 1997, representing an increase of approximately 27%. Such base
salary was allocated among the Company, Environmental and Separation based upon
the amount of time and effort devoted by Mr. Hannesson to the respective
businesses of such companies. Consequently, the Company, Environmental and
Separation paid $250,256, $15,302 and $129,442, respectively, of such salary.
Mr. Hannesson also received an automobile allowance of $24,000 for 1997, and the
Company, Environmental and Applied paid $15,205, $930 and $7,865, respectively,
of such allowance.
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<PAGE>
Annual Incentive Bonus. Annual incentive bonuses for executive officers
are intended to reflect the Compensation Committee's belief that a significant
portion of the annual compensation of each executive officer should be
contingent upon the performance of the Company.
For 1997, annual incentive bonuses were paid to the individuals named
in the Summary Compensation Table and certain other officers and employees of
the Company in part based upon recommendations of senior executive officers of
the Company as to appropriate levels of incentive compensation. The Compensation
Committee exercised its discretion to determine the final value of each 1997
incentive award, which values were then reviewed and approved by the full Board
of Directors. The Compensation Committee assessed performance against goals and
leadership performance, with each of these two categories weighted equally. The
goal category included an evaluation of performance areas such as increase in
stockholder value, operations development and employee satisfaction. The
leadership category was evaluated based upon the Compensation Committee's
judgment of leadership performance, including factors such as innovation,
strategic vision, marketplace orientation, customer focus, collaboration and
managing change.
Pursuant to his employment agreement with Environmental, Mr. Hannesson
is eligible to receive incentive compensation of up to $225,000 per year for
achieving certain of the performance goals set forth above. For 1997, Mr.
Hannesson was awarded an incentive bonus of $100,000. Such bonus was allocated
among the Company, Environmental and Separation based upon the amount of time
and effort devoted by Mr. Hannesson to the respective businesses of such
companies. Consequently, the Company, Environmental and Separation paid $63,356,
$3,874 and $32,770, respectively, of such bonus.
Stock Options. The Compensation Committee has the power to grant stock
options under the Plan. With respect to executive officers, it has been the
Compensation Committee's practice to grant, on an annual basis, stock options
that vest at the rate of 20% upon grant and 20% in each calendar year thereafter
for four years, and that are exercisable over a ten-year period at exercise
prices per share set at the fair market value per share on the date of grant.
Generally, the executives must be employed by the Company at the time the
options vest in order to exercise the options and, upon announcement of a Change
in Control (pursuant to and as defined in the Plan), such options become
immediately exercisable. The Compensation Committee believes that stock option
grants provide an incentive that focuses the executives' attention on managing
the Company from the perspective of an owner with an equity stake in the
business. The Company's stock options are tied to the future performance of the
Company's stock and will provide value to the recipient only when the price of
the Company's stock increases above the option grant price.
A total of 1,295,000 stock options were granted pursuant to the Plan in
1997, none of which were granted to Mr. Hannesson and 350,000 of which were
granted (in the aggregate) to three other individuals named in the Summary
Compensation Table. Such number does not include 275,000 stock options granted
to Dr. Adelman and Mr. Fullwood in May 1997, which were rescinded in June 1997.
The number of stock options granted in 1997 were determined by reference to the
long-term compensation for comparable positions at other similar public
companies and based upon an assessment of individual performance.
Impact of Section 162(m) of the Internal Revenue Code
The Compensation Committee's policy is to structure compensation awards
for executive officers that will be consistent with the requirements of Section
162(m) of the U.S. Internal Revenue Code of 1986 (the "Code"). Section 162(m)
limits the Company's tax deduction to $1.0 million per year for certain
compensation paid in a given year to the Chief Executive Officer and the four
highest compensated executives other than the Chief Executive Officer named in
the Summary Compensation Table. According to the Code and corresponding
regulations, compensation that is based on attainment of pre-established,
objective performance goals and complies with certain other requirements will be
excluded from the $1.0 million deduction limitation. The Company's policy is to
structure compensation awards for covered executives that will be fully
deductible where doing so will further the purposes of the Company's executive
compensation program. However, the Compensation Committee also considers it
important to retain flexibility to design compensation programs that recognize a
full range of performance criteria important to the Company's success, even
where compensation payable under such programs may not be fully deductible. The
Company expects that all compensation payments in 1997 to the individuals listed
in the Summary Compensation Table will be fully deductible by the Company.
45
<PAGE>
Conclusion
The Compensation Committee believes that the quality of executive
leadership significantly affects the long-term performance of the Company and
that it is in the best interest of the stockholders to compensate fairly
executive leadership for achievement meeting or exceeding the high standards set
by the Compensation Committee, so long as there is a corresponding risk when
performance falls short of such standards. A primary goal of the Compensation
Committee is to relate compensation to corporate performance. Based on the
Company's performance in 1997, the Compensation Committee believes that the
Company's current executive compensation program meets such standards and has
contributed, and will continue to contribute, to the Company's and its
stockholders' long-term success.
COMPENSATION, STOCK OPTION AND BENEFITS COMMITTEE
Herbert A. Cohen (Chairman)
David L. Mitchell
Edwin L. Harper
The Report of the Compensation Committee on Executive Compensation
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Annual Report into any filing under the
Securities Act, or under the Exchange Act, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such acts.
46
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
ITEM 12. BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information, as of March 26,
1998, with respect to the beneficial ownership of Common Stock by each person
known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock of the Company. Unless otherwise indicated,
the owners have sole voting and investment power with respect to their
respective shares.
<TABLE>
<CAPTION>
Number of Shares Percentage of Outstanding
Name and Address of of Common Stock Shares of Common Stock
Beneficial Owner (1) Beneficially Owned (2) Beneficially Owned
- -------------------------------------- ---------------------- -------------------------
<S> <C> <C>
Commodore Environmental
Services, Inc....................... 9,823,702(3) 42.5%
Bentley J. Blum....................... 4,851,091(4) 21.0%
Paul E. Hannesson..................... 1,426,382(5) 6.2%
Mellon Bank Corporation (6)........... 1,994,000(7) 8.6%
Mellon Bank, N.A.(6).................. 1,994,000(7) 8.6%
The Dreyfus Corporation (6)........... 1,994,000(7) 8.6%
</TABLE>
- -------------------------
(1) The address of Commodore Environmental Services, Inc., Bentley J. Blum
and Paul E. Hannesson is 150 East 58th Street, Suite 3400, New York,
New York 10155. The address of Mellon Bank Corporation, Mellon Bank,
N.A. and The Dreyfus Corporation is c/o Mellon Bank Corporation, One
Mellon Bank Center, Pittsburgh, Pennsylvania 15258. Messrs. Blum and
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 Exchange Act as consisting
of sole or shared voting power (including the power to vote 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) Excludes warrants to purchase an aggregate of 10,514,000 shares of
Common Stock at exercise prices ranging from $4.50 per share to $10.00
per share. See "Market for Registrant's Common Equity and Related
Stockholder Matters--Recent Sales of Unregistered Securities" and
"Certain Relationships and Related Transactions."
(4) Represents Mr. Blum's indirect beneficial ownership of Common Stock
based upon his beneficial ownership of 28,479,737 shares and his
spouse's ownership of 2,000,000 shares of Environmental common stock,
representing together 49.4% of the outstanding shares of Environmental
common stock at March 26, 1998. 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.
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<PAGE>
(5) Consists of: (i) 240,000 shares of Common Stock underlying currently
exercisable stock options granted to Mr. Hannesson by the Company under
the Plan; and (ii) Mr. Hannesson's indirect beneficial ownership of
Common Stock based upon his ownership of an aggregate of (a) 2,650,000
shares of Environmental common stock owned by Suzanne Hannesson, the
spouse of Mr. Hannesson, (b) 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 and
(c) currently exercisable options to purchase 500,000 and 1,950,000
shares of Environmental common stock at $.53 per share and $0.84 per
share, respectively, representing collectively 12.1% of the outstanding
shares of Environmental common stock at March 26, 1998. 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, and
additional stock options to purchase 1,500,000 shares of Environmental
common stock at $0.84 per share, which vest and become exercisable
ratably on November 18 of each of 1998 through 2000. 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) The information set forth above with respect to Mellon Bank, N.A.,
Mellon Bank Corporation and The Dreyfus Corporation is based on
information provided in a Schedule 13G, dated January 28, 1998 (the
"Mellon Bank 13G"), furnished to the Company. According to the Mellon
Bank 13G, The Dreyfus Corporation is a subsidiary of Mellon Bank, N.A.
which, in turn, is a subsidiary of Mellon Bank Corporation. Mellon Bank
Corporation is reporting as a parent holding company in accordance with
Rule 13d-1(b)(1)(ii)(G) of the Exchange Act, Mellon Bank, N.A. is
reporting as a bank as defined in Section 3(a)(6) of the Exchange Act
in accordance with Rule 13d-1(b)(1)(ii)(B) of the Exchange Act, and The
Dreyfus Corporation is reporting as an investment advisor registered
under Section 203 of the Investment Advisers Act of 1940 in accordance
with Rule 13d-1(b)(1)(ii)(E) of the Exchange Act.
(7) According to the Mellon Bank 13G, the shares reported include all
shares held of record by Mellon Bank, N.A., as trustee of a benefit
plan, which have not been allocated to the individual accounts of
employee participants in such benefit plan.
48
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information, as of March 26,
1998, with respect to the beneficial ownership of the Common Stock of the
Company by each director, each individual listed in the Summary Compensation
Table and 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 Percentage of Outstanding
of Common Stock Shares of Common Stock
Name of Beneficial Owner Beneficially Owned(1) Beneficially Owned
- ------------------------- ---------------------- ------------------
<S> <C> <C>
Bentley J. Blum............................. 4,851,091(2) 21.0%
Paul E. Hannesson........................... 1,426,382(3) 6.2%
Ed L. Romero................................ 450,000 1.9%
Tom J. Fatjo, Jr............................ 289,800(4) 1.3%
Edwin L. Harper, Ph.D....................... 366,539(5) 1.6%
Kenneth L. Adelman, Ph.D.................... 188,396(6) *
Michael D. Fullwood......................... 81,729(7) *
Herbert A. Cohen............................ 84,183(8) *
David L. Mitchell........................... 84,183(8) *
Thomas E. Noel.............................. 100,000(9) *
Jeane J. Kirkpatrick, Ph.D.................. 22,500(10) *
Peter E. Harrod............................. 25,000(11) *
Rayburn Hanzlik............................. 15,000(12) *
All executive officers
and directors as
a group (13 persons)...................... 7,984,803 34.6%
</TABLE>
- ---------------------------
* Percentage ownership is less than 1%.
(1) As used herein, the term beneficial ownership with respect to a security
is defined by Rule 13d-3 under the Exchange Act as consisting of sole or
shared voting power (including the power to vote 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.
(2) Represents Mr. Blum's indirect beneficial ownership of Common Stock based
upon his beneficial ownership of 28,479,737 shares and his spouse's
ownership of 2,000,000 shares of Environmental common stock, representing
together 49.4% of the outstanding shares of Environmental common stock at
March 26, 1998. 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.
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<PAGE>
(3) Consists of: (i) 240,000 shares of Common Stock underlying currently
exercisable stock options granted to Mr. Hannesson by the Company under
the Plan; and (ii) Mr. Hannesson's indirect beneficial ownership of Common
Stock based upon his beneficial ownership of an aggregate of (a) 2,650,000
shares of Environmental common stock owned by Suzanne Hannesson, the
spouse of Mr. Hannesson, (b) 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 and (c)
currently exercisable options to purchase 500,000 and 1,950,000 shares of
Environmental common stock at $0.53 per share and $0.84 per share,
respectively, representing collectively 12.1% 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, and additional stock options to
purchase 1,500,000 shares of Environmental common stock at $0.84 per
share, which vest and become exercisable ratably on November 18 of each of
1998 through 2000. Mr. Hannesson disclaims any beneficial interest in the
shares of Environmental common stock owned by or for the benefit of his
spouse and children.
(4) Consists of: (i) 41,400 shares of Common Stock directly owned by Mr.
Fatjo; and (ii) 248,400 shares of Common Stock owned by First Financial
Alliance Partnership, Inc., in which trusts controlled by Mr. Fatjo own
20% of the capital stock. Does not include 124,200 shares of Common Stock
owned by Tom J. Fatjo III, the adult son of Mr. Fatjo. Mr. Fatjo disclaims
any beneficial interest in the shares of Common Stock owned by or for the
benefit of his son.
(5) Consists of: (i) 162,375 shares of Common Stock underlying currently
exercisable stock options granted to Dr. Harper by the Company under the
Plan; and (ii) Dr. Harper's indirect beneficial ownership of Common Stock
based upon his beneficial ownership of currently exercisable stock options
to purchase 1,310,000 shares of Environmental common stock.
(6) Consists of: (i) 127,500 shares of Common Stock underlying currently
exercisable stock options granted to Dr. Adelman by the Company under the
Plan; and (ii) Dr. Adelman's indirect beneficial ownership of Common Stock
based upon his beneficial ownership of currently exercisable stock options
to purchase 385,000 shares of Environmental common stock.
(7) Consists of: (i) 50,000 shares of Common Stock underlying currently
exercisable stock options granted to Mr. Fullwood by the Company under the
Plan; and (ii) Mr. Fullwood's indirect beneficial ownership of Common
Stock based upon his beneficial ownership of currently exercisable stock
options to purchase 200,000 shares of Environmental common stock.
(8) Consists of: (i) 67,500 shares of Common Stock underlying currently
exercisable stock options granted to each of Messrs. Cohen and Mitchell by
the Company under the Plan; and (ii) Messrs. Cohen's and Mitchell's
indirect beneficial ownership of Common Stock based upon their respective
beneficial ownership of currently exercisable stock options to purchase
105,000 shares of Environmental common stock.
(9) Represents shares of Common Stock underlying currently exercisable stock
options granted to Mr. Noel by the Company under the Plan.
(10) Represents shares of Common Stock underlying currently exercisable stock
options granted to Dr. Kirkpatrick by the Company under the Plan.
(11) Represents shares of Common Stock underlying currently exercisable stock
options granted to Mr. Harrod by the Company under the Plan.
(12) Represents shares of Common Stock underlying currently exercisable stock
options granted to Mr. Hanzlik by the Company under the Plan.
Messrs. Blum and Hannesson are brothers-in-law. Mr. Harrod is the
son-in-law of Mr. Romero.
50
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
Since its acquisition of the capital stock of Commodore Laboratories,
Inc. (the Company's predecessor) in 1993, Environmental has advanced an
aggregate of $8,925,426 to the Company, which has been used to finance the
development of SET, including salaries of personnel, equipment, facilities and
patent prosecution. These cash advances by Environmental were evidenced by
successive unsecured 8% promissory notes of the Company's predecessor, and, at
December 31,1995, by the Environmental Funding Note. Kraft Capital Corporation
("Kraft"), a corporation wholly owned by Bentley J. Blum, a principal
stockholder of Environmental and a director of the Company and of Environmental,
provided approximately $656,000 of such financing to Environmental.
Environmental provided additional advances to the Company of $978,896 for the
first fiscal quarter of 1996, which were repaid by the Company subsequent to its
obtaining a line of credit from a commercial bank in April 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources."
