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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from July 1 to December 31, 1997
Commission file number 0-22291
Commodore Separation Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-3299195
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3240 Town Point Drive, Suite 200
Kennesaw, Georgia 30144
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (770) 422-1518
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock, par value $0.001 per share
10% Senior Convertible Redeemable Preferred Stock, par value $0.001 per share
Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to 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 $4,026,000 (based
upon the average bid and asked prices of the Common Stock on March 26, 1998 as
quoted by the Nasdaq SmallCap Market).
As of March 26, 1998, 11,515,575 shares of the registrant's Common
Stock were outstanding.
----------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
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COMMODORE SEPARATION TECHNOLOGIES, INC.
TRANSITION REPORT ON FORM 10-K
FOR THE TRANSITION PERIOD FROM JULY 1 TO DECEMBER 31, 1997
TABLE OF CONTENTS
Page
PART I.................................................................... 1
ITEM 1. BUSINESS.................................................... 1
General..................................................... 1
The SLiM Technology......................................... 2
Contracts................................................... 4
Markets and Customers....................................... 5
Raw Materials............................................... 7
Backlog..................................................... 7
Research and Development.................................... 7
Intellectual Property....................................... 7
Competition................................................. 8
Government Regulation....................................... 8
Environmental Matters....................................... 8
Employees................................................... 9
ITEM 2. PROPERTIES.................................................. 9
ITEM 3. LEGAL PROCEEDINGS........................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 9
PART II................................................................... 10
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS...................... 10
Market Information.......................................... 10
Dividend Information........................................ 10
ITEM 6. SELECTED FINANCIAL DATA..................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 12
General..................................................... 12
Results of Operations....................................... 12
Liquidity and Capital Resources............................. 13
Net Operating Losses........................................ 14
Year 2000 Considerations.................................... 14
Forward-Looking Statements.................................. 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 15
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...................... 15
PART III.................................................................. 16
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 16
Executive Officers and Directors............................ 16
Key Employees............................................... 19
Board Committees............................................ 19
Compensation of Directors................................... 20
Compliance with Section 16(a) of the Exchange Act........... 20
ITEM 11. EXECUTIVE COMPENSATION...................................... 21
Summary Compensation........................................ 21
Stock Options............................................... 22
Employment Agreements....................................... 23
Compensation Committee Interlocks and Insider
Participation............................................... 24
Report of the Compensation Committee on Executive
Compensation................................................ 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 30
Organization and Capitalization of the Company.............. 30
Loans Involving Affiliates.................................. 30
Offices..................................................... 30
Services Agreement.......................................... 31
Future Transactions......................................... 31
PART IV................................................................... 32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K................................................. 32
SIGNATURES................................................................ 35
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ON JULY 28, 1997, THE COMPANY CHANGED ITS FISCAL YEAR FROM A
TWELVE-MONTH PERIOD ENDING JUNE 30 TO A TWELVE-MONTH PERIOD ENDING DECEMBER 31,
EFFECTIVE JANUARY 1, 1998. CONSEQUENTLY, THE COMPANY IS FILING THIS TRANSITION
REPORT ON FORM 10-K FOR THE SIX-MONTH TRANSITION PERIOD FROM JULY 1 TO DECEMBER
31, 1997.
PART I
ITEM 1. BUSINESS.
GENERAL
Commodore Separation Technologies, Inc., a Delaware corporation (the
"Company"), has developed and is in the process of commercializing its
separation technology and recovery system known as SLiM(TM) (supported liquid
membrane). Based on 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.
In December 1997 and February 1998, the Company was awarded its first
two commercial contracts from Maryland Environmental Service ("MES") to use its
SLiM technology in connection with the removal of chromium in water leaching
from waste sites at the Baltimore Harbor and potentially polluting the
Chesapeake Bay. Prior to these awards, the Company had performed a series of
on-site demonstrations of SLiM, in which a SLiM unit, in a single feedstream
passthrough, reduced the contamination level of chromium from more than 630
parts per million (ppm) to less than one ppm. Under a license agreement with
Lockheed Martin Energy Research Corporation, the Company also has received the
exclusive worldwide license (subject to a government use license) to use and
develop its SLiM technology for separating the radionuclides, technetium and
rhenium, from mixed wastes containing radioactive materials. The Company's
business strategy is to pursue these and other opportunities for SLiM and to
seek marketing arrangements with established engineering and environmental
services firms to use SLiM.
To finance the significant growth experienced by the Company, the
Company raised a net amount equal to approximately $11,100,000 from an initial
public offering of its preferred stock, common stock and warrants in April and
May 1997 (the "IPO"). As of March 26, 1998, approximately 87% of the Company's
common stock was owned by Commodore Applied Technologies, Inc., a Delaware
corporation ("Applied"), and approximately 43% of Applied's common stock was, in
turn, owned by Commodore Environmental Services, Inc., a Delaware corporation
("Environmental").
The Company was incorporated in Delaware in November 1995. The
Company's principal executive offices are located at 3240 Town Point Drive,
Suite 200, Kennesaw, Georgia 30144, and its telephone number at that address is
(770) 422-1518.
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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 the Company's proprietary chemicals resident in the
membrane. The Company 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. The Company formulates the chemical
mixture for the process in each customer application, and performs the initial
installation of the equipment at the customer site. The customer will either
operate the equipment itself using computer data links to the Company, which
will monitor the equipment and process while in operation, or the Company will
enter into service contracts with the customer to operate the equipment at the
customer's site.
Operational Characteristics
The most common alternative methods for metals separation from
solubilized process streams presently include ion exchange, reverse osmosis,
precipitation, ultrafiltration, nanofiltration and chromatography. The Company
believes that most of these methods have certain drawbacks, including lack of
selectivity in the separation process, inability to handle certain metals in the
process streams and the creation of sludges and other harmful by-products which
require further post-treatment prior to disposal. For example, reverse osmosis
and ultrafiltration are incapable of separating chrome and chromium materials
from wastewater streams, and precipitation results in the production of sludge
that requires dewatering, drying and disposal in a landfill. Certain of these
other technologies also entail long process times and are relatively expensive.
The Company believes that SLiM is a superior and cost-effective alternative to
other existing forms of membrane filtration technology in that it:
o requires lower initial capital costs and lower operating costs;
o has the capability of treating a variety of elements and compounds
in industrial settings at greater speed and with a higher degree
of effectiveness, with varying contaminant concentrations and
volume requirements;
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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>
Some of these tests were performed on limited quantities of process
streams, and there can be no assurance that the same or similar results would or
could be obtained on a large-scale commercial basis or on any specific project.
Other than with respect to the Company's tests involving the separation and
recovery of zinc, nickel and chromium, no other tests conducted by the Company
have been independently verified.
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CONTRACTS
Port of Baltimore Contracts. In November 1997, the Company was awarded
its first commercial project by the State of Maryland and entered into a
multi-year, sole-source contract with MES for the removal of
chromium-contaminated leachate at the Hawkins Point Hazardous Waste Treatment
Facility at the Port of Baltimore. The contract, dated as of November 25, 1997
(the "Hawkins Point Contract"), provides that the Company will lease a SLiM unit
to MES for a one-time, lump-sum lease payment of $250,000, and will license its
proprietary SLiM technology to MES in exchange for a royalty equal to one-half
of any savings which MES realizes by using the SLiM technology as opposed to
conventional non-proprietary remediation technology. The Company also reserved
the right to market any residual chromium captured by its SLiM technology and
receive 50% of the revenues generated from any commercial sales of such residual
chromium.
The Hawkins Point Contract followed the Company's successful completion
of several on-site demonstrations of SLiM at the Port of Baltimore. During the
Company'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. The Company 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. The Company 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, the Company was awarded its second commercial project
by the State of Maryland and entered into another multi-year, sole-source
contract with MES for the removal of chromium-contaminated leachate at Dundalk
Marine Terminal at the Port of Baltimore. The contract, dated as of February 5,
1998 (the "Dundalk Contract"), provides that the Company will lease a SLiM unit
to MES for a one-time, lump-sum lease payment of $350,000, and will license its
proprietary SLiM technology to MES in exchange for a royalty equal to one-half
of any savings which MES realizes by using the SLiM technology as opposed to
conventional non-proprietary remediation technology. As in the case of the
Hawkins Point Contract, the Dundalk Contract provides that the Company shall
have the right to market any residual chromium captured by its SLiM technology
and receive 50% of the revenues generated from any commercial sales of such
residual chromium.
Lockheed License Agreement. In January 1997, the Company entered into a
license agreement (the "Lockheed License Agreement") with Lockheed Martin Energy
Research Corporation ("Lockheed Martin"), manager of the Oak Ridge National
Laboratory, a United States Department of Energy national laboratory ("Oak
Ridge"). Under the terms of the Lockheed License Agreement, the Company received
the exclusive worldwide license, subject to a government use license, to use and
develop the technology related to the separation of the radionuclides technetium
and rhenium from mixed wastes containing radioactive materials. The Company also
received under the Lockheed License Agreement the right to exploit the
technology for other commercial applications. Pursuant to the Lockheed License
Agreement, the Company made an initial cash payment of $50,000 upon the
execution of the agreement and is obligated to pay a royalty to Lockheed Martin
of 2% of net sales (less allowances for returns, discounts, commissions,
freight, and excise or other taxes) up to total net sales of $4,000,000 and 1%
of net sales thereafter. In addition, the Company has agreed to guarantee
Lockheed Martin, during the term of the Lockheed License Agreement, an annual
minimum royalty of $15,000 commencing in the third year of the Lockheed License
Agreement. The Lockheed License Agreement, which may be terminated at any time
solely by the Company, has a term which will last until the end of the life of
all patents or patentable claims described in or ultimately arising out of the
provisional patent filed jointly by the Company and three colleagues of Srinivas
Kilambi, Ph.D., the Company's former Senior Vice President--Technology, who
worked with him at Oak Ridge, covering their inventions related to
radionuclides. Based on tests conducted at Oak Ridge since May 1994, the Company
believes that this technology is capable of selectively extracting and
recovering technetium, rhenium and other radioactive isotopes as a concentrated
aqueous solution which
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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.
MARKETS AND CUSTOMERS
Overview
Based on market data compiled by the Company, the Company estimates
that, as of December 31, 1997, there were approximately 7,500 companies
operating metal plating and metal finishing facilities in the United States and
an additional 1,500 such facilities in Canada. Based on estimated sales by these
facilities, the Company believes that on average each of these facilities could
utilize four or more SLiM units, if they adopted the Company's technology. Based
on market data compiled by the Company, the potential market from organic and
inorganic chemical companies is in excess of 4,000 companies in the United
States and Canada. The Company believes that on average each of these companies
could utilize two to four SLiM units, if they adopted the Company's technology.
Additionally, there were more than 1,000 biochemical, bulk drug manufacturing
and pharmaceutical companies operating in the United States and Canada, and
based on these companies' estimated sales, the Company believes that on average
the typical such company could utilize two to four SLiM units operating at
substantial volumes. The Company believes that the potential international
market for each of the above applications could be up to two times the size of
the North American market. Federal, state and local government entities are also
a potential market for the Company, particularly in the area of environmental
remediation and clean-up.
Commercialization and Marketing Strategy
During its initial commercialization phase, the Company will be leasing
its equipment to customers, with the lease payments being due and payable after
installation and successful start-up of the equipment. When replacement modules
are required, the Company will supply these modules at a reasonable mark-up over
their cost. As new patents are filed and issued, the Company may, for certain
applications, determine to make a direct sale of the equipment with additional
long-term royalty payment provisions. The Company expects to obtain revenues
through servicing the SLiM equipment, including periodic replacement of the
membrane component. In addition to leasing and selling its equipment, the
Company will charge its customers based on a percentage of the customer's actual
cost savings derived from reduced disposal costs and recovered reusable
materials. In applications in which reusable materials are not recovered, the
Company's ongoing charges may be based on the volume of materials processed.
Although the Company is focusing its initial marketing efforts on domestic
businesses, the Company is also prepared to pursue international opportunities,
which may arise from successful presentations to multinational corporations or
from overseas referrals by domestic entities.
Metals Separation and Recovery. The Company's initial marketing efforts
are in the industrial sector, in which the separation and recovery of
metal-bearing aqueous solutions present a substantial market. Primary among the
potential customers in this area are metal plating and metal finishing
operations, which generate substantial volumes of mixed metals process streams
for which a limited number of potentially effective technologies are available
to effect proper separation.
In September 1997, the Company installed a demonstration SLiM unit at a
metal plating company. The unit operated in a batch mode for one week, and,
based on operating data results, successfully separated and recovered nickel and
zinc effluent streams with concentrations of up to 2,800 ppm. An independent
testing laboratory verified the results.
Based on management studies and discussions with metals industry
executives, the Company believes that the major competitive technologies in this
area are precipitation and ion exchange. Precipitation generates a metallic
sludge by-product requiring further treatment prior to landfill disposal. Ion
exchange captures anions or cations, but offers no selectivity within a group.
Further, ion exchange is only approximately 90% efficient. By contrast, SLiM
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does not generate harmful metallic sludges and, in some cases, enables process
water recycling while also enabling recovery of valuable raw materials to
approximately 99% efficiency. As costs of environmental compliance continue to
mount, the Company expects SLiM to become a preferred alternative to some
existing metals separation methods.
Environmental Remediation and Restoration. The Company believes that
SLiM has significant potential for application to environmental remediation and
restoration. In November 1997 and February 1998, the Company was awarded its
first two commercial contracts for the removal of chromium-contaminated leachate
at 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, the Company intends to enter into
collaborative joint working and marketing arrangements with established
engineering and environmental service organizations which are expected to
provide technical and professional expertise, market presence and credibility.
Radionuclide/Mixed Waste Separation. In the United States, there are
numerous sites operated or maintained by the DOE and/or the DOD at which there
are present "mixed wastes" containing radionuclides intermingled with other
hazardous wastes. These sites are also contaminated with other compounds
associated with nuclear weapons testing and energy. SLiM may have capabilities
in the separation of radionuclides such as cesium, technetium and rhenium. The
United States government estimates that potential government expenditures in
this market could be between $234 billion and $389 billion over the course of
the next 75 years. The Company anticipates pursuing this market area in
collaboration with established engineering and environmental service
organizations, who can provide technical and professional expertise, market
presence and credibility.
Gas Separation. The SLiM equipment and technology can possibly be
utilized to separate and recover valuable gases from mixed gaseous and liquid
compounds. For example, nitrogen is used for a wide variety of process
applications, including oil recovery, food processing, metal heat treatment, and
pharmaceutical testing and development.
Nitrogen is typically obtained by separating it from oxygen, using
processes such as cryogenic distillation, absorption, catalytic removal, and
permselective polymeric membrane separation. However, each of these processes
has disadvantages, which can include high energy usage, high pressure and
temperature requirements, and/or relatively low purity of the recovered gas. The
SLiM process may overcome these disadvantages by yielding relatively pure
nitrogen in a low-energy, lower capital cost process conducted at ambient
temperature and pressure. The Company has not developed a strategy or targeted a
market for commercialization of the gas separation application.
Biochemicals Separation and Recovery. SLiM may have capabilities in the
separation and recovery of biochemicals, including phenylalanine (an amino
acid). The Company believes that such capabilities, although untested, extend to
other biochemicals such as proteins, other amino acids, antibiotics, glycerides,
fatty acids, drug delivery vehicles and other pharmaceuticals. Mixed wastes
containing these materials are generated in both research and development
functions and in manufacturing functions. These materials have substantial
value, and the Company intends to emphasize both the value of the recovered
materials and the enhanced and speedier environmental compliance attributes of
SLiM in its marketing efforts.
Currently, the primary competing technology in this area is
chromatography, which requires substantially greater time to treat significant
volumes of material, and is substantially less selective in the types of
materials that can be separated from the liquid feedstream.
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RAW MATERIALS
The Company currently has a limited number of outside sources of supply
for some strategic components used in the SLiM process, including chemicals,
fibers and membrane casings. Business disruptions or financial difficulties of
such suppliers, or raw material shortages or other causes beyond the Company's
control, could adversely affect the Company by increasing the cost of goods sold
or reducing the availability of such components. In its development to date, the
Company has been able to obtain adequate supplies of these strategic components.
However, as it develops its commercial activities, the Company may experience a
rapid and substantial increase in its requirements for these components. If the
Company were unable to obtain a sufficient supply of required components, it
could experience significant delays in the manufacture of SLiM equipment, which
could result in the loss of orders and customers and could have a material
adverse affect on the Company's business, financial condition and results of
operations. In addition, if the cost of raw materials or finished components
were to increase, there can be no assurance that the Company would be able to
pass such increase to its customers. The use of outside suppliers also entails
risks of quality control and disclosure of proprietary information.
BACKLOG
At December 31, 1997, total backlog for the Company was approximately
$600,000, as compared with no backlog at June 30, 1997. All of such backlog
represents work for which the Company has entered into a signed agreement or
purchase order with respect thereto or has received an order to proceed with
work up to a specified dollar amount, and represents work which the Company
expects will be completed in the next 12 months. While the Company expects that
backlog amounts will result in revenue, no assurance can be given that all
amounts included in backlog will ultimately be realized, even if covered by
written contracts or work orders.
RESEARCH AND DEVELOPMENT
Research and development activities are ongoing and utilize internal
technical staff, as well as independent consultants retained by the Company and
its subsidiaries. All such activities are company-sponsored. Research and
development expenditures for the Company were $817,000 and $985,000 for the
transition period from July 1 to December 31, 1997 (the "Transition Period") and
for the fiscal year ended June 30, 1997, respectively.
INTELLECTUAL PROPERTY
In September 1997, the Company 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 and
Lockheed Martin. The other CIP provisional patent application and the
international patent application cover the sole inventions of Dr. Kilambi.
The Company's liquid membrane technology patent applications are based
on the selective combination of different known solvents, supports, diluents,
carriers and other components to separate a variety of metals, chemicals and
other targeted substances. While the Company believes that its technology covers
many separation applications, third parties may have developed, or may
subsequently assert claims to, certain of these solvents, supports, diluents,
carriers or other components for one or more specific applications. In such
event, the Company may need to acquire licenses to, or to contest the validity
of, issued or pending patents or claims of third parties.
To protect its trade secrets and the unpatented proprietary information
in its development activities, the Company requires its employees, consultants
and contractors to enter into agreements providing for the confidentiality and
the Company's ownership of such trade secrets and other unpatented proprietary
information originated by such persons while in the employ of the Company. The
Company also requires potential collaborative partners to enter into
confidentiality and non-disclosure agreements.
There can be no assurance that any patents which may hereafter be
obtained, or any of the Company's confidentiality and non-disclosure agreements,
will provide meaningful protection of the Company's confidential or proprietary
information in the case of unauthorized use or disclosure. In addition, there
can be no assurance that the
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Company will not incur significant costs and expenses, including the costs of
any future litigation, to defend its rights in respect of any such intellectual
property.
COMPETITION
The most common alternative methods for metals separation from
solubilized process streams presently include ion exchange, reverse osmosis,
precipitation, ultrafiltration, nanofiltration and chromatography. The Company
believes that most of these methods have certain drawbacks, including lack of
selectivity in the separation process, inability to handle certain metals in the
process streams, and the creation of sludges and other harmful by-products which
require further post-treatment prior to disposal. For example, reverse osmosis
and ultrafiltration are incapable of separating chromium from wastewater
streams, and precipitation results in the production of sludge which requires
dewatering, drying and disposal in a landfill. Certain of these other
technologies also entail long process times, and are relatively expensive.
By contrast, SLiM is capable of handling a broad range of compounds in
a faster and relatively inexpensive manner. Furthermore, the by-products of the
SLiM process consist primarily of wastewater, which can be discharged as normal
wastewater effluent, and to a substantially lesser extent and in only rare
circumstances, materials requiring landfill disposal.
Separation technologies are currently utilized by a wide variety of
domestic and international companies, including several large companies having
substantially greater financial and other resources than the Company. Although
the Company believes that SLiM has substantial advantages over many other known
separation technologies, any one or more of the Company's competitors, or other
enterprises not presently known, may develop technologies which are superior to
SLiM. To the extent the Company's competitors are able to offer comparable
services at lower prices or of higher quality, or more cost-effective
alternatives, the Company's ability to compete effectively could be materially
adversely affected. The Company believes that its ability to compete in both the
commercial and governmental sectors is dependent upon SLiM being a superior,
more cost-effective method to achieve separation and/or recovery of a variety of
materials in varying amounts and configurations. In the event that the Company
is unable to demonstrate that SLiM is a technologically superior and
cost-effective alternative to other separation technologies on a commercial
scale, the Company may not be able to compete successfully.
GOVERNMENT REGULATION
The Company and its customers are required to comply with a number of
federal, state and local laws and regulations in the areas of safety, health and
environmental controls, including, without limitation, the Resource Conservation
and Recovery Act, as amended, and the Occupational Safety and Health Act of
1970, which may require the Company, its prospective working partners or its
customers to obtain permits or approvals to utilize SLiM and related equipment
on certain job sites. In addition, if the Company begins to market SLiM
internationally, the Company will be required to comply with laws and
regulations and, when applicable, obtain permits or approvals in those other
countries. There is no assurance that such required permits and approvals will
be obtained. Furthermore, particularly in the environmental remediation market,
the Company may be required to conduct performance and operating studies to
assure government agencies that SLiM and its by-products do not pose
environmental risks. There is no assurance that such studies, if successful,
will not be more costly or time-consuming than anticipated. Further, if new
environmental legislation or regulations are enacted or existing legislation or
regulations are amended, or are interpreted or enforced differently, the
Company, its prospective working partners and/or its customers may be required
to meet stricter standards of operation and to obtain additional operating
permits or approvals.
ENVIRONMENTAL MATTERS
The Company's operations, as well as the use of specialized technical
equipment by its customers, are subject to numerous federal, state and local
regulations relating to the storage, handling and transportation of certain
regulated materials. Although the Company's role is generally limited to the
leasing of its specialized technical equipment for use by its customers, there
is always the risk of the mishandling of such materials or technological or
equipment failures, which could result in significant claims against the
Company. Any such claims against the Company could materially adversely affect
the Company's business, financial condition and results of operations.
8
<PAGE>
The Company maintains environmental liability insurance with limits of
$1.0 million per occurrence and $2.0 million in the aggregate. Applied
maintains, on behalf of itself and its subsidiaries (including the Company),
contractor's pollution liability insurance with limits of $15.0 million per
occurrence and $15.0 million in the aggregate. There can be no assurance that
such insurance will provide coverage against all claims, and claims may be made
against the Company (even if covered by an insurance policy) for amounts
substantially in excess of applicable policy limits. Any such event could have a
material adverse effect on the Company's business, financial condition and
results of operations.