In March 1996, the Company was formed as a wholly-owned subsidiary of
Environmental. Prior to its IPO, in exchange for the issuance of 15,000,000
shares of Common Stock, Environmental contributed to the Company (i) all of the
assets and properties (including joint working proposals, quotations and bids in
respect to projects and contracts awarded for feasibility studies), subject to
all of the liabilities, of its operating divisions relating to SET and the
exploitation of the SET technology and processes in all commercial and
governmental applications; (ii) all of the outstanding shares of the capital
stock of each of Commodore Laboratories, Inc., Commodore Remediation
Technologies, Inc., Commodore Government Environmental Technologies, Inc.,
Commodore Technologies, Inc. and Sandpiper Properties, Inc. (except for a 9.95%
minority interest in Commodore Laboratories, Inc. which at the time was held by
Albert E. Abel); and (iii) a portion of the Environmental Funding Note in the
amount of $3.0 million.
In April 1996, Bentley J. Blum personally guaranteed a $2.0 million
line of credit for the Company from a commercial bank. The initial borrowings
under the line of credit, in the approximate amount of $1.0 million, were
utilized to repay advances made by Environmental to the Company in 1996, and
Environmental, in turn, utilized such funds to repay Kraft the funds provided by
Kraft to Environmental for purposes of the advances to the Company. The Company
applied $2.0 million of the net proceeds of its IPO to repay the line of credit,
and Mr. Blum's guarantee was released at such time. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Upon completion of the IPO in June 1996, Environmental acquired from
Albert E. Abel the remaining 9.95% of the outstanding shares of common stock of
Commodore Laboratories, Inc. and contributed such shares to the Company for no
additional consideration. To acquire the remaining shares of Commodore
Laboratories, Inc., Environmental paid Mr. Abel the sum of $750,000 in cash, and
issued a ten-year, 8% promissory note to Mr. Abel in the principal amount of
$2,250,000, payable as to interest only until the maturity of the note on the
tenth anniversary of the date of issuance. Simultaneously, the Company settled
all outstanding obligations for accrued compensation payable to Mr. Abel and for
amounts receivable by the Company from Mr. Abel, and the net payment to Mr. Abel
arising therefrom approximated $120,000. The Company paid such amount to Mr.
Abel from the proceeds of its IPO.
In October 1996, the Company acquired all of the outstanding shares of
capital stock of Advanced Sciences. Advanced Sciences, together with its
subsidiaries, provides a full range of environmental and technical services,
including identification, investigation, remediation and management of hazardous
and mixed waste sites, to government agencies, including the DOD and DOE, and to
private companies located in the United States and abroad. In consideration for
all of the outstanding shares of capital stock of Advanced Sciences, the former
shareholders of Advanced Sciences received an aggregate of 450,000 shares of
Common Stock. Simultaneously, the Company also acquired of all of the
outstanding shares of capital stock of ASE. ASE, a newly formed entity with no
history of operations, had an option to purchase all of the outstanding capital
stock of Advanced Sciences and was acquired by the Company for the purpose of
enabling the Company to effect its acquisition of Advanced Sciences. The former
shareholders of ASE received, in consideration for all of the outstanding shares
of capital stock of ASE, an aggregate of 450,000 shares of Company Common Stock.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
51
<PAGE>
In December 1996, the Company transferred certain of its operating
assets related to its SET technology to Solution, subject to certain liabilities
related to such assets, in exchange for 100 shares of common stock of Solution,
representing all of the issued and outstanding shares of capital stock of
Solution. Solution agreed to assume all of the net assets of the Company
relating to its SET technology at December 1, 1996, which assets had an
aggregate value of approximately $4.0 million at such date, and all known or
unknown contingent or unliquidated liabilities of and claims against the Company
and its subsidiaries to the extent they relate to or arise out of the
transferred assets. The Company retained, among other things, (a) all temporary
cash investments of the Company at December 1, 1996, aggregating approximately
$14.1 million, and (b) the principal executive offices and related assets of the
Company which, at the time, were located in McLean, Virginia. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
In December 1996, as part of a corporate restructuring to consolidate
all of its current environmental technology businesses within the Company,
Environmental transferred to the Company all of the capital stock of Separation
and CFC Technologies. In addition, Environmental assigned to the Company notes
aggregating $976,200 at December 2, 1996, representing advances previously made
by Environmental to Separation. Such advances have been capitalized by the
Company as its capital contribution to Separation. In consideration for such
transfers, the Company paid Environmental $3.0 million in cash and issued to
Environmental a warrant expiring December 2, 2003 to purchase 7,500,000 shares
of the Company's Common Stock at an exercise price of $15.00 per share, valued
at $2.4 million. Such warrant was subsequently amended to, among other things,
reduce the exercise price thereof to $10.00 per share. See "--February 1998
Intercompany Note" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
SERVICES AGREEMENT
In September 1997, the Company, Environmental, Separation, 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, the Company acts
as the coordinator of billings and payments for Services on behalf of itself and
the other Affiliated Parties.
TRANSACTIONS WITH LANXIDE
In August 1996, the Company loaned $1.5 million to LPM, a wholly-owned
subsidiary of Lanxide, evidenced by the LPM Note. Lanxide, which specializes in
the manufacture of ceramic bonding and refractory materials, is related to the
Company by significant common beneficial ownership. The LPM Note is
collateralized by the assets of LPM and guaranteed by Lanxide. The LPM Note
became due on February 28, 1998. In March 1998, the Company transferred the LPM
Note to Environmental, together with $500,000 in cash, as partial prepayment of
the $4.0 million unsecured loan from Environmental to the Company in September
1997. See "--September 1997 Intercompany Convertible Note," "Market for
Registrant's Common Equity and Related Stockholder Matters--Recent Sales of
Unregistered Securities--September 1997 Intercompany Convertible Note" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
52
<PAGE>
SALE OF COMPANY COMMON STOCK BY ENVIRONMENTAL
In February 1998, Environmental sold (i) 1,381,692 shares of Common
Stock of the Company and (ii) three-year warrants to purchase an aggregate of
150,000 shares of Company Common Stock at an exercise price equal to $6.00 per
share, for an aggregate purchase price of $6.0 million (the "First Tranche
Sale") in a private placement (the "Environmental Private Placement") to certain
"accredited investors" as defined in Rule 501 of the Securities Act. After
deduction of fees and transaction costs associated with the First Tranche Sale
totaling approximately $550,000, Environmental received aggregate net proceeds
of approximately $5,450,000 from the First Tranche Sale. The shares of Company
Common Stock issued and to be issued to the investors in connection with the
Environmental Private Placement have been and will be issued from the account of
Environmental, which, immediately prior to the First Tranche Sale, owned
approximately 52% of the outstanding shares of Company Common Stock. As of March
26, 1998, Environmental owned approximately 43% of the outstanding shares of
Company Common Stock.
Pursuant to the terms of the Environmental Private Placement,
Environmental may be required to issue up to a maximum of 1,618,308 additional
shares of Company Common Stock to the investors, for no additional
consideration, in the event that 90% of the average closing bid price of the
Common Stock for a certain period of time is less than the $4.3425 per share
purchase price of the Common Stock sold in the First Tranche Sale. Environmental
will, for a certain period of time, have the right and option (but not the
obligation) to require the investors to purchase (i) an aggregate amount of
additional shares of Company Common Stock equal to 4,000,000 divided by 90% of
the average closing price per share of the Common Stock for the five trading
days immediately prior to the closing date of such sale and (ii) warrants to
purchase an aggregate of 100,000 shares of Company Common Stock at an exercise
price per share equal to the greater of $6.00 or 125% of the per share purchase
price of the shares of Common Stock sold pursuant to (i) above, for an aggregate
purchase price of $4.0 million (the "Second Tranche Sale"). As in the case of
the First Tranche Sale, Environmental may be required to issue additional shares
of Company Common Stock to the investors in connection with the Second Tranche
Sale, for no additional consideration, in the event that 90% of the average
closing bid price of the Common Stock for a certain period of time is less than
the per share purchase price of the Common Stock sold in the Second Tranche
Sale.
Pursuant to the terms of the Environmental Private Placement, if during
a certain period of time Environmental sells, or the Company issues, any shares
of Common Stock ("First Future Shares") at a price per share that is less than
the per share purchase price of the Common Stock sold in the First Tranche Sale
or Environmental sells, or the Company issues, any shares of Common Stock
("Second Future Shares") at a price per share that is less than the per share
purchase price of the Common Stock sold in the Second Tranche Sale,
Environmental will issue to the investors, for no additional consideration, a
number of additional shares of Company Common Stock equal to (a) with respect to
First Future Shares, an amount equal to the difference between (i) 6,000,000
divided by the price at which the First Future Shares were sold or issued and
(ii) 1,381,692, and (b) with respect to Second Future Shares, an amount equal to
the difference between (i) 4,000,000 divided by the price at which the Second
Future Shares were sold or issued and (ii) the amount equal to the number of
shares of Common Stock sold in the Second Tranche Sale. Notwithstanding the
foregoing, the terms "First Future Shares" and "Second Future Shares" do not
include any shares of Common Stock which may be issued in the future upon
conversion or exercise of, or pursuant to the terms of any agreement entered
into by the Company or Environmental in respect of, securities of the Company
and/or Environmental which have been issued prior to February 9, 1998.
The Company has agreed to file registration statements (the
"Registration Statements") on Form S-3, or other applicable form of registration
statement, under the Securities Act covering all of the shares of Common Stock
that have been and may be issued to the investors in the Environmental Private
Placement, and to keep such Registration Statements continuously effective under
the Securities Act for a period of two years after their respective effective
dates or such earlier date when all shares covered by the Registration
Statements have been sold or may be sold without volume restrictions under the
Securities Act (the "Effective Period").
53
<PAGE>
FEBRUARY 1998 INTERCOMPANY NOTE
Upon receipt of the net proceeds of the Environmental Private
Placement, Environmental provided a $5,450,000 unsecured loan to the Company,
evidenced by the Intercompany Note. Pursuant to the terms of the Intercompany
Note, interest on the unpaid principal balance of the Intercompany Note is
payable at the rate of 8% per annum semiannually in cash. The unpaid principal
amount of the Intercompany Note is due and payable, together with accrued and
unpaid interest, on the earlier to occur of (a) December 31, 1999, or (b)
consummation of any public offering or private placement (other than the
Environmental Private Placement) of securities of the Company with net proceeds
aggregating in excess of $6.0 million, other than in respect of working capital
financing or secured financing of assets received by the Company in the ordinary
course of business from any bank or other lending institution, provided that if
such funds are raised in a private placement during the period commencing on
February 9, 1998 and ending on the last day of the Effective Period, then the
Intercompany Note will not be payable unless a Registration Statement has been
effective for 75 consecutive days and is effective on the date of such
repayment. The Company will use the net proceeds of the loan solely for working
capital and general corporate purposes and not for the satisfaction of any
portion of Company debt or to redeem any Company equity or equity-equivalent
securities. See "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities--February 1998 Intercompany
Note" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
In connection with the loan, the Company amended and restated in its
entirety a five-year warrant to purchase 7,500,000 shares of Common Stock issued
to Environmental on December 2, 1996 to, among other things, reduce the exercise
price of the warrant from $15.00 per share to $10.00 per share. In addition, the
Company issued to Environmental an additional five-year warrant to purchase
1,500,000 shares of Common Stock at an exercise price of $10.00 per share. See
"Market for Registrant's Common Equity and Related Stockholder Matters--Recent
Sales of Unregistered Securities--February 1998 Intercompany Note."
SEPTEMBER 1997 INTERCOMPANY CONVERTIBLE NOTE
In September 1997, Environmental provided a $4.0 million unsecured
loan to the Company, evidenced by the Convertible Note. Pursuant to the terms of
the Convertible Note, the Company is obligated to pay Environmental interest
only at the rate of 8% per annum, payable quarterly. Unless converted into
Common Stock at any time, the unpaid principal amount of the Convertible Note is
due and payable, together with accrued and unpaid interest, on August 31, 2002.
Payment of principal and accrued interest under the Convertible Note is
subordinated to all other indebtedness for money borrowed of the Company.
Environmental has the right to convert the Convertible Note into shares of
Common Stock at a conversion price of $3.89 per share. Such conversion price was
fixed at approximately 85% of the five day average closing bid price of Common
Stock ($4.575 per share) prior to August 22, 1997, the date that the executive
committees of the respective boards of directors of the Company and
Environmental authorized such loan. In connection with the $4.0 million loan,
the Company issued Environmental a five-year warrant to purchase 1,000,000
shares of Common Stock at an exercise price of $5.0325 per share (approximately
110% of the $4.575 five day average closing bid price of Common Stock prior to
August 22, 1997).
In March 1998, the Company prepaid $2.0 million of the Convertible Note
by (i) paying Environmental the sum of $500,000 in cash and (ii) transferring to
Environmental the LPM Note. To induce Environmental to accept the Company's
prepayment of $2.0 million of the Convertible Note (and thereby give up the
right to convert $2.0 million of the Convertible Note into Common Stock), the
Company issued to Environmental an additional warrant to purchase up to 514,000
shares of Common Stock at an exercise price of $4.50 per share. Such exercise
price was fixed at approximately 110% of the closing sale price of the Common
Stock on February 20, 1998, the trading day immediately prior to the date the
Board of Directors of the Company approved such prepayment. The estimated fair
value of such warrant is approximately $340,000. See "--Transactions with
Lanxide," "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities--September 1997 Intercompany
Convertible Note" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
54
<PAGE>
SALE OF SERIES D PREFERRED STOCK BY ENVIRONMENTAL
In May and August 1997, Environmental sold an aggregate of 88,000
shares of its 7% Series D Convertible Preferred Stock, par value $0.01 per
share, with a liquidation preference of $100 per share (the "Series D Preferred
Stock"), for an aggregate purchase price of approximately $7.8 million. The
Series D Preferred Stock is convertible into shares of the Company's Common
Stock held by Environmental, at a conversion price equal to 85% of the lower of
(a) the average of the low prices, or (b) the average of the closing bid prices
of the Common Stock of the Company for the previous five business days ending on
the day prior to conversion (the "Average Closing Bid Price"). The conversion
price of the Series D Preferred Stock will be equal to certain amounts set forth
in the Certificate of Designation, Rights and Preferences for the Series D
Preferred Stock if the Average Closing Bid Price of the Common Stock for any
consecutive 30 days is equal to or less than $2.00, provided that in no event
will the conversion price of the Series D Preferred Stock be less than $1.50.
The purchasers of the Series D Preferred Stock also received five-year
warrants to purchase an aggregate of 1,175,000 shares of the Company's Common
Stock held by Environmental at exercise prices ranging from $5.15 per share to
$7.14 per share. Such exercise prices are (in addition to customary
anti-dilution adjustments) subject to reset on August 18, 1998 to an exercise
price equal to the lesser of (i) the exercise price in effect immediately prior
to August 18, 1998, or (ii) 110% of the closing bid price of the Common Stock on
August 17, 1998. In addition, if the Common Stock trades at less than 50% of the
August 17, 1998 closing bid price for any 10 consecutive trading days, the
exercise price is subject to further reset (on one occasion only) to 50% of such
August 17, 1998 closing bid price. In addition, affiliates of the finder
received warrants to purchase an aggregate of 85,000 shares of Common Stock from
Environmental at exercise prices ranging from $5.15 per share to $7.14 per
share. The Company has an effective registration statement on file with the
Commission covering the shares of Common Stock into which the Series D Preferred
Stock are convertible, as well as the 1,260,000 shares of Common Stock
transferable by Environmental upon exercise of the foregoing warrants.