EMPLOYEES
As of March 26, 1998, the Company had 19 full-time employees, of which
approximately 11 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.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in approximately
20,800 square feet of space in Kennesaw, Georgia (near Atlanta) under a lease
expiring in February 2002, which the Company began occupying in March 1997. Such
space also serves as the Company's administrative offices and research and
testing laboratories. The Company pays $116,000 in rent per year under such
lease.
The Company also maintains executive offices located in New York City
in approximately 2,000 square feet of space leased by an affiliate of Bentley
J. Blum, a director and principal stockholder of Environmental and a director of
the Company, Applied and other affiliates of the Company. Such space also serves
as the principal executive offices of Environmental, Applied and certain of
their 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.
ITEM 3. LEGAL PROCEEDINGS.
During the Transition Period, and as of March 26, 1998, the Company was
not involved in any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
Transition Period.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's common stock, par value $0.001 per share ("Common
Stock"), 10% Senior Convertible Preferred Stock, par value $0.001 per share
("Convertible Preferred Stock"), and Redeemable Common Stock Purchase Warrants
("Warrants") began trading publicly on April 3, 1997 at initial public offering
prices of $5.00 and $10.00 per share, respectively, and $0.10 per Warrant and
are traded and quoted on the Nasdaq SmallCap Market ("Nasdaq") under the symbols
CXOT, CXOTP and CXOTW, respectively. On March 26, 1998, there were 177 holders
of record of Common Stock, 1 holder of record of Convertible Preferred Stock and
9 holders of record of Warrants.
The following table sets forth, for the periods shown, the high and low
bid prices of the Common Stock, Convertible Preferred Stock and Warrants
(rounded to the nearest cent) as quoted by Nasdaq. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Convertible
Common Stock Preferred Stock Warrants
--------- ----- --------- ---------- --- ------------- ------------ -- -----------
High Low High Low High Low
--------- --------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1997: $5.00 $2.13 $10.00 $7.50 $1.88 $0.88
Fourth Quarter(1)..................
TRANSITION PERIOD:
July 1 to September 30, 1997.... 3.00 1.38 7.50 6.50 1.13 0.50
October 1 to December 31, 1997.. 3.75 1.00 7.63 2.75 1.38 0.25
</TABLE>
- -----------------
(1) Reflects bid information for the period beginning April 3, 1997 (the date
the Common Stock, Convertible Preferred Stock and Warrants began quoting on
Nasdaq) through June 30, 1997.
DIVIDEND INFORMATION
The holders of the Company's Convertible Preferred Stock are entitled
to receive if, when and as declared by the Board of Directors out of funds
legally available therefor, cumulative dividends at the rate of $1.00 per share
per annum, quarterly on the last business day of March, June, September and
December of each year, before any dividends are declared or paid on the Common
Stock or any capital stock ranking junior to the Convertible Preferred Stock. On
June 30, September 30 and December 31, 1997, the Company paid cash dividends to
the holders of the Convertible Preferred Stock in the aggregate amounts of
$138,000, $150,000 and $150,000, respectively. While the Company currently
intends to retain most of its earnings to finance the growth and development of
its business and to repay outstanding indebtedness, it does anticipate that it
will continue to pay similar cash dividends on its Convertible Preferred Stock
in the foreseeable future.
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future.
Any future determination as to the payment of cash dividends on the
capital stock of the Company will depend on the ability of the Company to
service its outstanding indebtedness and future earnings, capital requirements,
the financial condition of the Company and such other factors as the Company's
Board of Directors may consider.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data included in the following table as of June
30, 1996 and 1997, and as of December 31, 1997, for the period from November 15,
1995 (date of inception) to June 30, 1996, for the year ended June 30, 1997 and
for the six-month period ended December 31, 1997 are derived from the audited
Financial Statements of the Company appearing elsewhere herein. The financial
data for the six-month period ended December 31, 1996 is unaudited and, in the
opinion of management, includes all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation. The selected financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
Six Months Ended
November 15, 1995 December 31,
(date of inception) Year Ended ------------------------
Statement of Operations Data (1): to June 30, 1996 June 30, 1997 1996 1997
------------------- ------------- ------------------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue...................................... $ -- $ 8,000 $ 8,000 $ --
Cost and expenses............................ (60,000) (3,265,000) (857,000) (2,961,000)
Other income
and (expense).............................. (1,000) 86,000 (5,000) 195,000
Net loss..................................... (61,000) (3,171,000) (854,000) (2,766,000)
Net loss per share--basic
and diluted (2)........................... (.01) (.32) (.09) (.27)
Balance Sheet Data: June 30, 1996 June 30, 1997 December 31, 1997
------------- ------------- -----------------
Working capital (deficit).................... $(81,000) $7,817,000 $4,462,000
Total assets................................. 23,000 9,850,000 6,660,000
Long-term liabilities........................ -- 18,000 13,000
Deficit accumulated during development
stage..................................... (61,000) (3,232,000) (5,998,000)
Stockholders' equity (deficit)............... (61,000) 8,708,000 5,652,000
</TABLE>
- ------------------
(1) The Company is a development stage company and has had limited commercial
operations to date. See Note 1 of Notes to Financial Statements.
(2) Net loss per share is calculated on the basis of 10,000,000, 10,375,000,
10,000,000 and 11,502,000, shares of Common Stock, respectively, being
outstanding for the periods.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The Company was organized in November 1995, and has not generated
material revenues or any profits through December 31, 1997. Since its inception,
the Company has been engaged principally in organizational activities, including
research and development, developing a strategic operating plan, entering into
contracts, hiring personnel, developing and manufacturing commercial-scale units
and installing and operating units on an extended basis for demonstration or
test purposes. Accordingly, the Company has a limited operating history upon
which an evaluation of its performance and prospects can be made. The Company is
subject to all of the business risks associated with a new enterprise,
including, but not limited to, risks of unforeseen capital requirements, failure
of market acceptance, failure to establish business relationships, and
competitive disadvantages as against larger and more established companies.
The Company has generated nominal revenues to date, but expects to
generate additional revenues after the Company successfully completes the
installation of SLiM units at the Port of Baltimore. During the period from
November 15, 1995 (date of inception) to December 31, 1997, the Company incurred
a net loss of $5,998,000. For the six months ended December 31, 1997, the
Company incurred a loss of $2,766,000 and anticipates that it may continue to
incur significant losses for the foreseeable future. There can be no assurance
as to whether or when the Company will generate material revenues or achieve
profitable operations. See "Business" and the Financial Statements and Notes
thereto included elsewhere in this Transition Report.
On July 28, 1997, the Company changed its fiscal year. Effective
January 1, 1998, the Company's new fiscal year will be a twelve-month period
ending December 31. Previously, the Company's fiscal year was a twelve-month
period ending June 30. The Transition Period relates to the six months ended
December 31, 1997 and, where applicable, unaudited comparative information for
the six months ended December 31, 1996 has been presented.
RESULTS OF OPERATIONS
Six Months ended December 31, 1997 compared
to Six Months ended December 31, 1996
For the six months ended December 31, 1997, the Company incurred
$817,000 of research and development costs as compared to $412,000 for the six
months ended December 31, 1996. The increase is due to efforts to commercialize
the Company's technology. Research and development costs include salaries, wages
and other related costs of personnel engaged in research and development
activities, as well as contract services and equipment used in research and
development activities. Research and development costs are expensed when
incurred.
General and administrative expenses for the six months ended December
31, 1997 were $869,000 as compared to $443,000 for the six months ended December
31, 1996. The increase is due to hiring of personnel and acquisition of
infrastructure (e.g., office and lab space) to commercialize the Company's
technology.
For the six months ended December 31, 1997, the Company incurred
$230,000 of sales and marketing expense as compared to none for the six months
ended December 31, 1996. This increase is due to the Company's efforts to obtain
new customers and identify markets for applications of its technology.
For the six months ended December 31, 1997, the Company was charged
$911,000 by Applied as a management fee. This fee is a result of allocated wages
and salaries, rent, insurance (including directors' and officers' liability
insurance), and other administrative expenses. The management fees commenced in
April 1997. See "Certain Relationships and Related Transactions--Services
Agreement."
Interest income was $195,000 for the six months ended December 31,
1997, as compared to no interest income for the six month period ended December
31, 1996. This increase resulted from the investment of proceeds of the
Company's IPO since April 1997.
12
<PAGE>
Year ended June 30, 1997 compared to Seven Months
(November 15, 1995 - Inception) ended June 30, 1996
For the year ended June 30, 1997, the Company incurred $985,000 of
research and development costs as compared to $50,000 for the seven months ended
June 30, 1996. The increase is due to efforts to commercialize the Company's
technology. Research and development costs include salaries, wages and other
related costs of personnel engaged in research and development activities, as
well as contract services and equipment used in research and development
activities. Research and development costs are expensed when incurred.
General and administrative expenses for the year ended June 30, 1997
were $1,356,000, as compared to $10,000 for the seven months ended June 30,
1996. The increase is due to hiring of personnel and acquisition of
infrastructure (e.g., office and lab space) to commercialize the Company's
technology.
For the year ended June 30, 1997, the Company was charged $705,000 by
Applied as a management fee. This fee is a result of allocated wages and
salaries, rent, insurance (including directors' and officers' liability
insurance), and other administrative expenses. The management fees commenced in
April 1997. See "Certain Relationships and Related Transactions--Services
Agreement."
Gross revenues for the year ended June 30, 1997 were $8,000, as
compared to no revenues for the seven months ended June 30, 1996. The Company
performed a site demonstration at a client's facility which provided nominal
revenues.
Interest income was $99,000 for the year ended June 30, 1997, as
compared to no income for the seven-month period ended June 30, 1996. This
increase resulted from the investment of proceeds of the Company's IPO since
April 1997.
Interest expense was $13,000 for the year ended June 30, 1997, as
compared to $1,000 for the seven-month period ended June 30, 1996. The increased
interest expense is due to a line of credit extended to the Company to fund the
Company's operations pending completion of its IPO, which occurred in April
1997.
LIQUIDITY AND CAPITAL RESOURCES
Through April 1997, the Company financed its development efforts
through direct equity investments and loans from Environmental and Applied. From
November 15, 1995 (date of inception) to December 31, 1997, the Company
purchased or constructed equipment totaling $1,078,000 and has incurred patent
filing and maintenance costs of $172,000. In December 1996, as part of a
corporate restructuring to consolidate all of its current environmental
technology businesses within Applied, Environmental transferred to Applied all
of the then outstanding shares of capital stock of the Company and another
Environmental subsidiary. In addition, Environmental assigned to Applied
outstanding Company notes aggregating $976,200 at December 2, 1996, representing
advances previously made by Environmental to the Company. Such advances have
been capitalized by Applied as its capital contribution to the Company. In
consideration for such transfers, Applied paid Environmental $3,000,000 in cash
and issued to Environmental a warrant to purchase 7,500,000 shares of Applied
common stock. See "Certain Relationships and Related Transactions--Organization
and Capitalization of the Company."
The Company has sustained losses of $2,766,000, $3,171,000 and $61,000
for the six months ended December 31, 1997, for the year ended June 30, 1997 and
for the period from November 15, 1995 (date of inception) to June 30, 1996,
respectively. The Company had no significant revenues during the period from
November 15, 1995 (date of inception) to December 31, 1997. Substantially all of
the Company's losses are attributable to the expenses detailed above. At
December 31 and June 30, 1997, and at June 30, 1996, the Company had working
capital of $4,462,000, $7,817,000 and a working capital deficit of $81,000,
respectively, and stockholders' equity of $5,652,000, $8,708,000 and
stockholders' deficit of $61,000, respectively. The Company's increase in
working capital and stockholders' equity is principally due to the Company's
receipt of net proceeds of $11.1 million from its IPO in April and May 1997. The
decrease in working capital and stockholders' equity from June 30 to December
31, 1997 is principally due to the net loss for the period and dividends paid on
the Company's Convertible Preferred Stock.
13
<PAGE>
The Company believes it has adequate capital resources to sustain its
operations through approximately the third fiscal quarter of 1998, subject to
factors which cannot be predicted at this time and which may not be within the
Company's control. While the Company believes its capital requirements for the
remainder of 1998 will be met through the development of its business, the
Company may be required to obtain financing through external sources. There can
be no assurance that such financing will be available or, if available, that it
will be on terms satisfactory to the Company. In the event such external
financing is not available on terms acceptable to the Company, the Company may
be able to obtain interim financing from Applied, the owner of 87% of the
outstanding shares of Common Stock. There can be no assurance, however, that the
Company will be able to obtain any financing from Applied.
NET OPERATING LOSSES
At December 31, 1997, the Company had tax loss carryforwards of
approximately $5,998,000. The amount of and ultimate realization of benefit from
the net operating loss for income tax purposes is dependent, in part, upon the
tax laws in effect, future earnings of the Company, and other future events, the
effects of which cannot be determined. A change in ownership of the Company may
reduce the amount of loss allowable. These net operating carryforwards begin to
expire in 2011. A full valuation allowance has been established because of the
uncertainty about whether the Company will realize the benefit of net operating
losses.
YEAR 2000 CONSIDERATIONS
Many existing computer 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. 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 Transition 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.
14
<PAGE>
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 Transition Report does not contain
financial statements for fiscal years ended after June 15, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are included on pages F-1
through F-15 of this Transition Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On July 28, 1997, 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 July 28,
1997, 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 fiscal period ended June 30, 1996, 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' report with
respect to the Company's financial statements for the fiscal period ended June
30, 1996 contained additional paragraphs relating to the Company continuing as a
going concern due to the Company's significant losses and deficit in working
capital.
During the fiscal period ended June 30, 1996, 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 fiscal period ended June 30, 1996.
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.
15
<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 and Chief Executive Officer
Kenneth J. Houle...................... 58 President and Chief Operating Officer
Michael D. Fullwood................... 51 Senior Vice President, Chief Financial and Administrative
Officer, Secretary and General Counsel
James M. DeAngelis.................... 37 Senior Vice President--Sales & Marketing
Bentley J. Blum....................... 56 Director
Jeane J. Kirkpatrick, Ph.D............ 71 Director
Kenneth L. Adelman, Ph.D.............. 49 Director
David L. Mitchell..................... 76 Director
William R. Toller..................... 66 Director
Herbert A. Cohen...................... 64 Director
</TABLE>
- -------------
Paul E. Hannesson has been a director of the Company since its
inception, served as its Chairman of the Board from November 1995 to January
1997, and was re-appointed Chairman of the Board and appointed Chief Executive
Officer in May 1997. Mr. Hannesson has been a director of Applied since March
1996 and was appointed Chairman of the Board in November 1996. Mr. Hannesson
also served as Chief Executive Officer of Applied from March to October 1996 and
as President of Applied from March to September 1996, and was re-appointed Chief
Executive Officer of Applied in November 1996 and President in May 1997. Mr.
Hannesson has been a director of Environmental since February 1993 and was
appointed its Chairman of the Board and Chief Executive Officer in November
1996. Mr. Hannesson also served as President of Environmental from February 1993
to July 1996 and was re-appointed President in May 1997. Mr. Hannesson also
currently serves as the Chairman of the Board and Chief Executive Officer of
Commodore Solution Technologies, Inc., a wholly owned, subsidiary of Applied
("Solution"), and Commodore CFC Technologies, Inc., a wholly-owned subsidiary of
Applied ("CFC Technologies"). Mr. Hannesson was a private investor and business
consultant, from 1990 to 1993, and was also an officer and director of Specialty
Retail Services, Inc., from 1989 to August 1991. He also served as Chairman of
the Board of Lanxide Corporation, a company which specializes in the manufacture
of ceramic bonding and refractory materials. ("Lanxide"), from 1983 to February
1998. Mr. Hannesson is the brother-in-law of Bentley J. Blum, a director of the
Company.
Kenneth J. Houle was elected President and Chief Operating Officer of
the Company 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
16
<PAGE>
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.
Michael D. Fullwood was appointed Senior Vice President, Chief
Financial and Administrative Officer, Secretary and General Counsel of the
Company, Applied, Environmental, Solution and CFC Technologies in May 1997. Mr.
Fullwood served as a director of Lanxide and as 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 New York Stock Exchange-traded
manufacturer of quality specialty chemical and petroleum products ("Witco").
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.
James M. DeAngelis was appointed Senior Vice President--Sales &
Marketing of the Company in July 1996, after having served as its Vice
President--Marketing since November 1995. Mr. DeAngelis has also served as the
President of CFC Technologies since September 1994, and served as Vice
President--Marketing of Environmental from September 1992 to September 1995.
Prior to September 1992, Mr. DeAngelis was completing M.B.A. and Masters in
International Management degrees from the American Graduate School of
International Management. Mr. DeAngelis holds B.S. degrees in Biology and
Physiology from the University of Connecticut.
Bentley J. Blum has been a director of the Company since August 1996.
Mr. Blum has served as a director of Applied since March 1996 and served as its
Chairman of the Board from March to November 1996. Mr. Blum has served as a
director of Environmental since 1984 and served as its Chairman of the Board
from 1984 to November 1996. Mr. Blum also currently serves as a director of
Solution and CFC Technologies. For more than 15 years, Mr. Blum has been
actively engaged in real estate acquisitions and currently is the sole
stockholder and director of a number of corporations which hold real estate
interests, oil drilling interests and other corporate interests. Mr. Blum is
also a director of Lanxide; Federal Resources Corporation, a company formerly
engaged in manufacturing, retail distribution and natural resources development;
Specialty Retail Services, Inc., a former distributor of professional beauty
products; and North Valley Development Corp., an inactive real estate
development company. Mr. Blum is a principal stockholder of Environmental and is
the brother-in-law of Paul E. Hannesson, the Chairman of the Board and Chief
Executive Officer of the Company.
Jeane J. Kirkpatrick, Ph.D. has served as a director of the Company and
Applied 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 as the United States Representative to the United
Nations from 1981 to 1985 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.
Kenneth L. Adelman, Ph.D. joined the Board of Directors of the Company
in April 1997. Dr. Adelman has been a member of the Board of Directors of
Applied and Environmental since July 1996 and was appointed Executive Vice
President--Marketing and International Development of Applied in May 1997. Dr.
Adelman was appointed President and Chief Operating Officer of Solution in
November 1997. Since 1987, Dr. Adelman has been an independent consultant on
international issues to various corporations, including Lockheed Martin
Corporation and Loral Corporation. Dr. Adelman held positions of responsibility
in arms control during most of the Reagan
17
<PAGE>
Administration. From 1983 to the end of 1987, he was Director of the United
States Arms Control and Disarmament Agency. Dr. Adelman was a Professor at
Georgetown University and a writer for Washingtonian Magazine from 1987 to 1991.
Dr. Adelman accompanied President Reagan on summits with Mikhail Gorbachev and
negotiated with Soviet diplomats on nuclear and chemical weapons control issues,
from 1985 to 1987. He also headed the United States team on annual arms control
discussions with top-level officials of the People's Republic of China from 1983
through 1986. From 1981 to 1983, he served as Deputy United States
Representative to the United Nations with the rank of Ambassador Extraordinary
and Plenipotentiary. Dr. Adelman holds M.A. and Ph.D. degrees from Georgetown
University.
David L. Mitchell joined the Board of Directors of the Company in April
1997. Mr. Mitchell has been a member of the Board of Directors of Applied and
Environmental since July 1996. Mr. Mitchell has also served as a consultant to
Applied since July 1997. For the past thirteen years, Mr. Mitchell has been
President and co-founder of Mitchell & Associates, Inc., a banking firm
providing financial advisory services in connection with corporate mergers,
acquisitions and divestitures. Prior to forming Mitchell & Associates in 1982,
Mr. Mitchell was a Managing Director of Shearson/American Express Inc. from 1979
to 1982, a Managing Director of First Boston Corporation from 1976 to 1978, and
a Managing Director of the investment banking firm of S.G. Warburg & Company
from 1965 to 1976. Mr. Mitchell holds a bachelor's degree from Yale University.
William R. Toller joined the Board of Directors of the Company in
April 1997. Mr. Toller also joined the Board of Directors of Applied in March
1998 and has served as a consultant to Environmental since July 1997. Mr. Toller
served as Vice Chairman of Lanxide from July 1997 to February 1998. Mr. Toller
also currently serves as Chairman and Chief Executive Officer of Titan
Consultants, Inc. Mr. Toller had been the Chairman and Chief Executive Officer
of Witco since October 1990 and retired in July 1996. Mr. Toller joined Witco in
1984 as an executive officer when it acquired the Continental Carbon Company of
Conoco, Inc., where he had been its President and an officer since 1955. Mr.
Toller is a graduate of the University of Arkansas with a Bachelor's degree in
Economics, and the Stanford University Graduate School Executive Program. Mr.
Toller serves on the board of directors of Chase Industries, Inc., Fuseplus,
Inc., where he is also Chairman of the Organization and Compensation Committee,
and the United States Chamber of Commerce, where he is also a member of the
Labor Relations and International Policy Committees. Mr. Toller is also a member
of the Board of Trustees and the Executive and Finance Committees of the
International Center for the Disabled, a member of the Board of Associates of
the Whitehead Institute for Biomedical Research, a member of the National
Advisory Board of First Commercial Bank in Arkansas, a member of the Dean's
Executive Advisory Board and the International Business Committee at the
University of Arkansas, College of Business Administration, and a member of the
Board of Presidents of the Stamford Symphony Orchestra.
Herbert A. Cohen joined the Board of Directors of the Company in March
1998. Mr. Cohen has served as a director of Applied and Environmental since July
1996. Mr. Cohen has been a practicing negotiator for the past three decades
acting in an advisory capacity in hostage negotiations and crisis management. He
has been an advisor to Presidents Carter and Reagan in the Iranian hostage
crisis, the government's response to the skyjacking of TWA Flight 847 and the
seizure of the Achille Lauro. Mr. Cohen's clients have included large
corporations and government agencies such as the Department of State, the
Federal Bureau of Investigation, the Conference of Mayors, the Bureau of Land
Management, Lands and Natural Resources Division in conjunction with the EPA,
and the United States Department of Justice. In addition, Mr. Cohen was an
advisor and consultant to the Strategic Arms Reduction Talks negotiating team.
Mr. Cohen holds a law degree from New York University School of Law, and has
lectured at numerous academic institutions.
Each director is elected to serve for a term of one year or until his
successor is duly elected and qualified. The Company's officers are elected by,
and serve at the pleasure of, the Board of Directors, subject to the terms of
any employment agreements. Messrs. Hannesson and Blum are brothers-in-law. No
family relationship exists among any other directors or executive officers of
the Company.