LICENSE OF SET TECHNOLOGY
As a result of its acquisition of the capital stock of Commodore Labs,
the Company acquired all patents, discoveries, technology and other intellectual
property in connection with the SET process which it later transferred to
Solution effective December 1, 1996. Environmental licenses from Solution the
exclusive worldwide right with the right to sublicense, to make, use, sell and
exploit, itself or jointly with other third parties, for the life of all patents
now or hereafter owned by Solution, the SET process and all related technology
underlying such patents and intellectual property in all domestic and
international commercial and industrial applications, in connection with the
destruction of CFCs and other ozone-depleting substances (the "CFC Business");
provided that such license expressly limits the rights of the licensee(s) and
others who may be sub-licensees or users of the Company's patents and
technologies to the CFC Business.
CFC TECHNOLOGY AND SUPPORT AGREEMENT
The Company has entered into a five-year technology and technical
support agreement with Environmental and CFC Technologies. Pursuant to such
agreement, the Company will provide certain research and development, equipment
engineering and technical support to enable Environmental and CFC Technologies
to exploit the CFC Business. Under such agreement, the Company will provide
Environmental and CFC Technologies the services of certain Company personnel and
equipment. The Company will charge CFC Technologies and Environmental a fee
equal to the sum of (a) the actual costs of all materials and equipment utilized
in connection with such services; and (b) an hourly rate allocable to the
services rendered by all Company personnel which shall be equal to 120% of the
average hourly rate of compensation then payable by the Company to such persons
(based on a 35-hour work week). Under the terms of the technology and technical
services agreement, in no event will the employees of the Company be required to
expend in excess of 25% of their business and professional time in any 90-day
period in rendering services to Environmental or CFC Technologies, without the
majority approval or consent of Herbert A. Cohen and David L. Mitchell, or such
other members of the Board of Directors of the Company not otherwise affiliated
with or employed by Environmental, the Company or any of their respective
subsidiaries.
55
<PAGE>
FUTURE TRANSACTIONS
In June 1996, the Company's Board of Directors adopted a policy whereby
any future transactions between the Company and any of its subsidiaries,
affiliates, officers, directors and 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 non-management directors.
56
<PAGE>
PART IV
EXHIBITS, FINANCIAL STATEMENT
ITEM 14. SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Financial Statements.
Report of Independent Accountants................................................. F-1
Independent Auditor's Report...................................................... F-1A
Consolidated Balance Sheet as of December 31, 1996 and 1997....................... F-2
Consolidated Statement of Operations for the years ended
December 31, 1995, 1996 and 1997................................................ F-3
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997.......................................... F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1996 and 1997................................................ F-5
Notes to Consolidated Financial Statements........................................ F-6
</TABLE>
All financial statement schedules for which provision is made in
the applicable accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable, and,
therefore, have been omitted.
57
<PAGE>
<TABLE>
<CAPTION>
Exhibits.
Exhibit No. Description
----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement between the Company and National Securities Corporation, as Representative of
the several Underwriters listed therein (the "Representative"). (1)
3.1 Certificate of Incorporation of the Company. (1)
3.2 By-Laws of the Company. (1)
4.1 Specimen Common Stock Certificate. (3)
4.2 Form of Warrant Agreement between the Company and The Bank of New York. (1)
4.3 Specimen Warrant Certificate. (1)
4.4 Form of Representative's Warrant Agreement between the Company and the Representative, including form of
Representative's Warrant therein. (1)
4.5 Registration Rights Agreement, dated September 27, 1996, among the Company, CXI-ASI Acquisition Corp., and
certain stockholders. (5)
4.6 Registration Rights Agreement, dated September 27, 1996, among the Company, CXI-ASE Acquisition Corp., and
certain stockholders. (5)
4.7 Series A Convertible Preferred Stock Purchase Agreement, dated as of August 15, 1997, among the Company and
the Series A Preferred Stock purchasers listed therein. (9)
4.8 Certificate of Designations, Rights and Preferences of Series A Preferred Stock. (9)
4.9 Registration Rights Agreement between the Company and the Series A Preferred Stock purchasers. (9)
4.10 Warrant to purchase 1,000,000 shares of Common Stock issued to Environmental. (9)
4.11 Common Stock Purchase Agreements, dated as of September 26, 1997, by and between the Company and each of
certain private investors listed therein. (9)
4.12 Warrant to purchase 7,500,000 shares of Common Stock issued to Environmental. (10)
4.13 Warrant to purchase 1,500,000 shares of Common Stock issued to Environmental. (10)
4.14 Registration Rights Agreement, dated as of February 9, 1998, among the Company, Environmental and certain
private investors listed therein. (10)
10.1 Employment Agreement, dated June 1, 1995, between Environmental and Neil L. Drobny, and conditional
assignment thereof by Environmental to the Company, dated March 29, 1996. (1)
10.2 Employment Agreement, dated August 31, 1995, between Environmental and Carl O. Magnell, and conditional
assignment thereof by Environmental to the Company, dated March 29, 1996. (1)
10.3 Form of Employment Agreement, dated July 28, 1993, between Commodore Laboratories, Inc. and Albert E. Abel,
with conditional assignment thereof by Commodore Labs to the Company, dated March 29, 1996. (1)
10.4 Employment Agreement, dated October 3, 1994, between Environmental and Vincent Valeri, and conditional
assignment thereof by Environmental to the Company, dated March 29, 1996. (1)
10.5 Non-Competition, Non-Disclosure and Intellectual Property Agreement, dated March 29, 1996, between the
Company and Gerry D. Getman. (1)
10.6 Employment Agreement, dated as of March 29, 1996. between the Company and Paul E. Hannesson. (2)
10.7 1996 Stock Option Plan of the Company. (1)
10.8 Executive Bonus Plan of the Company. (1)
10.9 Nationwide Permit for PCB Disposal issued by the EPA to Commodore Remediation Technologies, Inc. (1)
10.10 Memorandum of Understanding, dated April 9, 1996, between Teledyne Brown Engineering (a Division of Teledyne
Industries, Inc.) and Commodore Government Environmental Technologies, Inc. (1)
10.11 Memorandum of Understanding. dated March 28, 1996, between Sharp Associates, Inc. and
the Company. (1)
10.12 Memorandum of Understanding, dated April 12, 1996, between Sverdrup Environmental, Inc. and the Company. (1)
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.13 Credit Facility Agreement and Promissory Note, dated April 5, 1996, between the Company and Chemical Bank,
and Guaranty and General Loan and Collateral Agreement, each dated April 5, 1996, between Bentley J. Blum and
Chemical Bank. (1)
10.14 Demand Promissory Note, dated December 31, 1995, in the principal amount of $8,925,426, issued by Commodore
Labs to Environmental. (1)
10.15 Form of $4,000,000 Promissory Note issued by the Company to Environmental, in partial replacement of the
$8,925,426 Demand Promissory Note, dated December 31, 1995, issued by Commodore Labs to Environmental. (1)
10.16 Bond Purchase Agreement, dated December 3, 1993, by and between Environmental and Credit Agricole Deux
Sevres. (1)
10.17 License Agreement, dated as of March 29, 1996, by and between the Company and Environmental, relating to the
use of SET in the CFC Business. (2)
10.18 Form of Technology and Technical Services Agreement entered into between the Company and CFC Technologies.(2)
10.19 Voting Agreement, dated June 28, 1996, among Environmental, Bentley J. Blum, the Company and National
Securities Corporation. (4)
10.20 Agreement and Plan of Merger, dated September 27, 1996, by and between the Company, CXI-ASI Acquisition Corp.
and Advanced Sciences, Inc. (5)
10.21 Agreement and Plan of Merger, dated September 27, 1996, by and between the Company CXI-ASE Acquisition Corp.
and A.S. Environmental, Inc. (5)
10.22 Agreement of Transfer, dated as of December 1, 1996 by and between the Company and Advanced Sciences. (11)
10.23 Bill of Sale, dated as of December 1, 1996, by and between the Company and Commodore Advanced Sciences, Inc.
(11)
10.24 Stock Purchase Agreement, dated as of December 2, 1996, between the Company and Environmental. (6)
10.25 Employment Agreement, dated as of October 31, 1996, between Environmental and Edwin L. Harper. (7)
10.26 Employment Agreement, dated as of October 1, 1996, between the Company and Thomas E. Noel. (5)
10.27 Form of Employment Agreement between Environmental and Paul E. Hannesson. (8)
10.28 8% convertible note for $4.0 million from the Company to Environmental. (9)
10.29 8% non-convertible note for $5,450,000 from the Company to Environmental. (10)
*10.30 Teaming Agreement, dated March 18, 1997, by and between ICF Kaiser Engineers, Inc. and Advanced Sciences.
*10.31 Memorandum of Understanding between Lockheed Martin Advanced Environmental Systems, Inc. and Advanced
Sciences.
*10.32 Services Agreement, dated as of September 1, 1997, by and among the Company, Environmental, Separation,
Advanced Sciences and other affiliated companies named therein.
16.1 Letter regarding change in certifying accountant. (12)
*22.1 Subsidiaries of the Company.
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith.
59
<PAGE>
(1) Incorporated by reference and filed as Exhibit to Registrant's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 2, 1996 (File No. 333-4396).
(2) Incorporated by reference and filed as Exhibit to Registrant's Amendment
No. 1 to Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on June 11, 1996 (File No. 333-4396).
(3) Incorporated by reference and filed as Exhibit to Registrant's Amendment
No. 2 to Registration Amendment No.2 to Registration Statement on Form S-1
filed with the Securities and Exchange Commission on June 25, 1996 (File
No. 333-4396).
(4) Incorporated by reference and filed as Exhibit to Registrant's
Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed
with the Securities and Exchange Commission on July 1, 1996 (File No.
333-4396).
(5) Incorporated by reference and filed as Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
October 15, 1996 (File No. 1-11871).
(6) Incorporated by reference and filed as Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 27, 1997 (File No. 1-11871).
(7) Incorporated by reference and filed as Exhibit to Amendment No. 3 to
Registration Statement on Form S-1 of Separation filed with the Securities
and Exchange Commission on January 23, 1997 (File No. 333-11813).
(8) Incorporated by reference and filed as Exhibit to Annual Report on Form
10-K for the fiscal year ended December 31, 1996 of Environmental filed
with the Securities and Exchange Commission on April 15, 1997 (File No.
0-10054).
(9) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
October 3, 1997 (File No. 1-11871).
(10) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
February 23, 1998 (File No. 1-11871).
(11) Incorporated by reference and filed as an Exhibit to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 filed with
the Securities and Exchange Commission on April 15, 1997 (File No.
1-11871).
(12) Incorporated by reference and filed as on Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
December 24, 1996 (File No. 1-11871).
60
<PAGE>
Reports on Form 8-K:
On October 3, 1997, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K, dated August 15, 1997, with respect to
the Company's private placement sale of Series A Preferred Stock in August 1997,
Environmental's $4.0 million loan to the Company in September 1997, and the
Company's private placement sale of 600,000 shares of Common Stock in October
1997. Such transactions were reported under Item 5 of Form 8-K and no financial
statements were included in such report.
61
<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 30, 1998 COMMODORE APPLIED TECHNOLOGIES, INC.
By:/S/ Paul E. Hannesson
--------------------------------------
Paul E. Hannesson
Chairman of the Board,
President 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>
<CAPTION>
<S> <C> <C>
/S/ Paul E. Hannesson
- ------------------------------ Chairman of the Board, President March 30, 1998
Paul E. Hannesson and Chief Executive Officer (Principal
Executive Officer)
/S/ Michael D. Fullwood
- ------------------------------ Senior Vice President, Chief Financial March 30, 1998
Michael D. Fullwood and Administrative Officer, Secretary
and General Counsel
(Principal Financial Officer)
/S/ Paul E. Hannesson
- ------------------------------ Chairman of the Board March 30, 1998
Paul E. Hannesson
/S/ Tom J. Fatjo, Jr.
- ------------------------------ Director March 30, 1998
Tom J. Fatjo, Jr.
/S/ Thomas E. Noel
- ------------------------------ Director March 30, 1998
Thomas E. Noel
/S/ Kenneth L. Adelman
- ------------------------------ Director March 30, 1998
Kenneth L. Adelman, Ph.D.
/S/ Bentley J. Blum
- ------------------------------ Director March 30, 1998
Bentley J. Blum
/S/ Herbert A. Cohen
- ------------------------------ Director March 30, 1998
Herbert A. Cohen
/S/ Jeane J. Kirkpatrick
- ------------------------------ Director March 30, 1998
Jeane J. Kirkpatrick, Ph.D.
/S/ David L. Mitchell
- ------------------------------ Director March 30, 1998
David L. Mitchell
/S/ Ed L. Romero
- ------------------------------ Director March 30, 1998
Ed L. Romero
/S/ William R. Toller
- ------------------------------ Director March 30, 1998
William R. Toller
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Financial Statements.
Report of Independent Accountants................................................. F-1
Independent Auditor's Report...................................................... F-1A
Consolidated Balance Sheet as of December 31, 1996 and 1997....................... F-2
Consolidated Statement of Operations for the years ended
December 31, 1995, 1996 and 1997......................................... F-3
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997................................... F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1996 and 1997......................................... F-5
Notes to Consolidated Financial Statements........................................ F-6
</TABLE>
All financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and, therefore,
have been omitted.
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Commodore Applied Technologies, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Commodore
Applied Technologies, Inc. and its subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended, 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 provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Philadelphia, Pennsylvania
March 27, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
of Commodore Applied Technologies, Inc.
We have audited the accompanying consolidated statements of
operations, stockholders' deficit, and cash flows of Commodore Applied
Technologies, Inc., and subsidiaries, (a development stage company) for the year
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express, an
opinion on these consolidated 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 consolidated financial statements referred to
above present fairly, in all material respects, the results of operations and
cash flows of Commodore Applied Technologies, Inc., and subsidiaries (a
development stage company) for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Tanner + Co.