18
<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:
Name Age Position
- ---- --- --------
Michael D. Kiehnau, P.E... 36 Vice President - Finance & Operations
Andrew P. Oddi............ 36 Vice President and Treasurer
William E. Ingram......... 52 Vice President and Controller
- ----------------
Michael D. Kiehnau, P.E. was appointed Vice President--Finance &
Operations of the Company in April 1997, after having served as the Company's
Chief Financial Officer from September 1996 to January 1997, and as its Vice
President--Operations from January to March 1997. From August 1992 to August
1996, Mr. Kiehnau served as a project manager for Brown & Root, Inc. (an
engineering and construction firm), and from 1983 to 1990, Mr. Kiehnau served in
various engineering capacities with the U.S. Army Corps of Engineers in the
United States, Europe and Central America. From 1990 to 1992, Mr. Kiehnau was a
full-time student. Mr. Kiehnau holds a B.S. degree from the United States
Military Academy, an M.A. in International Relations from Boston University, and
an M.B.A. from the Harvard Graduate School of Business Administration. He is a
licensed professional engineer.
Andrew P. Oddi was appointed Vice President and Treasurer of the
Company in June 1997, after having served as its Vice President--Finance since
September 1996. Mr. Oddi was also appointed Vice President and Treasurer of
Applied, Environmental, Solution and CFC Technologies in June 1997. Mr. Oddi has
also served as a director of Specialty Retail Services, Inc., a former
distributor of professional beauty products, since December 1997. Mr. Oddi
served as the Vice President of Finance, Chief Financial Officer and Secretary
of Applied from March to November 1996. Mr. Oddi also served as Vice President
of Finance & Administration and Chief Financial Officer of Environmental from
1987 to May 1997 and as a director of Environmental from December 1990 to July
1996. From 1982 to 1987, Mr. Oddi was employed by Ernst & Young, independent
accountants, and held the position of audit manager in 1986 and 1987. Mr. Oddi
is a Certified Public Accountant.
William E. Ingram was appointed Vice President and Controller of the
Company in June 1997. Mr. Ingram served as Applied'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, 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. He
also spent two years with the solid waste operations of Waste Management, Inc.
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.
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,
19
<PAGE>
was composed of William R. Toller (Chairman), David L. Mitchell and Herbert A.
Cohen, has responsibility for establishing and reviewing employee and
consultant/advisor compensation, bonuses and incentive compensation awards,
administering and interpreting the Company's 1996 Stock Option Plan, and
determining the recipients, amounts and other terms (subject to the requirements
of the 1996 Stock Option Plan) of options which may be granted under the 1996
Stock Option Plan from time to time and providing guidance to management in
connection with establishing additional benefit plans. The Executive and Finance
Committee was composed of Paul E. Hannesson, Bentley J. Blum and William R.
Toller as of March 26, 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.
COMPENSATION OF DIRECTORS
Each non-management director of the Company receives a director's fee
of $500 per meeting for attendance at Board of Directors meetings, and is
reimbursed for actual expenses incurred in respect of such attendance. The
Company does not separately compensate employees for serving as directors.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of the outstanding shares
of Common Stock of the Company, to file initial reports of beneficial ownership
and reports of changes in beneficial ownership of shares of Common Stock with
the Securities and Exchange Commission (the "Commission") and Nasdaq. Such
persons are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the Transition Period, and upon a review of Form
5 and amendments thereto furnished to the Company with respect to the Transition
Period, or upon written representations received by the Company from certain
reporting persons that no Form 5 were required for those persons, the Company
believes that no director, executive officer or holder of more than 10% of the
shares of Common Stock of the Company failed to file on a timely basis the
reports required by Section 16(a) of the Exchange Act during, or with respect
to, the Transition Period, except the following: (i) Jeane J. Kirkpatrick, 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); and
(ii) Kenneth L. Adelman, a director of the Company, who inadvertently failed to
timely file a Form 4 with respect to a transaction that occurred in July 1997
(such transaction was reported on a Form 4 filed late with the Commission on
August 19, 1997).
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION
The following table sets forth the amount of all compensation paid by
the Company and/or its affiliates and allocated to the Company's operations for
services rendered during the Transition Period, for the fiscal year ended June
30, 1997 and for the fiscal period ended June 30, 1996 to the person serving as
the Company's current Chief Executive Officer, to each of the Company's most
highly compensated executive officers other than the Chief Executive Offer whose
total salary and bonus compensation exceeded $100,000 during any such period,
and to one additional individual who served as an executive officer of the
Company during the Transition Period, but not at December 31, 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------------ --------------------------------------
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying LTIP Compen-
Name and Principal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------ ---- --------- -------- -------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul E. Hannesson 1997(1) 80,067(3) 20,270(4) 4,865(5) -0- -0- -0- -0-
Chief Executive 1997(2) 49,375(3) 12,500(4) 3,000(5) -0- 175,000 -0- -0-
Officer 1996 -0- -0- -0- -0- -0- -0- -0-
Kenneth J. Houle 1997(1) 90,000 27,000 -0- -0- -0- -0- -0-
President & Chief 1997(2) 77,596(6) 27,000 -0- -0- 100,000 -0- -0-
Operating Officer 1996 -0- -0- -0- -0- -0- -0- -0-
Michael D. Fullwood 1997(1) 40,683(7) 22,804(8) -0- -0- -0- -0- -0-
Senior Vice 1997(2) 16,726(7) 9,375(8) -0- -0- 67,500 -0- -0-
President 1996 -0- -0- -0- -0- -0- -0- -0-
James M. DeAngelis 1997(1) 72,500 20,500 -0- -0- -0- -0- -0-
Senior Vice 1997(2) 120,833 20,500 -0- -0- 101,250 -0- -0-
President 1996 -0- -0- -0- -0- -0- -0- -0-
Srinivas Kilambi, Ph.D. 1997(1) 55,000 -0- -0- -0- -0- -0- -0-
Former Senior Vice 1997(2) 105,481 40,000 -0- -0- 67,500 -0- -0-
President--Technology(9) 1996 34,038 -0- -0- -0- -0- -0- -0-
</TABLE>
- --------------------
(1) On July 28, 1997, the Company changed its fiscal year-end from June 30 to
December 31. Information is for the Transition Period from July 1 to
December 31, 1997.
(2) Information is presented for the Company's fiscal year ending on June 30,
1997.
(3) Represents the amount of Mr. Hannesson's base salary allocated to the
Company for such period. Mr. Hannesson's total base salary for calendar year
1997 was $395,000. Certain portions of such base salary were also allocated
to Applied and Environmental. See "Certain Relationships and Related
Transactions--Services Agreement."
(4) Represents the amount of Mr. Hannesson's annual incentive bonus allocated to
the Company for such period. Mr. Hannesson's total annual incentive bonus
for calendar year 1997 was $100,000. Certain portions of such annual
incentive bonus were also allocated to Applied and Environmental.
21
<PAGE>
(5) Represents the amount of Mr. Hannesson's automobile allowance allocated to
the Company for such period. Mr. Hannesson's total automobile allowance for
calendar year 1997 was $100,000. Certain portions of such automobile
allowance were also allocated to Applied and Environmental.
(6) Represents the amount of salary paid to Mr. Houle from January 27, 1997 (the
date on which Mr. Houle was elected President and Chief Operating Officer)
to June 30, 1997.
(7) Represents the amount of Mr. Fullwood's base salary allocated to the
Company for such period. Mr. Fullwood's total base salary for calendar year
1997 was $133,805. Certain portions of such base salary were also allocated
to Applied and Environmental.
(8) Represents the amount of Mr. Fullwood's annual incentive bonus allocated to
the Company for such period. Mr. Fullwood's total annual incentive bonus for
calendar year 1997 was $75,000. Certain portions of such annual incentive
bonus were also allocated to Applied and Environmental.
(9) Dr. Kilambi resigned as an executive officer of the Company in December
1997.
STOCK OPTIONS
The Company did not grant any options under the Plan to the individuals
listed in the Summary Compensation Table during the Transition Period. The
Company has no outstanding stock appreciation rights and granted no stock
appreciation rights during the Transition Period.
In July 1997, the Company modified the term of all outstanding options
under the Plan from five years to ten years. No other terms of such options were
changed.
The following table sets forth certain information concerning the
exercise of options during the Transition Period and the value of unexercised
options held under the Plan at December 31, 1997 by the individuals listed in
the Summary Compensation Table.
<TABLE>
<CAPTION>
Number Of Value Of
Securities Unexercised
Underlying In-The-Money
Unexercised Options
Options At Fiscal Year-
Shares Value At Fiscal Year-End(#) End($)
Acquired On Realized Exercisable/ Exercisable/
Name Exercise (#) ($)(1) Unexercisable Unexercisable(2)
- -------------------------- ------------ --------- --------------------- ----------------
<S> <C> <C> <C> <C>
Paul E. Hannesson......... -0- -0- 70,000/105,000 -0-/-0-
Kenneth J. Houle.......... -0- -0- 20,000/80,000 -0-/-0-
Michael D. Fullwood....... -0- -0- 13,500/54,000 -0-/-0-
James M. DeAngelis........ -0- -0- 40,500/60,750 -0-/-0-
Srinivas Kilambi, Ph.D.... -0- -0- 13,500/54,000 -0-/-0-
</TABLE>
- --------------
(1) Represents the difference between the exercise price and the closing price
on the date of exercise, multiplied by the number of shares acquired.
(2) Represents the difference between the last bid price of the Common Stock of
$2.00 on December 31, 1997, and the exercise price of the options multiplied
by the applicable number of options.
22
<PAGE>
EMPLOYMENT AGREEMENTS
Paul E. Hannesson, the Company's Chairman of the Board and Chief
Executive Officer, entered into an employment agreement with Environmental as of
November 18, 1996 for a term expiring on December 31, 1999. Pursuant to such
employment agreement, Mr. Hannesson agreed to devote his business and
professional time and efforts to the business of Environmental as a senior
executive officer, and to serve in senior executive positions with one or more
of Environmental's affiliates, including the Company. The employment agreement
provides that Mr. Hannesson shall receive, among other things, a base salary at
an annual rate of $395,000 through December 31, 1997, and will receive not less
than $434,500 through December 31, 1998 and not less than $477,950 through
December 31, 1999, for services rendered to Environmental and its affiliates,
including the Company. Pursuant to the employment agreement, Mr. Hannesson
received, among other things: (i) a signing bonus of (a) $150,000 cash and (b)
stock options to purchase 950,000 shares of common stock of Environmental, which
options vested on the date of his employment agreement; and (ii) options to
purchase an aggregate of 2,500,000 shares of Environmental common stock,
exercisable in installments over a period of five years commencing on the date
of his employment agreement. Mr. Hannesson also received options to purchase
common stock of the Company and Applied in the amount of 1.0% of each company's
total outstanding shares of common stock on the date of grant, and is eligible
to receive incentive compensation of up to $225,000 per year for achieving
certain goals.
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 a 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 through
April 30, 1998, which base salary shall be increased by not less than 5% per
year during the term of the agreement, for services rendered to Environmental
and its affiliates, including the Company. 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 Applied and
67,500 shares of Common Stock of the Company, and is 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.
Each of Kenneth J. Houle, James M. DeAngelis and Srinivas Kilambi,
Ph.D. entered into an employment agreement with the Company for a term expiring
on December 31, 1999. Pursuant to these employment agreements, Messrs. Houle,
DeAngelis and Kilambi agreed to devote substantially all of their business and
professional time and efforts to the business of the Company as executive
officers. The employment agreements provide that Messrs. Houle, DeAngelis and
Kilambi shall receive a fixed base salary at an annual rate of $180,000,
$145,000 and $110,000, respectively, for services rendered in such positions,
and each may be entitled to receive, at the sole discretion of the Board of
Directors of the Company or a committee thereof, bonuses and/or stock options
based on the achievement (in whole or in part) by the Company of its business
plan and by the employee of fixed personal performance objectives. Dr. Kilambi
resigned as an executive officer of the Company in December 1997, and his
employment agreement was terminated at that time.
The employment agreements also provide for termination by the Company
upon death or disability (defined as three aggregate months of incapacity during
any 365-consecutive day period) or upon conviction of a felony crime of moral
turpitude or a material breach of their obligations to the Company. In the event
any of the employment agreements are terminated by the Company without cause,
such executive will be entitled to compensation for the balance of the term. The
Company has obtained commitments for $1,000,000 key-man life insurance policies
in respect of each of Messrs. Houle (pending completion of a physical exam) and
DeAngelis.
The employment agreements also contain covenants (a) restricting the
executive from engaging in any activities competitive with the business of the
Company during the terms of such employment agreements and one year thereafter,
(b) prohibiting the executive from disclosure of confidential information
regarding the Company at any time, and (c) confirming that all intellectual
property developed by the executive and relating to the business of the Company
23
<PAGE>
constitutes the sole and exclusive property of the Company. See "Certain
Relationships and Related Transactions--Services Agreement."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The individuals who served as members of the Compensation, Stock Option
and Benefits Committee (the "Compensation Committee") during the Transition
Period were William R. Toller (Chairman), David L. Mitchell and Edwin L. Harper,
Ph.D. Dr. Harper was appointed to the Compensation Committee on December 16,
1997. Messrs. Mitchell and Harper also constituted two-thirds of the
Compensation, Stock Option and Benefits Committees of Applied and Environmental
at December 31, 1997. Dr. Harper served as the President and Chief Operating
Officer of Applied and Environmental from November 1996 to April 1997, as Vice
Chairman of the Company, Applied and Environmental from April to December 1997,
and as the Chairman of the Board and Chief Executive Officer of the Company,
Solution 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 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. Toller has served as a consultant
to Environmental since July 1, 1997 and receives compensation in the amount of
$2,000 per diem in such capacity. Mr. Mitchell has served as a consultant to
Applied since July 15, 1997 and receives compensation in the amount of $10,000
per month for services rendered to Applied in such capacity.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee was established in June 1997 and is
responsible for, among other things, establishing the compensation policies
applicable to executive officers of the Company. The Compensation Committee was
composed of William R. Toller (Chairman), David L. Mitchell and Edwin L. Harper,
Ph.D. at December 31, 1997, all of whom were non-employee directors of the
Company. Messrs. Mitchell and Harper also constituted two-thirds of the
Compensation, Stock Option and Benefits Committees of Applied and Environmental
at December 31, 1997. Decisions on compensation of the executives officers of
Applied and Environmental 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. Toller, 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:
24
<PAGE>
o focus participants on high priority goals to increase stockholder
value;
o encourage behavior that exemplifies the Company's values relating
to customers, quality of performance, employees, integrity,
teamwork and good citizenship;
o assess performance based on results and pre-set goals that link the
business activities of each individual to the goals of the Company;
and
o increase stock ownership to promote a proprietary interest in the
success of the Company.
Executive Officer Compensation
Each year the Compensation Committee conducts a full review of the
Company's executive compensation program. This review includes a comprehensive
evaluation of the competitiveness of the Company's compensation program and a
comparison of the Company's executive compensation to certain other public
companies which, in the view of the Compensation Committee, represent the
Company's most direct competitors for executive talent. It is the Compensation
Committee's policy to target overall compensation for executive officers of the
Company taking into account the levels of compensation paid for such positions
by such other public companies. A variety of other factors, however, including
position and time in position, experience, and both Company performance and
individual performance, will have an impact on individual compensation amounts.
The key elements of the Company's executive compensation program in
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 and Chief Executive Officer of
the Company, Solution and CFC Technologies, and the Chairman of the Board,
President and Chief Executive Officer of Applied and Environmental, 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 Environmental and its affiliates, including the
Company, is established by the members of the Compensation, Stock Option and
Benefits Committee of Environmental (the "Environmental Compensation
Committee"), who also constituted the Compensation, Stock Option and Benefits
Committee of Applied at December 31, 1997. Also, as set forth above, two of the
three members of the Environmental Compensation Committee constituted two-thirds
of the Compensation Committee of the Company's Board of Directors at December
31, 1997. In establishing Mr. Hannesson's base salary for 1997, the
Environmental 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 Environmental Compensation Committee reviewed in
25
<PAGE>
detail Mr. Hannesson's achievement of his 1996 goals and his individual
contributions to the Company and its affiliates. The Environmental 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 Environmental 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 Environmental 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. The salary decisions of the Environmental
Compensation Committee with respect to Mr. Hannesson as they specifically
related to the Company were then presented to the full Compensation Committee
which reviewed such decisions.
Mr. Hannesson's base salary increased from $310,627 for calendar year
1996 to $395,000 for calendar year 1997, representing an increase of
approximately 27%. Such base salary was allocated among the Company, Applied and
Environmental based upon the amount of time and effort devoted by Mr. Hannesson
to the respective businesses of such companies. Consequently, the Company,
Applied and Environmental paid $129,442, $250,256 and $15,302, respectively, of
such salary. Mr. Hannesson also received an automobile allowance of $24,000 for
the 1997 calendar year, and the Company, Applied and Environmental paid $7,865,
$15,205 and $930, respectively, of such allowance.
Annual Incentive Bonus. Annual incentive bonuses for executive officers
are intended to reflect the Compensation Committee's belief that a significant
portion of the annual compensation of each executive officer should be
contingent upon the performance of the Company.
For 1997, annual incentive bonuses were paid to the individuals named
in the Summary Compensation Table and certain other officers and employees of
the Company in part based upon recommendations of senior executive officers of
the Company as to appropriate levels of incentive compensation. The Compensation
Committee exercised its discretion to determine the final value of each 1997
incentive award, which values were then reviewed and approved by the full Board
of Directors. The Compensation Committee assessed performance against goals and
leadership performance, with each of these two categories weighted equally. The
goal category included an evaluation of performance areas such as increase in
stockholder value, operations development and employee satisfaction. The
leadership category was evaluated based upon the Compensation Committee's
judgment of leadership performance, including factors such as innovation,
strategic vision, marketplace orientation, customer focus, collaboration and
managing change.
Pursuant to his employment agreement with Environmental, Mr. Hannesson
is eligible to receive incentive compensation of up to $225,000 per year for
achieving certain of the performance goals set forth above. For the 1997
calendar year, Mr. Hannesson was awarded an incentive bonus of $100,000. Such
bonus was allocated among the Company, Applied and Environmental based upon the
amount of time and effort devoted by Mr. Hannesson to the respective businesses
of such companies. Consequently, the Company, Applied and Environmental paid
$32,770, $63,356 and $3,874, respectively, of such bonus.
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 330,000 stock options were granted in 1997 pursuant to the
Plan, 40,000 of which were granted to Mr. Hannesson and 167,500 of which were
granted (in the aggregate) to two other individuals named in the
26
<PAGE>
Summary Compensation Table. 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.
Conclusion
The Compensation Committee believes that the quality of executive
leadership significantly affects the long-term performance of the Company and
that it is in the best interest of the stockholders to compensate fairly
executive leadership for achievement meeting or exceeding the high standards set
by the Compensation Committee, so long as there is a corresponding risk when
performance falls short of such standards. A primary goal of the Compensation
Committee is to relate compensation to corporate performance. Based on the
Company's performance in 1997, the Compensation Committee believes that the
Company's current executive compensation program meets such standards and has
contributed, and will continue to contribute, to the Company's and its
stockholders' long-term success.
COMPENSATION, STOCK OPTION AND BENEFITS COMMITTEE
William R. Toller (Chairman)
David L. Mitchell
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.
27
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
ITEM 12. BENEFICIAL OWNERS AND MANAGEMENT.
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, each director, each executive
officer 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 of Common Percentage of Outstanding
Name and Address Stock Beneficially Common Stock
of Beneficial Owner(1) Owned(2) Beneficially Owned
- -------------------------------------------- --------------------------- -------------------------
<S> <C> <C>
Commodore Applied Technologies, Inc......... 10,000,000 86.8%
Commodore Environmental
Services, Inc.(3)......................... 4,252,096 36.9%
Bentley J. Blum(4).......................... 2,099,749 18.2%
Paul E. Hannesson(5)........................ 664,889 5.8%
Kenneth J. Houle(6)......................... 40,000 *
Michael D. Fullwood(7)...................... 59,506 *
James M. DeAngelis(8)....................... 88,096 *
Kenneth L. Adelman(9)....................... 134,895 *
David L. Mitchell(10)....................... 62,920 *
William R. Toller(11)....................... 30,375 *
Jeane J. Kirkpatrick (12)................... 23,646 *
Herbert A. Cohen (13)....................... 47,733 *
All executive officers and directors
as a group (10 persons)..................... 3,251,809 28.2%
</TABLE>
- ------------------
* Percentage ownership is less than 1%.
(1) The address of each of Commodore Applied Technologies, Inc., Commodore
Environmental Services, Inc., Bentley J. Blum, Paul E. Hannesson, Michael D.
Fullwood, Kenneth L. Adelman, Ph.D., David L. Mitchell, William R. Toller,
Jeane J. Kirkpatrick, Ph.D. and Herbert A. Cohen is 150 East 58th Street,
Suite 3400, New York, New York 10155. The address of Kenneth J. Houle and
James M. DeAngelis is 3240 Town Point Drive, Suite 200, Kennesaw, Georgia
30144. Bentley J. Blum and Paul E. Hannesson are brothers-in-law.
(2) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
as consisting of sole or shared voting power (including the power to vote or
direct the vote) and/or sole or shared investment power (including the power
to dispose or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
including a right to acquire such power(s) during the next 60 days. Unless
otherwise noted, beneficial ownership consists of sole ownership, voting and
investment rights.
(3) Represents Environmental's indirect beneficial ownership of Common Stock
based upon Environmental's beneficial ownership of approximately 43% of the
outstanding shares of Applied common stock.
28
<PAGE>
(4) Represents Mr. Blum's indirect beneficial ownership of Common Stock based
upon Mr. Blum's beneficial ownership of 28,479,737 shares and his spouse's
ownership of 2,000,000 shares of common stock of Environmental,
representing together 49.4% of the outstanding shares of Environmental
common stock. Does not include 450,400 shares of Environmental common stock
owned by Simone Blum, the mother of Mr. Blum, and 385,000 shares of
Environmental common stock owned by Samuel Blum, the father of Mr. Blum.
Mr. Blum disclaims any beneficial interest in the shares of Environmental
common stock owned by his spouse, mother and father.
(5) Consists of: (a) 62,000 shares of Common Stock underlying currently
exercisable stock options granted to Mr. Hannesson by the Company under the
Plan; and (b) Mr. Hannesson's indirect beneficial ownership of Common Stock
based upon his beneficial ownership of an aggregate of (i) 2,650,000 shares
of Environmental common stock owned by Suzanne Hannesson, the spouse of Mr.