Salt Lake City, Utah
January 19, 1996
F-1A
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1997 and 1996
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 2) $13,151 $ 12,076
Accounts receivable, net (Notes 2 and 6) 3,064 7,149
Notes and advances to related parties (Note 13) 866 1,527
Inventory 360 -
Restricted cash and certificates of deposit (Note 2) 260 670
Prepaid assets and other current receivables 403 581
------- --------
Total current assets 18,104 22,003
Other receivables 18 63
Investments and advances (Note 7) 554 658
Property and equipment, net (Notes 2 and 8) 2,498 2,044
Other assets (Notes 2 and 5)
Patents and completed technology, net of accumulated amortization of
$238 and $140, respectively 1,150 1,004
Goodwill, net of accumulated amortization of $320 and $113, respectively 7,353 7,560
Other 19 124
-------- --------
8,522 8,688
-------- --------
Total Assets $ 29,696 $ 33,456
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,930 $ 3,804
Due to related parties 55 252
Current portion of long term debt 27 89
Line of credit (Note 10) 1,199 7,042
Other accrued liabilities (Note 9) 3,723 1,978
------- -------
Total current liabilities 6,934 13,165
Long term debt 19 29
Notes payable to related parties (Notes 5 and 13) 3,568 186
------- -------
Total Liabilities 10,521 13,380
Minority interest in subsidiary 6,645 -
Commitments and contingencies (Note 14) - -
Redeemable Preferred Stock
Series A Preferred Stock, par value $0.001 per share, 7% cumulative
dividends 80,000 shares authorized, 9,600 outstanding,
$986 redemption amount 876 -
Stockholders' Equity:
Common Stock, par value $0.001 per share, 75,000,000 and 50,000,000
shares authorized, 22,766,334 and 21,650,000 issued and outstanding,
respectively 23 22
Additional paid-in capital 41,541 34,270
Accumulated deficit (29,910) (14,216)
-------- --------
Total Stockholders' Equity 11,654 20,076
-------- --------
Total Liabilities and Stockholders' Equity $ 29,696 $ 33,456
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-2
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended December 31, 1997, 1996 and 1995
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Contract revenues (Note 2) $ 19,493 $ 5,123 $ -
Costs and expenses:
Cost of sales 16,325 4,136 -
Research and development (Note 2) 3,074 2,022 1,815
General and administrative 12,196 3,412 1,773
Depreciation and amortization (Note 2) 1,282 561 -
Minority interest (82) - -
--------- --------- ---------
Total costs and expenses 32,795 10,131 3,588
--------- --------- ---------
Loss before interest, taxes and equity in
losses of unconsolidated subsidiary (13,302) (5,008) (3,588)
Interest income 745 477 6
Interest expense (1,310) (617) (274)
Income tax expense (Note 11) - - -
---------- -------- --------
Net loss before affiliate losses (13,867) (5,148) (3,856)
Equity in losses of unconsolidated subsidiary (1,827) (495) -
---------- -------- --------
Net loss $ (15,694) $ (5,643) $ (3,856)
========== ======== ========
Net loss per share - basic and diluted (Note 3) $ (0.73) $ (0.31) $ (0.26)
========== ======== ========
Number of weighted average shares outstanding (in thousands) 21,844 18,100 15,000
========== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-3
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
(Commodore Labs, Inc.) Common Stock
----------------------- ------------------------
Shares Amount Shares Amount
-------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 19,372 $ 19 147,012 $ 2
Net loss - - - -
------ --------- ----------- ---------
Balance, December 31, 1995 19,372 19 147,012 2
Conversion of note payable to principal shareholder to equity - 14,852,988 14
Redemption of predecessor's preferred stock (19,372) (19) - -
Sale of common stock - - 5,750,000 5
Acquisition of remaining interests in Commodore
Laboratories, Inc. - - - -
Issuance of stock options - - - -
Acquisition of Advanced Sciences, Inc. - - 900,000 1
Acquisition of Commodore Separation
Technologies Inc., Commodore CFC
Technologies Inc., and CFC
Technologies Inc., (see Note 5) - - - -
Issuance of warrants (see Note 5) - - - -
Net loss - - - -
------ ---------- ----------- ---------
Balance, December 31, 1996 - - 21,650,000 22
Gain on subsidiary's sale of Common Stock - -
Warrants issued in connection with Redeemable
Preferred Stock - -
Warrants issued in connection with convertible loan
from parent - -
Beneficial conversion feature on convertible loan from parent - -
Beneficial conversion feature on Series A Preferred Stock - -
Sale of Common Stock, net of $1,198 liability for price reset 700,000 1
Preferred Stock dividends - -
Conversion of Series A Preferred Stock into Common Stock 416,334 -
Net loss - -
------ --------- ----------- ---------
Balance, December 31, 1997 22,766,334 $ 23
====== ========= =========== =========
</TABLE>
<PAGE>
[RESTUBBED TABLE]
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Paid in Accumulated
Capital (Deficit)
------------ ------------
<S> <C> <C>
Balance, January 1, 1995 $ 10 $ (4,717)
Net loss - (3,856)
---------- ------------
Balance, December 31, 1995 10 (8,573)
Conversion of note payable to principal shareholder to equity 2,986 -
Redemption of predecessor's preferred stock - -
Sale of common stock 30,546 -
Acquisition of remaining interests in Commodore
Laboratories, Inc. 706 -
Issuance of stock options 20 -
Acquisition of Advanced Sciences, Inc. 2,249 -
Acquisition of Commodore Separation
Technologies Inc., Commodore CFC
Technologies Inc., and CFC
Technologies Inc., (see Note 5) (4,647) -
Issuance of warrants (see Note 5) 2,400 -
Net loss - (5,643)
---------- ------------
Balance, December 31, 1996 34,270 (14,216)
Gain on subsidiary's sale of Common Stock 3,927 -
Warrants issued in connection with Redeemable
Preferred Stock 25 -
Warrants issued in connection with convertible loan
from parent 660 -
Beneficial conversion feature on convertible loan from parent 750 -
Beneficial conversion feature on Series A Preferred Stock 216 -
Sale of Common Stock, net of $1,198 liability for price reset 1,143 -
Preferred Stock dividends (240) -
Conversion of Series A Preferred Stock into Common Stock 790 -
Net loss - (15,694)
------------ --------------
Balance, December 31, 1997 $ 41,541 $ (29,910)
============ ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-4
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (15,694) $ (5,643) $ (3,856)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,282 561 41
Equity in losses of unconsolidated subsidiary 1,827 495 -
Provision for related party bad debt 814 - 98
Minority interest in subsidiary losses (82) - -
Non-cash interest expense 792 - -
Other non-cash charges 135 - -
Changes in assets and liabilities, net of acquisitions: -
Accounts receivable 4,085 (2,351) -
Inventory (360) - -
Prepaid assets 178 (190) -
Other accounts receivable 45 (63) (7)
Accounts payable and accrued liabilities (1,347) 153 (74)
Other 105 (121) -
---------- -------- ---------
Net cash used in operating activities (8,220) (7,159) (3,798)
---------- -------- ---------
Cash flows from investing activities:
Equipment purchased or constructed (1,409) (335) (227)
Patents acquired (401) (58) (137)
Purchase of Commodore Separation Technologies
Inc., Commodore CFC Technologies, Inc. and
CFC Technologies, Inc., net of cash acquired - (2,870) -
Advances to related parties - (1,527) -
(Increase) decrease in restricted cash 410 (519) -
Other investments (1,723) (1,153) -
---------- -------- --------
Net cash used in investing activities (3,123) (6,462) (364)
---------- -------- --------
Cash flows from financing activities:
Proceeds from sale of Common Stock 2,341 30,551 -
Proceeds from sale of Series A Preferred Stock 1,668 - -
Preferred stock dividends paid by subsidiary (438) - -
Proceeds from subsidiary's sale of Common and Preferred Stock 11,088 - -
Payments to principal shareholder - (5,925) -
Borrowings from principal shareholder 4,000 - 4,166
(Repayments)/borrowings under the line of credit (5,843) 1,361 -
Payments on long term debt and capital leases (72) (255) -
Repayment of related party accounts receivable and payable (326) (39) -
---------- ------- --------
Net cash provided by financing activities 12,418 25,693 4,166
---------- ------- --------
Increase in cash 1,075 12,072 4
Cash, beginning of period 12,076 4 -
---------- ------- --------
Cash, end of period 13,151 $12,076 $ 4
========== ======= =========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 446 $ 1,442 $ -
========== ======= =========
Taxes $ - $ - $ -
========== ======= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-5
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
1. Background
Commodore Applied Technologies, Inc. and subsidiaries ("Applied"), a
majority-owned subsidiary of Commodore Environmental Services, Inc.
("Commodore"), is engaged in the destruction and neutralization of hazardous
waste and the separation of hazardous waste from other materials. Applied
owns technologies related to the separation and destruction of
polychlorinated biphenyls (PCBs) and chlorofluorocarbons (CFCs).
Applied is currently working on the commercialization of these technologies
through development effects, licensing arrangements and joint ventures.
Through Advanced Sciences, Inc. ("ASI"), a subsidiary acquired on October 1,
1996, Applied has contracts with various government agencies and private
companies in the United States and abroad. As some government contracts are
funded in one year increments, there is a possibility for cutbacks as these
contracts constitute a major portion of ASI's revenues, and such a reduction
would materially affect the operations. However, management believes the
subsidiary's existing client relationships will allow Applied to obtain new
contracts in the future. Prior to the acquisition of ASI, Applied was
considered to be a developmental stage company.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Applied and its
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The investment in Teledyne-Commodore, LLC,
a 50% owned joint venture with Teledyne Environmental, Inc., has been
accounted for under the equity method of accounting as Applied does not have
a controlling interest in the venture.
Use of Estimates
The preparation of consolidated 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 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.
Revenue Recognition
Substantially all of the Company's revenues are generated by its subsidiary,
ASI, consisting of engineering and scientific services performed for the U.S.
Government and prime contractors that serve the U.S. Government under a
variety of contracts, most of which provide for reimbursement of cost plus
fixed fees. Revenue under cost-reimbursement contracts is recorded using the
percentage of completion method as costs are incurred and include estimated
fees in the proportion that costs incurred to date bear to total estimated
costs.
F-6
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Anticipated losses on contracts are provided for by a charge to income during
the period such losses are first 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
costs and income and are recognized in the period in which the revisions are
determined.
Direct and indirect contract costs are subject to audit by the Defense
Contract Audit Agency ("DCAA"). Management does not expect these audits to
materially affect the financial statements and have established appropriate
allowances to cover potential audit disallowances. Contract revenues have
been recorded in amounts which are expected to be realized upon final
settlement. The DCAA has audited ASI's contracts through September 30, 1995.
An allowance for doubtful accounts and potential disallowances has been
established based upon the portion of billed and unbilled receivables that
management believes may be uncollectible.
Applied had revenues from one significant contract representing 65% of total
contract revenues for the year ended December 31, 1997. This contract is
scheduled to end on September 30, 1998, but has two one-year renewal options.
Cash and Cash Equivalents
Applied considers cash and highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Applied's
investments in cash equivalents are diversified among securities with high
credit ratings in accordance with Applied's investment policy.
Restricted Cash and Certificates of Deposit
Restricted cash at December 31, 1997 and 1996 consisted of $260 and $670,
respectively, held in interest bearing deposit accounts as collateral for the
line of credit, collateral for a performance bond, and as deposits on certain
leased property.
Concentration of Credit Risk
Applied maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. Applied has not experienced any losses in
such accounts. Applied believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Improvements which substantially
increase the useful lives of assets are capitalized. Maintenance and repairs
are expensed as incurred. Upon retirement or disposal, the related cost and
accumulated depreciation are removed from the respective accounts and any
gain or loss is recorded. Provisions for depreciation are computed on the
straight-line method based on the estimated useful lives of the assets which
range from 2-10 years.
Other Assets
Goodwill represents the fair value of securities issued plus the fair value
of net liabilities assumed in connection with the acquisition of ASI (see
Note 5). Goodwill is being amortized on a straight line basis over its
estimated 30 year life. Completed technology represents certain technology
and related patents acquired in connection with the purchase of third-party
interests in Commodore Laboratories,
F-7
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Inc. ("Labs") (see Note 5). Completed technology and patents are being
amortized on a straight line basis over their estimated 7 and 17 year lives,
respectively. Applied annually evaluates the existence of impairment on the
basis of whether the goodwill, patents and completed technology are fully
recoverable from the projected undiscounted net cash flows of the assets to
which they relate.
Income Taxes
Applied provides for deferred income taxes on estimated future tax effects of
temporary differences between financial statement carrying amounts and the
tax basis of existing assets and liabilities.
Research and Development
Research and development expenditures are charged to operations as incurred.
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. Accounts
receivable, notes receivable, temporary investments, long term debt and the
line of credit are financial instruments that are subject to possible
material market variations from the recorded book value. The fair value of
these financial instruments approximate the recorded book value as of
December 31, 1997 and 1996.
Segment Reporting
Applied currently has one principal business line in environmental
technologies. Applied and its subsidiaries operate primarily in the United
States.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued its
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting on
Comprehensive Income," effective for fiscal years beginning after December
15, 1997. SFAS 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in the financial statements and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital on the balance sheet.
Also in June 1997, the FASB issued SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997.
Applied is currently analyzing the effect these standards will have upon the
disclosure in the financial statements and notes thereto.
In 1997, the FASB also issued SFAS 128, "Earnings Per Share" and SFAS 129,
"Disclosure of extra Information About Capital Structure." Both statements
are effective for periods ending after December 15, 1997 and neither has had
a material impact on the financial position or results of operations of
Applied.
F-8
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
3. Earnings Per Share
All earnings per share amounts reflect the implementation of SFAS 128. SFAS
128 established 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 is computed by
dividing net income available to common shareholders, by the weighted average
number of shares outstanding during the period, as restated for shares issued
in business combinations accounted for as poolings-of-interests and stock
dividends. Diluted earnings per share are computed using the weighted average
number of shares determined for the basic computations 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. Loss per share has been computed based on the
number of shares outstanding as though capitalization, through the
contribution of $3,000 of a note payable to principal stockholder for
15,000,000 shares of Applied's common stock had taken place on January 1,
1995.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
------------- ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net loss $ (15,694) $ (5,643) $ (3,856)
Preferred stock dividends (240) - -
Dividends on Series A Preferred Stock (not declared) (26) - -
------------- ------------ ------------
Net loss available to common shareholders $ (15,960) $ (5,643) $ (3,856)
============= ============ ============
Weighted average common shares outstanding (basic) 21,844,000 18,100,000 15,000,000
Series A Convertible Preferred Stock (Note 4) (*) - -
Employee Stock Options (Note 12) (*) (*) -
Warrants issued in connection with Convertible Note (Note 5) (*) - -
Warrants issued in connection with initial public offering
(Note 5) (*) (*) -
Warrants issued in connection with purchase of CST, CFC
and CCFC (Note 5) (*) (*) -
Placement agent Warrants issued in connection with
certain securities (Note 5) (*) (*) -
------------ ------------ --------------
Weighted average common shares outstanding (diluted) 21,844,000 18,100,000 15,000,000
============ ============ ==============
Loss per share (basic) $ (0.73) $ (0.31) $ (0.26)
============ ============ ==============
Loss per share (diluted) $ (0.73) $ (0.31) $ (0.26)
============ ============ ===============
</TABLE>
(*)Due to Applied's loss from continuing operations in 1997, 1996 and 1995,
the incremental shares issueable in connection with these instruments are
anti-dilutive and accordingly not considered in the calculation.
F-9
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
4. Redeemable Preferred Stock
Series A Preferred Stock
In August 1997, Applied sold 18,000 shares of its Series A Preferred Stock
for an aggregate purchase price of $1,800. The Series A Preferred Stock has a
liquidation preference of $100 per share plus accumulated and unpaid
dividends (the "Liquidation Preference") and pays a 7% annual cumulative
dividend. The Series A Preferred Stock is convertible by investors into that
number of shares of Common Stock equal to the Liquidation Preference divided
by the Conversion Price. The Conversion Price is defined as the amount equal
to the lesser of (i) $4.64, representing 100% of the average of the closing
sale prices of the Common Stock for the five consecutive trading days
preceding the issuance date of the Series A Preferred Stock, or (ii) 88% of
the average of the closing sale prices of the Common Stock for the five
consecutive trading days immediately prior to the date of conversion
(beneficial conversion feature). The Conversion Price is subject to certain
floors based upon the trading price of Applied Common Stock.
The Series A Preferred Stock is subject to mandatory redemption at the
Liquidation Preference upon certain events, including (i) the average share
price for any sixty consecutive days is less than $2.00, (ii) Applied's
Common Stock is not listed on any exchange or over-the-counter market for
fifteen consecutive trading days, or (iii) Applied is required to obtain
stockholder approval under exchange regulations in order to issue shares of
Common Stock and fails to obtain such approval within ninety calendar days.
After cash transaction costs of $132, Applied received net proceeds of $1,668
from the sale of the Series A Preferred Stock. Of this total, $25 was
allocated to paid-in capital related to warrants issued to the placement
agent in connection with the transaction and $216 was allocated to paid-in
capital related to the beneficial conversion feature. The remaining $1,427
was recorded as mandatorily redeemable preferred stock. The $216 beneficial
conversion feature was charged to income available to common shareholders
over the earliest possible conversion period of five months.
The $876 December 31, 1997 carrying value is not being accreted to the $986
liquidation value because of the uncertainty associated with the redemption
features.
In December 1997, stockholders owning 8,400 shares of the Series A Preferred
Stock elected to convert their shares to Common Stock based upon conversion
prices ranging from $2.00 to $2.29 per share. At the time of conversion,
Applied recorded $24 of preferred dividends related to the accumulated and
unpaid dividends on shares converted. The conversions resulted in the
issuance of 416,000 new shares of Common Stock valued at $790, the carrying
value of the underlying Preferred Stock at the time of conversion.
F-10
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
5. Significant Transactions
In 1997, the Company amended its Certificate of Incorporation authorizing up
to 10,000,000 shares of Preferred Stock, $.001 par value and increasing
authorized shares of Common Stock from 50,000,000 to 75,000,000.
Intercompany Convertible Note
In September 1997, Commodore provided a $4,000, 8% convertible unsecured loan
to Applied. Unless converted into Common Stock, the interest in the
convertible loan is payable quarterly and the unpaid principal amount is
payable on August 31, 2002. Commodore has the right to convert the loan into
shares of Common Stock at a conversion price of $3.89 per share, a 16%
discount from the market price at the date of closing (beneficial conversion
feature), subject to adjustment based on a number of factors. As of December
31, 1997, the conversion price on the convertible loan remained at $3.89 per
share. In connection with the $4,000 loan, Applied issued Commodore a
five-year warrant to purchase 1,000,000 shares of Common Stock at an exercise
price of $5.03 per share, 109% of the market price on the date of closing.
Applied recorded the $750 value of the beneficial conversion feature as
additional paid-in capital, offset by an immediate recognition of the $750 as
interest expense. The warrants issued in connection with this transaction
were valued at $660 in the aggregate and recorded as additional paid-in
capital. The original issue discount associated with this allocation is being
recognized using the effective interest rate method over the term of the
loan. Amortization of this discount for 1997 totaled $42.
Private Placement of Common Stock
In October 1997, Applied sold 700,000 shares of Common Stock (of which
600,000 shares were sold at $3.68 per share and 100,000 shares were sold at
$3.93 per share) for an aggregate purchase price of approximately $2,600.
Transaction costs on this sale totaled $256. Additionally, affiliates of the
placement agent received warrants to purchase an aggregate of 60,000 shares
of Common Stock at $3.675 per share.
The sales agreement related to these shares specified certain twelve-month
price reset provisions in the event that new Common shares were sold or
issued in connection with the exercise of warrants at a per share price less
than the original sales price. At the end of the twelve-month period, the
price reset features expire. At the option of the Company, the liability
under the price reset feature can be satisfied by issuing new Common Stock
(at a price equal to the reset price) up to an aggregate of 5% of the total
Common Stock of the Company (including the original shares and the shares
issued in connection with the price reset); any excess price reset
liabilities must be paid in cash.
At December 31, 1997, the aggregate price reset liability was $1,198. This
amount has been recorded as an adjustment to the original purchase price.
Although the Company has not yet determined what, if any, portion of this
liability will be settled in new Common Stock, the entire amount has been
accrued as a liability at December 31, 1997.
F-11
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Commodore Separation Technologies, Inc.
On December 2, 1996 Applied purchased Commodore Separation Technologies Inc.
("Separation"), Commodore CFC Technologies, Inc. ("CCFC") and CFC
Technologies, Inc. ("CFC") from Commodore for $5,400, consisting of $3,000 in
cash and warrants to purchase 7,500,000 shares of Applied's Common Stock at
an exercise price of $15.00 per share and with termination date of December
2, 2003. These warrants were amended in February 1998 (see Note 15). The
acquisition was accounted for as a transaction between entities under common
control. Applied recorded its investment in Separation, CFC and CCFC as $753,
equal to Commodore's historical basis in these subsidiaries. The difference
between this amount and the $5,400 paid to Commodore was recorded as a direct
reduction in the paid-in capital of Applied.
In April 1997, Separation completed an initial public offering of its Common
and Preferred equity securities from which it received net proceeds of
approximately $6,109 and $4,978, respectively. This offering reduced
Applied's equity ownership in Separation from 100 percent to 87 percent.
Applied's $3,927 gain on this transaction has been recorded as a direct
increase in Applied's paid-in capital because Separation is a development
stage company.
Minority interests in Separation at December 31, 1997 consists of the
Separation Preferred Stock and warrants to purchase Separation Common Stock,
both of which were sold in Separation's initial public offering. By December
31, 1997, all other minority interests in Separation's Common Equity had been
reduced to zero, resulting in 100% of the losses of Separation being absorbed
by Applied. The face value and liquidation value of the Separation Preferred
Stock is $6,000. The non-cumulative dividend rate on the Separation
Preferred Stock is 10%. For the year ended December 31, 1997, Separation paid
dividends to its Preferred shareholders of $438.
Acquisitions and Reorganizations
On March 29, 1996, Commodore, Applied's sole shareholder at that date, in
exchange for the issuance of 15,000,000 shares of Applied Common Stock,
capitalized Applied, as follows: (1) contributed 90.05 percent of the
outstanding common stock of Labs and 100 percent of the outstanding capital
stocks of Commodore Technologies ("Technologies"), Commodore Government
Environmental ("Government"), Commodore Remediation Technologies
("Remediation"), and Sandpiper Properties ("Sandpiper"), (2) assigned all
rights, titles, and interests in its contracts, assets, and properties
related to AGENT 313 to Applied, and (3) contributed $3,000 of a promissory
note to Applied for the purpose of funding the development of AGENT 313. This
exchange (along with the July 1996 transaction described in the second
succeeding paragraph) were recorded by Applied at Commodore's historical book
value.
In June of 1996, Applied made a public offering of 5,750,000 shares of its
$.001 par value common stock for $6.00 per share. Along with each share was
one detachable warrant valued at $.10, which entitles its owner to purchase
one share of Applied stock at the price of $8.40 per share for the period
from June 28, 1997 until June 28, 2001. These warrants are redeemable by
Applied for $.0l per share if the average trading price of Applied stock for
any 20 day period is greater than or equal to $18.00 per share. Net proceeds
from the offering were $30,551.
F-12
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
In July 1996, Commodore acquired the remaining 9.95% of Labs and contributed
its investment to Applied. The excess of Commodore's purchase price of $3,000
over the $2,294 fair value of the net assets acquired has been recorded as
completed technology and is being amortized over 7 years.
On October 1, 1996, Applied acquired all of the outstanding voting common
stock of Advanced Sciences, Inc. ("ASI") and A.S. Environmental, Inc.
("ASE"). This transaction also included the purchase of ASI's foreign
subsidiaries, Advanced Sciences Integrada, S.A., ("ASI Argentina") and
Advanced Sciences Integrated Mexico, S.A., ("ASI Mexico"). The acquisition
has been recorded using the purchase method of accounting. Accordingly, the
results of operations of ASI have been included in those of Applied for the
period subsequent to the date of acquisition.
In consideration for the ASI and ASE stock, Applied issued 900,000 shares of
common stock to ASI and ASE shareholders, with a fair value of $2,250. The
fair value of the underlying net liabilities of ASI totaled $5,423, resulting
in $7,673 of goodwill associated with the acquisition.
The unaudited pro forma combined results of operations of Applied for the
year ended December 31, 1996, as if the acquisition had occurred on January
1, 1996, is as follows:
1996
----
Revenues $ 26,649
Net loss (10,044)
Net loss per share $ (0.53)
Due to the fact that ASI's year end prior to the acquisition date was as of
September 30, the foregoing unaudited pro forma results of operations
consists of the combination of Applied's annual results as of December 31,
1996 and ASI annual results for the period ended September 30, 1996.
F-13
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
6. Receivables
The components of Applied's trade receivable are as follows as of December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Contract receivables:
Amounts billed $3,285 $7,060
Retainages 168 128
Unrecovered costs and estimated profits
subject to future negotiation - not billed (52) 71
------ ------
3,401 7,259
Less: Allowance for doubtful accounts and potential disallowances (416) (300)
------ ------
Contract receivable-net 2,985 6,959
Other receivables, net of allowances of $45 and $306 79 190
====== ======
Total receivables-net $3,064 $7,149
====== ======
</TABLE>
The balances billed but not paid by customers pursuant to retainage
provisions are due upon completion and acceptance of the contracts.
Unbilled receivables include current and prior year costs and fees billable
upon specified events (including settlement of prior years' government
audits). All such amounts have been classified as current assets although
certain amounts may not be collected within one year depending on when the
conditions are satisfied.
Substantially all of trade receivables are pledged to secure its line of
credit (see Note 10).
F-14
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
7. Other Investments
On August 6, 1996, Applied and Teledyne Environmental, Inc. formed a joint
venture named Teledyne-Commodore, LLC ("the LLC") and signed a licensing
agreement for one of Applied's patented remediation technologies. The LLC was
funded by a capital contribution of $1,000 in cash from each Teledyne and
Applied on October 1, 1996. Further capital contributions are required only
when the Board of Members determines additional contributions are necessary
or advisable. In February 1997 and pursuant to the agreement, Applied
contributed an additional $1,000 to the LLC. This investment is accounted
for under the equity method. Summarized information of the LLC results of
operations is as follows at December 31, 1997 and 1996:
1997 1996
---- ----
Revenues $ 510 $ 16
Expenses 4,163 1,006
------- -------
Net loss (3,653) (990)
------- -------
Applied equity in net loss (50%) $(1,827) $ (495)
======= =======
Investment in LLC:
Opening balance $ 658 $ -
Capital contribution 1,000 1,000
Advances to LLC 723 153
Equity in net loss (1,827) (495)
------- -------
Net amount $ 554 $ 658
======= =======
8. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Average December 31,
Useful Life 1997 1996
----------- ---- ----
<S> <C> <C> <C>
Machinery and equipment 10 $2,438 $1,772
Furniture and fixtures 5 277 427
Computer equipment 4 503 210
Leasehold improvements 5 258 43
------ ------
3,476 2,452
Less: accumulated depreciation and amortization 978 408
------ ------
Total property and equipment $2,498 $2,044
====== ======
</TABLE>
F-15
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
9. Other Accrued Liabilities
Other accrued liabilities consist of the following:
1997 1996
------ ------
Price reset feature of Common Stock $1,198 $ -
Compensation and employee benefits 1,711 919
Other 814 1,059
------ ------
$3,723 $1,978
====== ======
10. Line of Credit
At December 31, 1997 and 1996, ASI had a $1,199 and $7,042 outstanding
balance, respectively, on a revolving line of credit with a current limit of
$6,000, due March 31, 1998 with interest payable monthly at prime plus 1
percent (9.5 percent as of December 31, 1997). The credit line is secured by
$153 of restricted cash and the receivables of ASI. The line of credit
contains certain financial covenants and restrictions including minimum
ratios that ASI must satisfy. ASI was not in compliance with the covenants
at December 31, 1996. On January 17, 1997, ASI entered into a revised line
of credit agreement and received a waiver and forbearance of amounts due
related to their previous covenant violations. ASI was in compliance with
the covenants at December 31, 1997.
11. Income Taxes
Applied 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 1997, 1996 and 1995 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
components of the net deferred income tax as of December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Components of current deferred taxes, net:
Reserve for uncollectible receivables
and potential disallowances $ 492 $ 925 $ -
Net operating loss carryforward 11,200 5,887 2,788
In process technology 969 969 969
--------- ------- ---------
12,661 7,781 3,757
Less: Valuation allowance (12,661) (7,781) (3,757)
--------- ------- ---------
Net $ - $ - $ -
========= ======= =========
</TABLE>
F-16
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Applied conducts a periodic examination of its valuation allowance. Factors
considered in the evaluation include recent and expected future earnings and
Applied's liquidity and equity positions. As of December 1997 and 1996,
Applied has established a valuation allowance for the entire amount of net
deferred tax assets.
Applied has net operating loss ("NOL") carryforwards at December 31, 1997 of
approximately $28,000 which expire in years 2000 through 2012. Of the total
amount of NOL carryforwards, approximately $2,600 are limited to use against
future taxable income of ASI in accordance with certain separate return
limitations. If a substantial change in Applied's ownership should occur,
there would be an annual limitation of the amount of NOL carryforwards which
could be utilized.
12. Stock Options and Stock Warrants
Applied has adopted the intrinsic value method of accounting for stock
options and warrants under APB 25 with footnote disclosures of the pro forma
effects as if the FAS 123 fair value method had been adopted.
Had compensation expense for Applied's employee stock options been
determined based on the fair value at the grant date for awards in 1997 and
1996 consistent with the provisions of FAS 123, Applied's net loss per share
would have been increased to the pro forma amounts indicated below:
Year Ended
December 31,
1997 1996
---- ----
Net Loss - as reported $(15,694) $(5,643)
Net Loss - pro forma $(17,742) $(6,239)
Loss per share - as reported $ (0.73) $ (0.31)
Loss per share - Pro forma $ (0.82) $ (0.34)
FAS 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 the following assumptions about the
underlying stock: The expected dividend yield of the stock is zero, the
assumed volatility is 60 percent, the expected risk-free rate of return is
6.0 - 6.5 percent, calculated as the rate offered on U.S. Government
securities with the same term as the expected life of the options, and the
expected term is the maximum possible term under the option.
Stock Options
In March 1996, Applied adopted its 1996 Stock Option Plan (the "Plan")
pursuant to which officers, directors, key employees and/or consultants of
Applied can receive incentive stock options and non-qualified stock options
to purchase up to an aggregate of 2,000,000 shares of Applied's common stock
(of which no more than 1,500,000 shares may be issued pursuant to
non-qualified stock options). Substantially all stock options granted in
1996 were done so under the Plan. Exercise prices
F-17
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
underlying common stock as of the date granted. Stock options granted under
the plan vest over a 3-5 year period.
A summary of the status of options granted under the Plan as of December 31,
1997 and 1996 and changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
1996 1997
--------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding - beginning of year - - 1,994,875 $ 6.22
Granted 1,994,875 $ 6.22 1,570,000 6.29
Exercised - - - -
Forfeited - - (242,500) 6.19
Rescinded - - (410,000) 8.03
--------- ---------
Options outstanding - end of year 1,994,875 6.22 2,912,375 6.06
========= =========
Options exercisable - end of year 629,875 1,144,875
========= =========
Weighted average fair value of options
granted during the period $ 1.70 $ 4.61
</TABLE>
The following table summarizes information about employee stock options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------------- ----------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$4.75 - $6.69 2,794,875 6.97 years $ 6.23 1,112,375 $ 5.99
2.00 - 2.00 117,500 9.96 years 2.00 32,500 2.00
--------- ----------
$2.00 - $6.69 2,912,375 7.09 years $ 6.06 1,144,875 $ 5.88
========= ==========
</TABLE>
F-18
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Stock Warrants
Outstanding warrants (vested and not vested) at December 31, 1997 are as
follows:
Number of
Granted Granted Warrants Exercise Expiration
1996 1997 1997 Price Date
-------- ------- ----------- -------- ------------
500,000 - 500,000 $ 7.20 August 2001
5,750,000 - 5,750,000 8.40 August 2001
500,000 - 500,000 13.86 August 2001
7,500,000 - 7,500,000 15.00 December 2003
- 19,407 19,407 5.80 August 2002
- 60,000 60,000 3.68 August 2002
- 1,000,000 1,000,000 5.03 August 2002
- 60,000 60,000 5.00 November 2000
---------- --------- ----------
14,250,000 1,139,407 15,389,407
========== ========= ==========
There were no stock warrants outstanding at December 31, 1995, nor were any
warrants exercised in 1996 or 1997. As of December 31, 1996 and 1997,
7,500,000 and 15,389,407 warrants were exercisable, respectively.