Hannesson, (ii) 2,650,000 shares of Environmental common stock owned by the
Hannesson Family Trust (Suzanne Hannesson and John D. Hannesson, trustees)
for the benefit of Mr. Hannesson's spouse, (iii) currently exercisable
options to purchase 2,450,000 shares of Environmental common stock,
representing 12.1% of the outstanding shares of Environmental common stock,
and (iv) 240,000 shares of Applied common stock underlying currently
exercisable stock options granted to Mr. Hannesson under Applied's 1996
Stock Option Plan. 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) Represents shares of Common Stock underlying currently exercisable stock
options granted to Mr. Houle by the Company under the Plan.
(7) Consists of: (a) 27,000 shares of Common Stock underlying currently
exercisable stock options granted to Mr. Fullwood by the Company under the
Plan; and (b) Mr. Fullwood's indirect beneficial ownership of Common Stock
based upon his beneficial ownership of (i) 200,000 shares of Environmental
common stock underlying currently exercisable stock options granted to Mr.
Fullwood by Environmental and (ii) 50,000 shares of Applied common stock
underlying currently exercisable stock options granted to Mr. Fullwood by
Applied.
(8) Consists of: (a) 1,000 shares of Common Stock; (b) 1,000 shares of Common
Stock underlying currently exercisable warrants; (c) 40,500 shares of
Common Stock underlying currently exercisable stock options granted to Mr.
DeAngelis by the Company under the Plan; and (d) Mr. DeAngelis' indirect
beneficial ownership of Common Stock based upon his beneficial ownership of
(i) 580,000 shares of Environmental common stock and (ii) 15,000 shares of
Applied common stock underlying currently exercisable stock options granted
to Mr. DeAngelis by Applied.
(9) Consists of: (a) 30,450 shares of Common Stock; (b) 30,375 shares of Common
Stock underlying currently exercisable stock options granted to Dr. Adelman
by the Company under the Plan; and (c) Dr. Adelman's indirect beneficial
ownership of Common Stock based upon his beneficial ownership of (i)
currently exercisable options to purchase 385,000 shares of Environmental
common stock and (ii) currently exercisable options to purchase 127,500
shares of Applied common stock.
(10) Consists of: (a) 30,375 shares of Common Stock underlying currently
exercisable stock options granted to Mr. Mitchell by the Company under the
Plan; and (b) Mr. Mitchell's indirect beneficial ownership of Common Stock
based upon his beneficial ownership of currently exercisable options to
purchase (i) 67,500 shares of Applied common stock and (ii) 105,000 shares
of Environmental common stock.
(11) Represents shares of Common Stock underlying currently exercisable stock
options granted to Mr. Toller by the Company under the Plan.
(12) Consists of: (a) 15,188 shares of Common Stock underlying currently
exercisable stock options granted to Dr. Kirkpatrick by the Company under
the Plan; and (b) Dr. Kirkpatrick's indirect beneficial ownership of
29
<PAGE>
Common Stock based upon her beneficial ownership of currently exercisable
options to purchase 22,500 shares of Applied common stock.
(13) Represents Mr. Cohen's indirect beneficial ownership of Common Stock
based upon his beneficial ownership of currently exercisable options to
purchase (i) 67,500 shares of Applied common stock and (ii) 105,000 shares
of Environmental common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
The Company was organized in November 1995 as a wholly-owned subsidiary
of Environmental. In February 1996, pursuant to an assignment of technology
agreement between the Company and Srinivas Kilambi, Ph.D., the Company's former
Senior Vice President--Technology, the Company acquired rights to the SLiM
technology from Dr. Kilambi. In consideration for such technology, the Company
caused Environmental to transfer to Dr. Kilambi 200,000 shares of Environmental
common stock and agreed to pay Dr. Kilambi a royalty through December 3, 2002
equal to 2% of the Company's revenues actually received and attributed to the
commercial application of the acquired technology, except for applications
related to the radionuclides, technetium and rhenium, for which Dr. Kilambi is
entitled to receive a royalty of 0.66% of net sales (less allowances for
returns, discounts, commissions, freight, and excise or other taxes). In
exchange for Environmental's issuance of such shares to Dr. Kilambi, as well as
Environmental's funding and support of the Company, the Company issued to
Environmental 10,000,000 shares of Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
From the Company's inception to December 1996, Environmental financed
the research and development activities of the Company through direct equity
investments and loans to the Company. In December 1996, as part of a corporate
restructuring to consolidate all of its environmental technology businesses
within Applied, Environmental transferred to Applied all of the outstanding
shares of capital stock of the Company and CFC Technologies. In addition,
Environmental assigned to Applied outstanding Company notes aggregating $976,200
at December 2, 1996, representing advances previously made by Environmental to
the Company. Such advances have been capitalized by Applied as its capital
contribution to the Company. In consideration for such transfers, Applied paid
Environmental $3,000,000 in cash and issued to Environmental a warrant expiring
December 2, 2003 to purchase 7,500,000 shares of Applied common stock at an
exercise price of $15.00 per share. Such warrant was subsequently amended to,
among other things, reduce the exercise price thereof from $15.00 per share to
$10.00 per share. Such warrant is valued at $2.4 million and contains provisions
granting certain registration rights with respect to the warrant shares. As a
result of the IPO, Applied currently owns 87% of the outstanding shares of
Common Stock of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
LOANS INVOLVING AFFILIATES
In March 1997, the Company entered into a $1,500,000 line of credit
with a commercial bank. The entire line of credit was borrowed prior to the
completion of the Company's IPO to repay advances made by Applied to the Company
since December 1, 1996 for providing equipment installed in the Company's new
Atlanta facility and for working capital purposes. The line of credit was
guaranteed by Applied and secured by cash collateral provided by Applied. Upon
completion of the IPO, the Company applied $1,500,000 of the net proceeds to
repay such line of credit, and such guarantee and cash collateral was released
to Applied.
OFFICES
The Company maintains approximately 2,000 square feet of office space
in New York, New York, which also serves as offices of Environmental, Applied,
certain of their affiliates, and Messrs. Bentley J. Blum and Paul E.
Hannesson.
30
<PAGE>
In addition, prior to the Company's occupation of its Kennesaw, Georgia
facility in March 1997, the Company shared facilities in Columbus, Ohio with
Applied and certain of its other subsidiaries. The Company paid an
allocable share of rent equal to $750 per month for such space. The Company
terminated the existing lease in Columbus, Ohio on March 31, 1997.
SERVICES AGREEMENT
In September 1997, the Company, Applied, Environmental, Advanced
Sciences, and certain other affiliates of the Company (the "Affiliated Parties")
entered into a services agreement, dated as of September 1, 1997 (the "Services
Agreement"), whereby the Company and the Affiliated Parties agreed to cooperate
in sharing, where appropriate, costs related to accounting services, financial
management, human resources and personnel management and administration,
information systems, executive management, sales and marketing, research and
development, engineering, technical assistance, patenting, and other areas of
service as are appropriately and necessarily required in the operations of the
Company and the Affiliated Parties (collectively, the "Services"). Pursuant to
the Services Agreement, services provided by professional employees of the
Company and the Affiliated Parties to one another are charged on the basis of
time actually worked as a percentage of salary (including cost of benefits)
attributable to that professional. In addition, charges for rent, utilities,
office services and other routine charges regularly incurred in the normal
course of business are apportioned to the professionals working in the office on
the basis of salary, and then charged to any party in respect of whom the
professional devoted such time based upon time actually worked. Furthermore,
charges from third parties, including, without limitation, consultants,
attorneys and accountants, are levied against the party actually receiving the
benefit of such services. Pursuant to the Services Agreement, Applied acts as
the coordinator of billings and payments for Services on behalf of itself, the
Company and the other Affiliated Parties.
FUTURE TRANSACTIONS
In connection with the IPO, the Company's Board of Directors adopted a
policy whereby any future transactions between the Company and any of its
subsidiaries, affiliates, officers, directors, principal stockholders or any
affiliates of the foregoing will be on terms no less favorable to the Company
than could reasonably be obtained in "arm's length" transactions with
independent third parties, and any such transactions will also be approved by a
majority of the Company's disinterested outside directors.
31
<PAGE>
PART IV
EXHIBITS, FINANCIAL STATEMENT
ITEM 14. SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this Transition Report:
<TABLE>
<CAPTION>
Financial Statements. Page No.
- --------------------- --------
<S> <C>
Report of Independent Accountants........................................................... F-1
Independent Auditor's Report................................................................ F-1A
Balance Sheet as of December 31, 1997, June 30, 1997 and June 30, 1996...................... F-2
Statement of Operations for the six months ended December 31, 1997,
for the year ended June 30, 1997, for the period from November 15, 1995
(date of inception) to June 30, 1996, and for the period from November 15, 1995
to December 31, 1997................................................................... F-3
Statement of Stockholders' Equity for the period from November 15,
1995 (date of inception) through December 31, 1997..................................... F-4
Statement of Cash Flows for the six months ended December 31, 1997, for the
year ended June 30, 1997, for the period from November 15, 1995
(date of inception) to June 30, 1996, and for the period from
November 15, 1995 to December 31, 1997................................................. F-5
Notes to Financial Statements............................................................... F-6
</TABLE>
All financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and, therefore,
have been omitted.
<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").(5)
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 By-Laws of the Company.(1)
3.3 Form of Certificate of Designation, Preferences and Rights of 10% Senior Convertible Redeemable
Preferred Stock of the Company.(6)
4.1 Specimen Common Stock Certificate.(2)
4.2 Form of Warrant Agreement among the Company, the Representative and the Bank of New York.(5)
4.3 Specimen Warrant Certificate.(3)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.4 Form of Representative's Warrant Agreement between the Company and the Representative,
including form of Representative's Warrant therein.(5)
4.5 Specimen Convertible Preferred Stock Certificate.(3)
10.1 Employment Agreement, dated as of August 1, 1996, between the Company and Alan R. Burkart.(1)
10.2 Employment Agreement, dated as of September 1, 1996, between the Company and Carl O. Magnell.(1)
10.3 Employment Agreement, dated as of September 1, 1996, between the Company and James M. DeAngelis.(1)
10.4 Employment Agreement, dated as of September 1, 1996, between the Company and Srinivas Kilambi, Ph.D.(1)
10.5 Employment Agreement, dated as of September 1, 1996, between the Company and Michael D. Kiehnau.(1)
10.6 1996 Stock Option Plan of the Company.(1)
10.7 Executive Bonus Plan of the Company.(1)
10.8 Memorandum of Understanding, dated August 30, 1996, between the Company and Teledyne Brown Engineering,
a Division of Teledyne Industries, Inc., as amended.(1) and (5)
10.9 Memorandum of Understanding, dated August 29, 1996, between the Company and Sverdrup Environmental, Inc.,
as amended.(1) and (5)
10.10 Services Agreement, dated August 31, 1996, between the Company and Commodore CFC Technologies, Inc.(1)
10.11 Assignment of Technology Agreement, dated as of December 4, 1995, by and between the Company
(formerly Commodore Membrane Technologies, Inc.) and Srinivas Kilambi, Ph.D.(1)
10.12 Employment Agreement, dated as of October 31, 1996, between Environmental and Edwin L. Harper, Ph.D.(3)
10.13 Undivided Rights (Sole Commercial) License Agreement, dated January 5, 1997, between Lockheed
Martin Energy Research Corporation and the Company.(3)
10.14 Stock Purchase Agreement, dated as of December 2, 1996, by and between Environmental and Applied.(3)
10.15 Form of Revolving Credit Agreement between the Company and Environmental.(5)
10.16 Employment Agreement, dated as of January 27, 1997, between the Company and Kenneth J. Houle.(4)
10.17 Employment Agreement, dated as of November 18, 1996, between Environmental and Paul E. Hannesson.(7)
10.18 Employment Agreement, dated May 7, 1997, between Environmental and Michael D. Fullwood.(7)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*10.1 Equipment Lease, dated as of November 25, 1997, between the Company and Maryland Environmental Service.