13. Related Party Transactions
During 1996, Applied advanced an aggregate amount of $1.5 million to Lanxide
Performance Materials, Inc. ("LPM"), a wholly-owned subsidiary of Lanxide
Corp. Lanxide is related to Commodore by substantial common ownership. The
promissory notes became due on February 28, 1998. At December 31, 1997 a
$814 reserve against this receivable exists, reducing the net receivable to
its estimated fair value. In March 1998, Applied realized this receivable by
exchanging it for amounts due under the Intercompany Convertible Note (see
Note 5).
ASI has a lease agreement with its Chairman under which ASI utilizes certain
real estate for business purposes. Rent of approximately $11 and $6 was
paid for the years ended December 31, 1997 and 1996, respectively.
During the year ended December 31, 1997, Applied was charged a management
fee by Commodore of $640. This management fee was based on allocated wages
and salaries, rent, insurance and other administrative expenses relating to
its executive offices in New York. The management fees ended in August,
1997. Subsequent to August 1997, Applied entered into a cost sharing
agreement with Commodore whereby all common costs were accumulated and
allocated based on various factors, including executive time reports. Costs
were allocated on this basis between Applied, Commodore and a company owned
by a director of Applied.
F-19
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
14. Commitments and Contingencies
Operating Leases
Applied and its subsidiaries are committed under non cancelable operating
leases for office space and other equipment. Future obligations under the
leases for the next five years are as follows:
1998 $ 509
1999 485
2000 339
2001 248
2002 15
-------
$ 1,596
=======
Rent expense approximated $767, $313 and $127 in 1997, 1996 and 1995,
respectively.
Capital Lease Obligations
Applied has capital lease obligations of $46, net of imputed interest at
rates ranging from 8 percent to 12 percent, of which $27 is due in 1998 and
is recorded as a current liability and the remaining $19 is due through
1999.
Employment Agreements
Applied and its subsidiaries have employment agreements with 14 executives
and key personnel. Aggregate minimum payments under the employment
agreements for the following five years are as follows:
1998 $ 2,128
1999 1,806
2000 279
2001 85
-------
Total $ 4,298
=======
Applied has a five-year Executive Bonus Plan (the "Bonus Plan") under which
a number of executives and employees of the Company are entitled to formula
bonuses. Applied accrued $653 for 1997 executive bonuses.
Self Insurance
Applied operates a health benefit plan for certain employees under which it
is partially self-insured. The maximum liability is limited to $65 per
individual per year. Claims in excess of Applied's maximum liability are
insured by a health insurance carrier. Effect April 1, 1997, Applied became
fully insured through an outside health insurance carrier.
F-20
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Litigation
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 operation.
15. Subsequent Events
Intercompany Note
In February, 1998, Commodore provided a $5,450 unsecured loan to Applied,
evidenced by Applied's 8% non-convertible note (the "Intercompany Note").
Pursuant to the terms of the Intercompany Note, interest on the unpaid
principal balance of the Intercompany Note is payable at the rate of 8% per
annum semiannually in cash. The unpaid principal amount of the Intercompany
Note is due and payable, together with accrued and unpaid interest, on the
earlier to occur of (a) December 31, 1999, or (b) consummation of any public
offering or private placement of securities of Applied with net proceeds
aggregating in excess of $6.0 million, other than in respect of working
capital and general corporate purposes and not for the satisfaction for any
portion of Applied debt or to redeem any Applied equity or equity-equivalent
securities.
In connection with the loan, Applied amended a five-year warrant to purchase
7,500,000 shares of Applied Common Stock issued to Commodore on December 2,
1996 to, among other things, reduce the exercise price of the warrant from
$15.00 per share to $10.00 per share. In addition, Applied issued to
Commodore an additional five-year warrant to purchase 1,500,000 shares of
Applied Common stock at an exercise price of $10.00 per share.
Investments
In January, 1998, and pursuant to agreement by the Board of Members, Applied
advanced an additional $1,000 payment to the Teledyne-Commodore joint
venture (see Note 6).
F-21
<PAGE>
EXHIBIT INDEX
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").
(1)
3.1 Certificate of Incorporation of the Company. (1)
3.2 By-Laws of the Company. (1)
4.1 Specimen Common Stock Certificate. (3)
4.2 Form of Warrant Agreement between the Company and The Bank of
New York. (1)
4.3 Specimen Warrant Certificate. (1)
4.4 Form of Representative's Warrant Agreement between the Company
and the Representative, including form of Representative's
Warrant therein. (1)
4.5 Registration Rights Agreement, dated September 27, 1996, among
the Company, CXI-ASI Acquisition Corp., and certain
stockholders. (5)
4.6 Registration Rights Agreement, dated September 27, 1996, among
the Company, CXI-ASE Acquisition Corp., and certain
stockholders. (5)
4.7 Series A Convertible Preferred Stock Purchase Agreement, dated
as of August 15, 1997, among the Company and the Series A
Preferred Stock purchasers listed therein. (9)
4.8 Certificate of Designations, Rights and Preferences of Series
A Preferred Stock. (9)
4.9 Registration Rights Agreement between the Company and the
Series A Preferred Stock purchasers. (9)
4.10 Warrant to purchase 1,000,000 shares of Common Stock issued to
Environmental. (9)
4.11 Common Stock Purchase Agreements, dated as of September 26,
1997, by and between the Company and each of certain private
investors listed therein. (9)
4.12 Warrant to purchase 7,500,000 shares of Common Stock issued to
Environmental. (10)
4.13 Warrant to purchase 1,500,000 shares of Common Stock issued to
Environmental. (10)
4.14 Registration Rights Agreement, dated as of February 9, 1998,
among the Company, Environmental and certain private investors
listed therein. (10)
10.1 Employment Agreement, dated June 1, 1995, between
Environmental and Neil L. Drobny, and conditional assignment
thereof by Environmental to the Company, dated March 29, 1996.
(1)
10.2 Employment Agreement, dated August 31, 1995, between
Environmental and Carl O. Magnell, and conditional assignment
thereof by Environmental to the Company, dated March 29, 1996.
(1)
10.3 Form of Employment Agreement, dated July 28, 1993, between
Commodore Laboratories, Inc. and Albert E. Abel, with
conditional assignment thereof by Commodore Labs to the
Company, dated March 29, 1996. (1)
<PAGE>
10.4 Employment Agreement, dated October 3, 1994, between
Environmental and Vincent Valeri, and conditional assignment
thereof by Environmental to the Company, dated March 29, 1996.
(1)
10.5 Non-Competition, Non-Disclosure and Intellectual Property
Agreement, dated March 29, 1996, between the Company and Gerry
D. Getman. (1)
10.6 Employment Agreement, dated as of March 29, 1996. between the
Company and Paul E. Hannesson. (2)
10.7 1996 Stock Option Plan of the Company. (1)
10.8 Executive Bonus Plan of the Company. (1)
10.9 Nationwide Permit for PCB Disposal issued by the EPA to
Commodore Remediation Technologies, Inc. (1)
10.10 Memorandum of Understanding, dated April 9, 1996, between
Teledyne Brown Engineering (a Division of Teledyne Industries,
Inc.) and Commodore Government Environmental Technologies,
Inc. (1)
10.11 Memorandum of Understanding. dated March 28, 1996, between
Sharp Associates, Inc. and the Company. (1)
10.12 Memorandum of Understanding, dated April 12, 1996, between
Sverdrup Environmental, Inc. and the Company. (1)
10.13 Credit Facility Agreement and Promissory Note, dated April 5,
1996, between the Company and Chemical Bank, and Guaranty and
General Loan and Collateral Agreement, each dated April 5,
1996, between Bentley J. Blum and Chemical Bank. (1)
10.14 Demand Promissory Note, dated December 31, 1995, in the
principal amount of $8,925,426, issued by Commodore Labs to
Environmental. (1)
10.15 Form of $4,000,000 Promissory Note issued by the Company to
Environmental, in partial replacement of the $8,925,426 Demand
Promissory Note, dated December 31, 1995, issued by Commodore
Labs to Environmental. (1)
10.16 Bond Purchase Agreement, dated December 3, 1993, by and
between Environmental and Credit Agricole Deux Sevres. (1)
10.17 License Agreement, dated as of March 29, 1996, by and between
the Company and Environmental, relating to the use of SET in
the CFC Business. (2)
10.18 Form of Technology and Technical Services Agreement entered
into between the Company and CFC Technologies.(2)
10.19 Voting Agreement, dated June 28, 1996, among Environmental,
Bentley J. Blum, the Company and National Securities
Corporation. (4)
10.20 Agreement and Plan of Merger, dated September 27, 1996, by and
between the Company, CXI-ASI Acquisition Corp. and Advanced
Sciences, Inc. (5)
10.21 Agreement and Plan of Merger, dated September 27, 1996, by and
between the Company CXI-ASE Acquisition Corp. and A.S.
Environmental, Inc. (5)
<PAGE>
10.22 Agreement of Transfer, dated as of December 1, 1996 by and
between the Company and Advanced Sciences. (11)
10.23 Bill of Sale, dated as of December 1, 1996, by and between the
Company and Commodore Advanced Sciences, Inc. (11)
10.24 Stock Purchase Agreement, dated as of December 2, 1996,
between the Company and Environmental. (6)
10.25 Employment Agreement, dated as of October 31, 1996, between
Environmental and Edwin L. Harper. (7)
10.26 Employment Agreement, dated as of October 1, 1996, between the
Company and Thomas E. Noel. (5)
10.27 Form of Employment Agreement between Environmental and Paul E.
Hannesson. (8)
10.28 8% convertible note for $4.0 million from the Company to
Environmental. (9)
10.29 8% non-convertible note for $5,450,000 from the Company to
Environmental. (10)
*10.30 Teaming Agreement, dated March 18, 1997, by and between ICF
Kaiser Engineers, Inc. and Advanced Sciences.
*10.31 Memorandum of Understanding between Lockheed Martin Advanced
Environmental Systems, Inc. and Advanced Sciences.
*10.32 Services Agreement, dated as of September 1, 1997, by and
among the Company, Environmental, Separation, Advanced
Sciences and other affiliated companies named therein.
16.1 Letter regarding change in certifying accountant. (12)
*22.1 Subsidiaries of the Company.
*27.1 Financial Data Schedule.
- ----------
* Filed herewith.
(1) Incorporated by reference and filed as Exhibit to Registrant's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 2, 1996 (File No. 333-4396).
(2) Incorporated by reference and filed as Exhibit to Registrant's Amendment
No. 1 to Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on June 11, 1996 (File No. 333-4396).
(3) Incorporated by reference and filed as Exhibit to Registrant's Amendment
No. 2 to Registration Amendment No.2 to Registration Statement on Form S-1
filed with the Securities and Exchange Commission on June 25, 1996 (File
No. 333-4396).
(4) Incorporated by reference and filed as Exhibit to Registrant's
Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed
with the Securities and Exchange Commission on July 1, 1996 (File No.
333-4396).
<PAGE>
(5) Incorporated by reference and filed as Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
October 15, 1996 (File No. 1-11871).
(6) Incorporated by reference and filed as Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 27, 1997 (File No. 1-11871).
(7) Incorporated by reference and filed as Exhibit to Amendment No. 3 to
Registration Statement on Form S-1 of Separation filed with the Securities
and Exchange Commission on January 23, 1997 (File No. 333-11813).
(8) Incorporated by reference and filed as Exhibit to Annual Report on Form
10-K for the fiscal year ended December 31, 1996 of Environmental filed
with the Securities and Exchange Commission on April 15, 1997 (File No.
0-10054).
(9) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
October 3, 1997 (File No. 1-11871).
(10) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
February 23, 1998 (File No. 1-11871).
(11) Incorporated by reference and filed as an Exhibit to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 filed with
the Securities and Exchange Commission on April 15, 1997 (File No.
1-11871).
(12) Incorporated by reference and filed as on Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
December 24, 1996 (File No. 1-11871).
<PAGE>
TEAMING AGREEMENT
AGREEMENT made this 18th day of March, 1997
BY AND BETWEEN
ICF Kaiser Engineers, Inc.
**("Team Leader")
1086 17th Street
Los Alamos, NM 87644
AND
Advanced Sciences, Inc. (ASI) (Hereinafter "Team Member")
2340 Menaul Blvd. NE Suite 400
Albuquerque, NM 87107
Concerns the submission of a proposal to the below listed Client in response to
Client's Request for Proposal (hereinafter "RFP"):
CLIENT: Los Alamos National Laboratories
RFP NO.: ER Recompete
WHEREAS, the Client has issued an RFP for certain work (hereinafter the
"Project"); and
WHEREAS, the parties hereto intend that the Team Leader will submit a proposal
in response to the RFP (hereinafter the "Proposal"); and
WHEREAS, the parties have complementary Capabilities not available within their
respective organizations, and having assessed the capabilities of other firms
have concluded that it is to their mutual benefit to act as a team solely for
the purpose of preparing and submitting the Proposal for the Project; and
WHEREAS, the Team Leader, if it received the contract award, would be
responsible for the Project and would contemplate subcontracting portions of the
Project to other firms, including Team Member with the objective of providing
ASI with 5-6 FTE's of revenue annually subject to program funding and ASI
performance.
NOW, THEREFORE, to effectuate the foregoing, In consideration of the mutual
covenants and agreements herein set forth, the receipt and sufficiency of which
are hereby acknowledged, Team Leader and Member agree as follows:
<PAGE>
1 PROPOSAL PREPARATION
1.1 Team Member shall submit to Team Leader all appropriate
technical and business data and information concerning its
proposed portion of the Project, including reasonable cost or
pricing data, for use in preparation of the Proposal in
accordance with the schedule set forth in Annex A. attached
hereto and incorporated herein by reference. Team Member shall
make available appropriate and high-quality personnel to
provide reasonable assistance to Team Leader in the
preparation of the Proposal as directed by Team Leader.
<PAGE>
1.2 Team Leader will prepare the Proposal, integrate the
information provided by the Team Member and submit the
Proposal to the Client. Team Leader will include the Team
Member's price for its proposed portion of the Project in the
Proposal Team Leader shall have the final right to determine
the technical contents of the Proposal, however, Team Member
may review its portion of the Proposal prior to submittal.
1.3 Team Leader shall identify Team Member as a proposed Teaming
subcontractor and describe Team Member's Project
responsibilities in the Proposal.
1.4 Team Leader shall be the prime interface with the Client and
shall direct and coordinate all marketing activity related to
the Project. If communications are initiated by the Client
directly with Team Member concerning the Project, Team Member
shall use its best efforts to refer such communications to
Team Leader or, if referral is not possible, to coordinate
with Team Leader prior to answering such communications.
2 RELATIONSHIP OF THE PARTIES
2.1 This Agreement has been entered into solely for the benefit of
the parties hereto and is not intended to create an interest
in any third party.
2.2 The parties shall act as independent contractors in the
performance of this Agreement. Neither party shall act as
agent for or partner of the other party for any purpose
whatsoever, and the employees of one party shall not be deemed
the employees of the other party. Nothing in this Agreement
shall be construed to grant either party the right to make
commitments of any kind for or on behalf of the other party
without prior written consent of the other party.
2.3 This Agreement shall not constitute, create, or in any way be
interpreted as a joint venture, partnership or formal business
organization of any kind.
2.4 Except for the compensation which may be paid to the parties
in accordance with any such prime contract and subcontract,
each party shall bear all of its own expenses and liabilities
incurred in connection with this Agreement, including Proposal
expenses.
2.5 No publicity or advertising regarding any proposal or contract
under the Project or relating to this Agreement shall be
released without the prior written approval of Team Leader,
which consent will not be unreasonably withheld.
2.6 To preserve the integrity of the Project and promote the free
flow of information between the parties so as to maximize the
potential for success of the Proposal, Team Member shall not,
during the term of this Agreement, as prime contractor,
subcontractor, or in any other capacity, submit any other
proposal in response to the RFP.
<PAGE>
3 PERFORMANCE
3.1 In the event of contract award to Team Leader, the parties
hereto shall immediately commence good faith negotiations of a
subcontract based substantially on the terms and conditions
set forth in Annex B, attached hereto and incorporated herein
by reference, and consistent with the terms of this Agreement,
encompassing Team Member's proposed portion of the Project and
consistent with the requirements of the prime contract.
Subject to the requirements of the prime contract with the
Client, applicable laws and regulations, agreement on other
terms and conditions, and, if required by the prime contract,
approval of the Contracting Officer, the parties will enter
into the subcontract.
3.2 The specific work to be performed by Team Member will be
defined in the subcontract and/or in task orders issued
thereunder by Team Leader and accepted by Team Member from
time to time. Annex C, attached hereto and incorporated herein
by reference, describes basic responsibilities and
understandings of the parties relating to the anticipated
allocation of work under this Agreement.
3.3 Any subcontract entered into as contemplated herein shall
include, among other appropriate provisions, those provisions
of the prime contract between the Team Leader and the Client
which by its terms are required to be flowed down to the Team
Member. Team Member will advise Team Leader in writing as soon
as possible after execution of this Agreement, but in any
event, prior to Subcontractor's submission of its portion of
the Proposal, of any clauses or provisions of the RFP to which
Team Member takes exception. Any clauses or provisions to
which exception is not taken may be included in the
subcontract if flow down is required or appropriate.
4 PROPRIETARY INFORMATION
4.1 The parties anticipate that it may be necessary to provide
access to information of a proprietary nature ("Proprietary
Information") to each other pursuant to this Agreement in
preparation of the Proposal and/or performance of the Project.
Information that is proprietary shall be clearly identified or
labeled is such by the disclosing party at the time of
disclosure to the extent possible. When concurrent
identification of proprietary information is not feasible, the
disclosing party shall provide such identification promptly
thereafter.
4.2 The parties agree that the asserted Proprietary Information
disclosed under this Agreement derives independent economic
value, actual or potential, from not being generally known to,
and not being readily ascertainable through proper means, by
other persons who can obtain economic value from its
disclosure or use.
4.3 Each of the parties agrees that it will hold such proprietary
information confidential in the same manner as it holds its
own proprietary information of like kind. Disclosures of such
information shall be restricted to the Client and those
individuals who are directly participating in preparation of
the Proposal and other work related to the Project.
4.4 Neither party shall be liable for disclosure or use of such
information marked as proprietary which:
4.4.1 was at the time of receipt otherwise known to the
party receiving it;
4.4.2 has been published or is otherwise within the public
knowledge or is generally known to the public at the
time of its disclosure to the receiving party;
<PAGE>
4.4.3 subsequently is developed independently by the
receiving party or by persons having nothing to do
with the subject Proposal;
4.4.4 becomes known or available to the receiving party
from a source other than the disclosing party without
breach of this Agreement by the recipient;
4.4.5 becomes part of the public domain without breach of
this Agreement by the recipient;
4.4.6 becomes available to the receiving party by
inspection or analysis of products available in the
market;
4.4.7 is disclosed with the prior written approval of the
other party; or
4.4.8 was exchanged and five years have subsequently
elapsed.
4.5 Neither the execution of this Agreement, nor the furnishing of
any proprietary information by either party shall be construed
as granting to the other party expressly, by implication, by
estoppel or otherwise, any license under any invention,
patent, trademark, copyright or other proprietary right now or
hereafter owned or controlled by the party furnishing same.
4.6 The parties shall return all such proprietary information of
the other upon termination of this Agreement, unless a
subcontract is executed by the parties. The terms and
conditions of this paragraph 4.0 shall survive the termination
of this Agreement.
5 RIGHTS IN INVENTIONS
5.1 Inventions conceived pursuant to this Agreement shall remain
the property of the originating party. In the event of joint
inventions, the parties shall engage in good faith
negotiations to establish their respective rights. Failing
agreement, either may seek allocation of rights in a court of
competent jurisdiction. It is understood and agreed that the
Team Member may be required to and shall grant licenses or
other rights to the Client to inventions, data, and
information in accordance with the prime contract unless
exception to Rights in Data or similar contract clauses has
been taken; provided, however, such license or other rights
shall not exceed those required by said prime contract and in
no event will Team Leader obtain any such rights unless
separately contracted for. The terms and conditions of this
paragraph 5.0 shall survive the termination of this Agreement.
6 TERMINATION
6.1 This Agreement shall expire upon the happening of one of the
following events, whichever shall occur first:
6.1.1 Written notice from the Client that it will not award
a contract for the Project pursuant to the RFP.
6.1.2 Written notice from the Client of Client's final
rejection of the Proposal or award of a contract for
the Project to a firm other than the Team Leader.
6.1.3 Written notice from the Client stating its
disapproval of the use of Team Member as a
subcontractor or direction to select someone other
than the Team Member for the work identified as Team
Member's responsibility in the Proposal or otherwise.
<PAGE>
6.1.4 Execution of a subcontract by and between the Team
Leader and the Team Member for performance of
portions of the Project.
6.1.5 The expiration of 12 months from the date of this
Agreement; provided, however, this Agreement shall be
extended for one additional year if the Proposal has
been submitted and the Client has not provided
written notice as to contract award within the
12-month period.
6.1.6 Inability of the parties to execute a subcontract
within sixty (60) days of contract award after good
faith negotiation by both parties.
6.1.7 The Client so materially modifies the requirements of
the Project that a substantial portion of Team
Member's responsibilities have been eliminated.
6.1.8 The insolvency, bankruptcy, reorganization under the
bankruptcy laws, or assignment for the benefit of
creditors of either party to the extent that there is
a reasonable doubt that such party lacks the
resources or ability to properly perform its
obligations hereunder.
6.1.9 Mutual agreement of the parties to terminate the
Agreement.
6.2 Upon a material breach of this Agreement by either party, the
non-breaching party may terminate this Agreement if such
breach remains uncured five (5) days after the breaching
party's receipt of notice of the breach.
7 GENERAL
7.1 All notices, requests, consents and other communications
hereunder shall be deemed to have been duly given if delivered
or mailed, first class, postage prepaid or by commercial
courier to each party at the address first given above.
7.2 The parties agree not to solicit the employees of the other
party who are directly associated with this Proposal, or are
listed as "key persons" under the Proposal, for the duration
of this Agreement and for a period of one year following
termination of this Agreement.
7.3 This Agreement may not be assigned or otherwise transferred by
either party, in whole or in part, without the express prior
written consent of the other party which shall not be
unreasonably withheld. No provision of this Agreement may be
waived or modified except by a writing executed by both
parties.
7.4 If any term, provision, covenant, or condition of this
Agreement is held to be invalid or unenforceable by a court of
competent jurisdiction, it is to that extent deemed omitted
and the remainder of this Agreement shall continue in full
force and effect.
7.5 This Agreement shall be governed and construed under the laws
of the State of New Mexico.
<PAGE>
8 ENTIRE AGREEMENT
8.1 Both parties acknowledge that they have read this Agreement,
understand it, and agree to be bound by its terms and further
agree that it is the entire agreement between parties hereto
which supersedes all prior agreements, written or oral,
relating to the subject matter hereof. No modification or
waiver of any provisions shall be binding unless in a writing
signed by the party against whom such modification or waiver
is sought to be enforced.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date first set forth above.
- -------------------------------------------------------------------------------
FOR: TEAM LEADER FOR: Team Member
/s/ Richard A. Smith /s/ Peter E. Harrod
- --------------------------------- ----------------------------------
Signature Signature
Richard A. Smith Peter E. Harrod
- --------------------------------- ----------------------------------
Name (Typed or Printed) Name (Typed or Printed)
March 17, 1997 April 8, 1997
- --------------------------------- ----------------------------------
Date Date
<PAGE>
Memorandum of Understanding
1. Parties:
Lockheed Martin Advanced Environmental Systems Inc., a corporation
established under the laws of the state of Delaware, having offices
at 201 Third St. NW, Suite 1600, Albuquerque, NM 87102 (herein after
called LMAES).
Commodore Advanced Sciences, Inc., a corporation established under
the laws of Virginia, having offices at 6867 Elm Street, McLean, VA
22101, (herein after referred to as "CAS").
2. Purpose:
a. The purpose of this agreement is to set forth understandings
under which LMAES and CAS will evaluate, for possible teamed
effort by the parties, potential projects and contracts related
to cooperative efforts in the pursuit of mutually beneficial
projects related to Commodore's Solvated Electron Technology
(SET(TM)) and particular expertise and complementary technologies
of LMAES. Projects in these areas may include environmental
investigations, waste characterization, remedial investigations,
feasibility studies, remediation, demilitarization, and research
and development.
b. In the event the parties determine on a case by case basis to
work with each other for a particular project (e.g. a request for
a proposal by the United States Government or other entities) the
parties will seek to negotiate a separate teaming agreement for
each such project.
3. Objectives:
a. It is the intent of both Parties to cooperate in a business
arrangement to pursue opportunities with the SET(TM) technology
for mixed and hazardous waste. Should a contract result from
these activities, the Parties agree to enter into a formal
teaming arrangement where the rights and responsibilities of both
Parties will be clearly identified.
b. A further objective is to work together to develop a "History" of
working together on field projects that will add value in
pursuing future work together.
c. As an integral part of the overall objectives, performing a
project or projects together will be the initial step.
1
<PAGE>
4. Validation of SET(TM) Technology
(a) CAS will validate the SET(TM) technology under field conditions,
provide details on unit operability and maintainability in the DOE or
DOD environment, verify previous testing and results regarding
scalability, and provide operating data as to SET(TM)'s applicability
to integrate the process into other treatment trains that LMAES has,
or has access to, when required. In addition, CAS will validate for
LMAES their previous test results on destruction, identification of
by-products from the reactions (and verification of their benign
nature) and, in the case of mixed waste, how the process may reduce
and concentrate certain radioactive materials from soil. Ideally, the
demonstration would show SET(TM)'s versatility in dealing with various
waste forms such as soils, liquids and miscellaneous heterogenous
waste streams such as job control material.
(b) In conjunction with demonstrating and verifying the technical aspects
of the SET(TM) process, site support issues will be validated. These
include material handling, radiological engineering in design and
implementation of radiological controls, industrial hygiene controls,
and safety procedures in using the ammonia and sodium metal during
process applications.
(c) To assist in effectively and expeditiously implementing this MOU,
LMAES agrees to enter into a research and development contract with
CAS in an amount not to exceed $50,000, with planned effective date in
January of 1998, to treat contaminated material and validate SET(TM)
Technology against specific expected results (to be finalized and
agreed to before activation of contract). In support of this R&D
contract, CAS will provide an equivalent amount of "Like Kind" value
($50K) in equipment, operators, consumables, laboratory testing, etc.
to aid the success of the treatability studies and customer site
demonstration.
(d) The intent of this R&D contract is to demonstrate the benefits to be
derived from use of the SET(TM) Technology in the decontamination of
soil and/or drummed material. Some amount of contaminated material may
be shipped to the LMAES Material Treatability Laboratory, in Las
Vegas, NV, to evaluate contaminant bonding and particle size
distribution. This will be followed by treatability studies using the
SET(TM) Technology, provided by CAS in conjunction with other pre and
post processors, as required, to assess results.
5. Business Opportunities
(a) Following successful treatability studies, LMAES and CAS will plan to
schedule demonstration at a selected customer site.
(b) A projected near-term customer is Y-12 (Oak Ridge) contaminated soil
and
2
<PAGE>
job control material. Follow-on opportunities at the Portsmouth, Ohio
facility will be predicated on successful demonstration and validation
activities at Oak Ridge Y-12 facility or other facilities.
(c) Both parties mutually agree to identify, during the 4th quarter of
1997 and 1st quarter 1998, the clients and projects that they will
initially pursue together during the term of this MOU. These will
include, but not necessarily be limited to, the Department of Energy,
Department of Defense, International and LMC.
(d) Upon successful completion of all demonstration and validation
provided for herein the two parties will further define potential
customers to be targeted for further business opportunities.
6. Marketing
(a) Both Parties shall submit to each other all appropriate technical and
business data and information concerning its technical and business
history, including reasonable cost or pricing data, for use in
developing strategies leading to a favorable competitive position with
respect to the client's opportunities. Both Parties shall make
available appropriate and high-quality personnel to provide reasonable
assistance to each other in the preparation of presentations,
meetings, strategy sessions, and proposals. Further, both Parties will
continue to work together toward these objectives throughout any
subsequent evaluations, presentations, submittal, and best and final
request concerning the pursuit of contracts which may follow the
submission of the proposals. Both Parties agree that their portion of
the project scopes is subject to negotiation.
(b) In pursuit of the program it is agreed that both Parties will jointly
develop specific marketing and pricing strategies. The Parties will
meet at those times which are necessary to discuss progress and status
of their technical documentation; and cooperate in the exchange of
data which may be necessary to aid in the development of briefings.
Both Parties will also provide a person at each company to serve as a
primary designated focal point of the effort. For LMAES, that person
shall be Ed Brown at (505) 924-2588; for CAS that person shall be
Peter Harrod at (703) 872-6809.
7. Organization:
a. If CAS is awarded a prime contract for a project, CAS shall award a
subcontract to LMAES in accordance with the provisions of the project
teaming agreement.
3
<PAGE>
b. If LMAES is awarded a prime contract for a project, LMAES shall award
a subcontract to CAS in accordance with the provisions of the project
teaming agreement.
8. Expenses and Costs:
Except as otherwise provided by any contract to be negotiated hereunder
for Commodore's Solvated Electron Technology (SET(TM)) validation, the
parties will each bear all of its own expenses, costs, risks, and
liabilities arising out of any effort performed under this agreement and
neither party will make any claim or charge against the other.
9. Proposal Preparation:
a. The party who is the proposed prime contractor shall prepare the
proposal, integrate the data provided by the proposed subcontractor,
and submit the proposal to the client.
b The proposed subcontractor shall provide appropriate and highly
qualified personnel and use its best efforts to support the
preparations of the proposals to be submitted to the client for the
projects by a preparing and submitting to the proposed prime
contractor such data applicable to the work involved as is required by
the proposed prime contractor for use in preparation for use in said
proposal and be providing all reasonable assistance to the proposed
prime contractor in preparation of the proposals.
10. Performance:
a. The parties shall in good faith negotiate the terms of any subcontract
for the work identified in the teaming agreement, the obligation to
award any subcontract is contingent upon the client approval of the
subcontract.
b. The subcontract shall include, among other provisions mutually
acceptable to both parties, those provisions of the prime contract
which are required or appropriate to be passed on to a subcontractor.
11. Disclosure and Protection of Information:
a. During the course of the Agreement either party may exchange or
disclose to one another information and data which it considers to be
proprietary. Proprietary information shall be defined as information
which is in writing and identified by an appropriate mark or stamp as
proprietary, or is disclosed orally and identified orally as
proprietary and identified in writing as proprietary within thirty
(30) days of the oral disclosure. The recipient party agrees that it
will use the proprietary information only in connection with the
4
<PAGE>
proposal activity contemplated by this Agreement, and the performance
of any resultant contact(s), to the extent set forth in such
contract(s) and that it will not disclose the same to third parties
without the written consent of the transmitting party; provided,
however, that the recipient party shall not be liable for any
disclosure of such data to others: (1) after 4 (four) years from the
effective date of the Agreement; (2) if the data is within, or later
falls within, the public domain through no fault of recipient; (3)
if the data is known by the recipient, its divisions, subsidiaries, or
parent affiliates as substantiated by documentation dated prior to the
disclosure thereof by the transmitting party to others on a
non-restricted basis; or (4) if the data is approved for release or
use by written authorization of an officer of the transmitting party.
b. Each party agrees that all information and data received and marked as
proprietary in accordance with the Agreement: (1) will be disclosed
only to personnel of the recipient party having a "need to know" in
connection with performance of effort within the intent and provisions
of this Agreement and to the United States Government or authorized
representative thereof in the performance by either party of its
portion of the Project, provided, however, that any information
proprietary to either party which is disclosed under this provision by
the other parity to the United States Government or an authorized
representative thereof shall be marked with a restrictive legend as is
appropriate and permissible under applicable laws and regulations; and
(2) if reproduced in whole or in part in accordance with the
Agreement, will carry a proprietary notice at least similar to that
with which the information is submitted to the recipient party, except
as provided in Item (1) of the subparagraph (b) relative to
information disclosed to the United States Government.
c. Neither this Agreement nor any disclosure of information hereunder
shall be construed to grant either party any rights, license or
immunity, in or under any issued, pending, or after-acquired patents
or patent applications or proprietary technical information of the
other party.
12. Publicity:
Except as may be required by Federal, State, or local laws and regulations
or courts of competent jurisdiction, no publicity or advertising shall be
released by either LMAES or CAS in connection with the Agreement or any
proposal contemplated hereby without the prior written approval of the
other. Neither party however, shall be precluded from revealing to the
Government the existence and contents of this Agreement.
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<PAGE>
13. Independent Contractors
Each party hereto shall act as an independent contractor, and this
Agreement shall not constitute, create, give effect to or otherwise
recognize a joint venture, pooling arrangement, partnership, or formal
business organization of any kind. No relationship, other than that created
by and set forth in this Agreement, shall be intended or established by any
reference to the parties operating as a "Team" or "Team Members".
14. Term of Agreement
This Agreement and all rights and duties hereunder except those in
Paragraph 11. Disclosure and Protection of Information, shall terminate
upon expiration of eighteen (18) months from the date of this Agreement.
15. Entire Agreement:
This Agreement contains the entire Agreement of the parties and supersedes
any previous understanding, commitments or agreements, oral or written,
with respect to the subject matter hereof.
16. Assignment:
Neither party may assign or transfer its interest hereunder without the
prior written consent of the other party.
17. Governing Law:
This Agreement and the interpretation thereof shall be governed by the laws
of the State of New Mexico.
18. Other Work:
Nothing herein shall be deemed to restrict either party from offering any
other party any items or services that it may regularly offer for sale,
even though such items or services may be contemplated by this Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed effective as of the latest date signed below.
LOCKHEED MARTIN ADVANCED ENVIRONMENTAL SYSTEMS, INC.
(LMAES)
BY: /s/ James A. Tegnelia DATE: DECEMBER 2, 1997
---------------------------------- ---------------------------------
James A. Tegnelia
President
COMMODORE ADVANCED SCIENCES, INC. (CAS)
BY: /s/ Kenneth L. Adelman DATE: 12/9/97
---------------------------------- ---------------------------------
Kenneth L. Adelman
Executive Vice President
(703) 748-0200
(704) 748-0201 fax
7
<PAGE>
SERVICES AGREEMENT
THIS SERVICE AGREEMENT ("Agreement") is made and entered into as of the 1st
day of September 1997, by and among
COMMODORE ENVIRONMENTAL SERVICES, INC., a Delaware corporation with
principal offices in New York, New York (hereinafter "Environmental"), and
COMMODORE APPLIED TECHNOLOGIES, INC., a Delaware corporation with principal
offices in New York, New York (hereinafter "Applied"), and
COMMODORE SEPARATION TECHNOLOGIES, INC., a Delaware corporation with
principal offices in Atlanta, Georgia (hereinafter "Separation"), and
COMMODORE REMEDIATION TECHNOLOGIES, INC., a Delaware corporation with
principal offices in Houston, Texas (hereinafter "Advanced"), and
COMMODORE LABORATORIES, INC., a Delaware corporation with principal offices
in Marengo, Ohio (hereinafter "Laboratories"), and
COMMODORE TECHNOLOGIES, INC., a Delaware corporation with principal offices
in Wilmington, Delaware (hereinafter "Technologies"), and
ADVANCED SCIENCES, INC., a New Mexico corporation with principal offices in
Albuquerque, New Mexico (hereinafter "ASI"), and
CFC TECHNOLOGIES, INC., a Delaware corporation with principal offices in
Atlanta, Georgia (hereinafter "CFC"), and
COMMODORE REFRIGERANT TECHNOLOGIES, INC., a Delaware corporation with
principal offices in Atlanta, Georgia (hereinafter "Refrigerant"), and
COMMODORE GOVERNMENT ENVIRONMENTAL TECHNOLOGIES, INC., a Delaware
corporation with principal offices in Houston, Texas (hereinafter
"Governmental"),
all of which companies are hereinafter referred to as "Companies".
WITNESSETH
WHEREAS, the Companies are all affiliated companies through common
ownership, and
<PAGE>
WHEREAS, the Companies are all pursuing material science technologies and to
varying degrees have common markets and customers, and common business
perspectives, and
WHEREAS, some of the Companies do not have support and administrative
infrastructures and need to obtain such services from third parties, while other
of the Companies do have some such support and administrative services
personnel, and
WHEREAS, some of the Companies are sharing common facilities and are sharing
common executives, and
WHEREAS, some of the Companies are able to provide personnel and expertise
in certain operational areas, such as marketing, research and development,
manufacturing, engineering, and the provision of other technical services, and
some of the Companies are in need of such assistance, and
WHEREAS, the Companies are interested in cooperating in sharing costs where
appropriate and in cooperating on joint endeavors and projects from time to
time, all to the benefit of some of the Companies specifically and all of the
Companies generally, and
WHEREAS, the Companies are interested in ensuring that any cost sharing is
done equitably and accurately,
NOW THEREFORE, in consideration of the foregoing and the mutual promises and
conditions hereinafter set forth, the parties hereto do hereby agree as follows:
1. Term. This Agreement shall take effect on September 1, 1997, and shall
remain in effect for a period of five years, unless earlier terminated by the
parties by mutual agreement, provided, however that any of the Companies may
earlier terminate its participation in this Agreement by giving written notice
to all of the other parties hereto thirty (30) days prior to its withdrawal from
Agreement. Any such withdrawal shall not affect the then-accrued rights of the
parties which shall remain in full force and effect.
2. Services. The parties agree that the services covered by this Agreement
include, but are not necessarily limited to, accounting, financial management,
including supervising and administering banking relationships, insurance and
risk management, credit, management of payables and accounts receivable, tax
preparation and planning, human resource and personnel management and
administration, information systems, purchasing and procurement, legal and
corporate secretarial (provided that nothing herein shall be construed to imply
that an attorney shall practice law in a state in which he or she is not
licensed to practice), executive management, sales and marketing, manufacturing,
distribution and traffic, customer relations, public relations, research and
development, engineering, technical assistance, product design, development and
maintenance, patenting, and other areas of service such as are appropriately and
necessarily required in the operations of a company such as the Companies (all
of the foregoing are jointly and severally referred to as hereafter as
"Services").
<PAGE>
3. Compensation
(a) The parties shall designate an officer, generally the Chief Financial
Officer of a party, who shall supervise payments hereunder.
(b) Services provided by one party to one or more other parties hereunder
shall be equitably charged in accordance with the following principles:
1. Professional employees shall be charged on the basis of time
actually worked as a percentage of salary (including cost of benefits)
attributable to that professional. Such employees shall keep accurate records of
the time worked on behalf of another party to this agreement. Charges for
clerical employees shall track the charges of the supervisory professional
employee.
2. Charges for offices, including rent, utilities, office services,
and all other routine charges regularly incurred in the normal course of
business, shall be 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 is working based upon time actually worked.
3. Charges from third parties, including but not limited to
consultants, lawyers, accountants, and similarly, shall be levied against the
party actually receiving the benefit of the services. Best efforts shall be
exerted to ensure that third parties themselves keep accurate records as to
which company they are performing services.
(c) Any issues arising under this provision shall be settled by the
officers designated under Clause 3(a) above.
(d) No fees shall be levied upon services rendered hereunder inasmuch as
the parties agree that each party to this Agreement shall benefit equally from
this Agreement.
(e) Payments hereunder shall be made by a party within thirty (30) days
after the close of a quarter during which receipt of a billing from another
party has occurred, by check or wire transfer in accordance with the billing
instructions of the billing party. Any billings hereunder shall be supported by
such documentation as the party being charged may reasonably require.
(f) Applied shall act as a coordinator of billings and payments hereunder
on behalf of itself and other parties hereunder. It shall also coordinate
receipt of third parties billings, analysis of supporting documentation, and
allocation of charges to the appropriate parties hereunder, subject to the other
provisions of this Agreement.
4. Parties to the Agreement. Additional parties ("After-adhering Parties")
may adhere to this Agreement and become full parties to this Agreement, with the
agreement of the initial parties ("Initial Parties") hereto. If any of the
parties named herein shall not execute this Agreement, all parties hereto that
have executed this Agreement shall
<PAGE>
nevertheless be fully bound one to another. If any of the Initial Parties shall
withdraw from the Agreement, all remaining Initial Parties to the Agreement
shall continue to be fully bound one to another.
5. Agreement Between Separation and CFC. The Services Agreement between
Separation and CFC dated April 8, 1997, shall be terminated and of no further
force and effect, subject to the then-accrued rights of the parties with the
effective date of this Agreement.
6. Audit. Any party hereto may audit the books and records of any other
party hereto in respect of billings hereunder upon reasonable notice and during
normal business hours.
7. Indemnification. Each party hereto agrees to indemnify and hold harmless
the other parties hereto against and in respect of any and all claims, suits,
actions, proceedings, investigations, judgments, deficiencies, damages,
settlements, liabilities, and legal and other expenses (collectively "Losses")
as and when incurred, arising out of, in connection with or based upon any act
or omission, or alleged act or omission, by the indemnified party in connection
with its performance or non-performance hereunder. The indemnified party has to
give the indemnifying party prompt notice of any claim asserted or threatened
against it in respect of which indemnification is sought (though indemnification
shall not be conditioned upon receipt of such notice). Indemnification hereunder
is conditioned upon the indemnified party having acted in good faith and in a
manner believed to be in the best interests of the indemnifying party and within
the scope of authority set forth hereunder.
8. Notices. All notices required or permitted hereunder shall be in writing
and mailed or sent by facsimile to the chief financial officer of the party
receiving the notice at its principal office.
9. Assignment. Neither this Agreement nor any rights or obligations
hereunder may be transferred, assigned, or delegated, in whole or in part, by
any party without the written consent of all other parties to this Agreement.
Subject to the foregoing, this Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns, but no other persons shall acquire or have any
rights under this Agreement.
10. Choice of law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without reference to conflict
or choice of laws principles.
IN WITNESS HEREOF, and intending to be legally bound, the parties have duly
executed this Agreement with effect as of September 1, 1997.
COMMODORE ENVIRONMENTAL SERVICES, INC.
By: /s/ Paul E. Hannesson
---------------------
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
By: /s/ Paul E. Hannesson
---------------------
COMMODORE SEPARATION TECHNOLOGIES, INC.
By: /s/ Paul E. Hannesson
---------------------
COMMODORE REMEDIATION TECHNOLOGIES, INC.
By: /s/ Paul E. Hannesson
---------------------
COMMODORE LABORATORIES, INC.
By: /s/ Paul E. Hannesson
---------------------
COMMODORE TECHNOLOGIES, INC.
By: /s/ Paul E. Hannesson
---------------------
ADVANCED SCIENCES, INC.
By: /s/ Paul E. Hannesson
---------------------
CFC TECHNOLOGIES, INC.
By: /s/ Paul E. Hannesson
---------------------
COMMODORE REFRIGERANT TECHNOLOGIES, INC.
By: /s/ Paul E. Hannesson
---------------------
COMMODORE GOVERNMENT ENVIRONMENTAL TECHNOLOGIES, INC.
By: /s/ Paul E. Hannesson
---------------------
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name of Subsidiary State or Jurisdiction of Incorporation Percentage Owned
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commodore Solution
Technologies, Inc. Delaware 100%
Commodore Separation
Technologies, Inc. Delaware 87%
Commodore CFC
Technologies, Inc. Delaware 100%
CFC Technologies, Inc. Ohio 100%
Commodore Advanced
Sciences, Inc.* New Mexico 100%
A.S. Environmental, Inc.* Delaware 100%
Commodore Laboratories, Inc.* Ohio 100%
Commodore Remediation
Technologies, Inc.* Delaware 100%
Commodore Government
Environmental
Technologies, Inc.* Delaware 100%
Commodore Technologies, Inc.* Ohio 100%
Sandpiper Properties, Inc.* Ohio 100%
Environmental Alternatives, Inc.* New Mexico 100%
Advanced Sciences Integrated
Mexico, S.A. de C.V.* Mexico 100%
Advanced Sciences Integradas S.A.* Argentina 100%
CORT Technologies, Inc.* Delaware 100%
Commodore Refrigerant
Technologies, Inc. Delaware 100%
</TABLE>
- -----------------------------
* Wholly owned subsidiary of Commodore Solution Technologies, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,151
<SECURITIES> 0
<RECEIVABLES> 3,480
<ALLOWANCES> 416
<INVENTORY> 360
<CURRENT-ASSETS> 18,104
<PP&E> 3,476
<DEPRECIATION> 978
<TOTAL-ASSETS> 29,696
<CURRENT-LIABILITIES> 6,934
<BONDS> 19
0
0
<COMMON> 23
<OTHER-SE> 11,631
<TOTAL-LIABILITY-AND-EQUITY> 29,696
<SALES> 19,493
<TOTAL-REVENUES> 19,493
<CGS> 16,325
<TOTAL-COSTS> 32,795
<OTHER-EXPENSES> 1,827<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 565<F1>
<INCOME-PRETAX> (15,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,694)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
<FN>
1 Net of interest income of 745.
2 Equity in losses of unconsolidated subsidiary.
</FN>
</TABLE>