*10.20 License Agreement, dated as of November 25, 1997, between the Company and Maryland Environmental Service.
*10.21 Equipment Lease, dated as of February 5, 1998, between the Company and Maryland Environmental Service.
*10.22 License Agreement, dated as of February 5, 1998 between the Company and Maryland Environmental Service.
22.1 Subsidiaries of the Company.(1)
*27.1 Financial Data Schedule.
- ---------------
* Filed herewith.
(1) Incorporated herein by reference and filed as an Exhibit to the Registrant's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on September 12, 1996 (File No. 33-11813)
(the "Registration Statement").
(2) Incorporated herein by reference and filed as an Exhibit to Amendment No. 1 to the Registration Statement
filed with the Securities and Exchange Commission on October 18, 1996.
(3) Incorporated herein by reference and filed as an Exhibit to Amendment No. 3 to the Registration Statement
filed with the Securities and Exchange Commission on January 23, 1997.
(4) Incorporated herein by reference and filed as an Exhibit to Amendment No. 4 to the Registration Statement
filed with the Securities and Exchange Commission on January 28, 1997.
(5) Incorporated herein by reference and filed as an Exhibit to Amendment No. 5 to the Registration Statement
filed with the Securities and Exchange Commission on March 13, 1997.
(6) Incorporated herein by reference and filed as an Exhibit to Amendment No. 6 to the Registration Statement
filed with the Securities and Exchange Commission on March 25, 1997.
(7) Incorporated herein by reference and filed as an Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997.
</TABLE>
Reports on Form 8-K:
On July 31, 1997, the Company filed with the Commission a Current
Report on Form 8-K, dated July 28, 1997, with respect to the mutual agreement of
the Company and Tanner + Co. to terminate their relationship and the Company's
decision to change its fiscal year-end from June 30 to December 31. Such events
were reported under Item 5 of Form 8-K and no financial statements were included
in such report.
34
<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 SEPARATION TECHNOLOGIES, INC.
By:/s/Paul E. Hannesson
----------------------------------------
Paul E. Hannesson, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/Paul E. Hannesson Chairman of the Board and Chief March 30, 1998
- ------------------------------------------ Executive Officer (principal executive
Paul E. Hannesson officer)
/s/Michael D. Fullwood Senior Vice President, Chief Financial March 30, 1998
- ------------------------------------------ and Administrative Officer, Secretary
Michael D. Fullwood and General Counsel (principal
financial and accounting officer)
/s/Paul E. Hannesson
- ------------------------------------------ Chairman of the Board March 30, 1998
Paul E. Hannesson
/s/Bentley J. Blum
- ------------------------------------------ Director March 30, 1998
Bentley J. Blum
/s/David L. Mitchell
- ------------------------------------------ Director March 30, 1998
David L. Mitchell
/s/William R. Toller
- ------------------------------------------ Director March 30, 1998
William R. Toller
/s/Kenneth L. Adelman
- ------------------------------------------ Director March 30, 1998
Kenneth L. Adelman, Ph.D.
/s/Jeane J. Kirkpatrick
- ------------------------------------------ Director March 30, 1998
Jeane J. Kirkpatrick, Ph.D.
/s/Herbert A. Cohen
- ------------------------------------------ Director March 30, 1998
Herbert A. Cohen
</TABLE>
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements. Page No.
- --------------------- --------
<S> <C>
Report of Independent Accountants........................................................F-1
Independent Auditor's Report.............................................................F-1A
Balance Sheet as of December 31, 1997, June 30, 1997 and June 30, 1996...................F-2
Statement of Operations for the six months ended December 31, 1997, for
the year ended June 30, 1997, for the period from November 15,
1995 (date of inception) to June 30, 1996, and for the period from
November 15, 1995 to December 31,
1997................................................................................F-3
Statement of Stockholders' Equity for the period from November 15,
1995 (date of inception) through December 31, 1997..................................F-4
Statement of Cash Flows for the six months ended December 31, 1997, for
the year ended June 30, 1997, for the period from November 15,
1995 (date of inception) to June 30, 1996, and for the period from
November 15, 1995 to December 31, 1997..............................................F-5
Notes to Financial Statements............................................................F-6
</TABLE>
All financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and, therefore,
have been omitted.
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Commodore Separation Technologies,
Inc. (a development stage company)
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Commodore Separation Technologies,
Inc. (a development stage company) at December 31, 1997 and June 30, 1997, and
the results of its operations and its cash flows for the six months ended
December 31, 1997, the year ended June 30, 1997 and the period from November 15,
1995 (inception) through December 31, 1997, 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
audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, Pennsylvania
February 26, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Commodore Separation Technologies, Inc.
We have audited the accompanying balance sheet of Commodore Separation
Technologies, Inc. (a development stage company) as of June 30, 1996, and the
related statements of operations, stockholders' deficit, and cash flows for the
period from November 15, 1995 (date of inception) to June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Commodore Separation
Technologies, Inc. (a development stage company) as of June 30, 1996, and the
results of its operations and its cash flows for the period from November 15,
1995 (date of inception) to June 30, 1996, in conformity with generally accepted
accounting principles.
/s/ Tanner + Co.
Salt Lake City, Utah
August 1, 1996
F-1A
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Balance Sheet
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, June 30,
------------- ------------------
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,951 $8,893 $ 3
Restricted cash 88 - -
Inventory 360 - -
Receivables from related party 17 12 -
Prepaid assets and other current receivables 41 36 -
-------- ------ ----
Total current assets 5,457 8,941 3
Property and equipment:
Technical equipment 690 411 7
Office equipment 388 355 3
Leasehold improvements 205 203 -
-------- ------ ----
1,283 969 10
Less accumulated depreciation 247 116 -
-------- ------ ----
Net property and equipment 1,036 853 10
Intangible assets, net of accumulated amortization of $5, $2 and $0 167 56 10
-------- ------ ----
$ 6,660 $9,850 $ 23
======= ====== ====
Liabilities and Stockholders' Equity (Deficit)
Accounts payable $ 405 $ 288 $ 18
Accrued liabilities 328 141 12
Due to related party 262 695 54
-------- ------ ----
Total current liabilities 995 1,124 84
Capital lease obligation 13 18 -
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 10% non-cumulative,
5,000,000 shares authorized, 600,000, 600,000 and 0 shares
issued and outstanding, respectively 1 1 -
Common stock, $.001 par value, 50,000,000 shares
authorized, 11,503,650, 11,500,000 and 10,000,000 shares issued
and outstanding, respectively 11 11 10
Additional paid in capital 11,638 11,928 5
Subscription receivable - - (15)
Deficit accumulated during the development stage (5,998) (3,232) (61)
-------- ------ ----
Total stockholders' equity (deficit) 5,652 8,708 (61)
-------- ------ ----
$ 6,660 $9,850 $ 23
======= ====== ====
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Statement of Operations
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Cumulative
November 15, Amounts From
1995 November 15,
Six Months Year (Date of 1995
Ended Ended Inception) (Date of
December 31, June 30, to June 30, Inception to
1997 1997 1996 December 31, 1997
------------ -------- ------------ ------------------
<S> <C> <C> <C> <C>
Costs and expenses:
Research and development $ 817 $ 985 $ 50 $ 1,852
General and administrative 869 1,356 10 2,235
Depreciation and amortization 134 118 - 252
Corporate overhead expenses 911 705 - 1,616
Sales and marketing 230 51 - 281
Licensing fee - 50 - 50
------- ------- ------ -------
Total costs and expenses 2,961 3,265 60 6,286
------- ------- ------ -------
Revenue - 8 - 8
Interest income 195 99 - 294
Interest expense - (13) (1) (14)
------- ------- ------ -------
Net loss before income taxes (2,766) (3,171) (61) (5,998)
Income tax benefit - - - -
------- ------- ------ -------
Net loss $(2,766) $(3,171) $ (61) $(5,998)
======= ======= ====== =======
Net loss per share - basic and diluted (0.27) (0.32) (0.01)
======= ======= ======
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Statement of Stockholders' Equity
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Preferred Stock
----------------------- ------------------ Subscription
Shares Amount Shares Amount Receivable
---------- ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C>
Common stock issued for cash on
November 15, 1995 (inception) at $1 per share 100 - - - -
Stock split of 150,000 shares for one share
on September 5, 1996 14,999,900 $ 15 - - $ (15)
Reverse stock split of 1.50 shares
for one share on November 26, 1996 (5,000,000) (5) - - -
Net loss for the period from
November 15, 1995 through June 30, 1996 - - - - -
----------- ------- -------- -------- ---------
Balance, June 30, 1996 10,000,000 10 (15)
Collection of subscription receivable - - - - 15
Conversion of notes payable to capital - - -
Proceeds from sale of common stock and warrants 1,500,000 1 -
Proceeds from sale of preferred stock and warrants - - 600,000 $ 1 -
Dividend on preferred stock - - - - -
Net loss for the year ended June 30, 1997 - - - - -
----------- ------- ------- -------- ---------
Balance, June 30, 1997 11,500,000 11 600,000 1 -
Issuance of common stock 3,650 - - - -
Dividend on preferred stock - - - - -
Net loss for the six months ended December 31, 1997 - - - - -
---------- ------- ------- -------- ---------
11,503,650 $ 11 600,000 $ 1 $ -
========== ======= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During the Shareholders'
Paid in Development Equity
Capital Stage (Deficit)
---------- ------------ -------------
<S> <C> <C> <C>
Common stock issued for cash on
November 15, 1995 (inception) at $1 per share - - -
Stock split of 150,000 shares for one share
on September 5, 1996
Reverse stock split of 1.50 shares
for one share on November 26, 1996 $ 5 - -
Net loss for the period from
November 15, 1995 through June 30, 1996 - $ (61) $ (61)
--------- ---------- -------
Balance, June 30, 1996 5 (61) (61)
Collection of subscription receivable - - 15
Conversion of notes payable to capital 976 - 976
Proceeds from sale of common stock and warrants 6,108 - 6,109
Proceeds from sale of preferred stock and warrants 4,977 - 4,978
Dividend on preferred stock (138) - (138)
Net loss for the year ended June 30, 1997 - (3,171) (3,171)
--------- ---------- -------
Balance, June 30, 1997 11,928 (3,232) 8,708
Issuance of common stock 10 - 10
Dividend on preferred stock (300) - (300)
Net loss for the six months ended December 31, 1997 - (2,766) (2,766)
--------- --------- -------
$ 11,638 $ (5,998) $ 5,652
========= ========= =======
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Statement of Cash Flows
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Cumulative
November 15, Amounts From
Six Months Year 1995 November 15,
Ended Ended (Inception) 1995
December 31, June 30, to June 30, (Inception) to
1997 1997 1996 December 31, 1997
------------ -------- ------------ -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,766) $(3,171) $ (61) $ (5,998)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 134 118 - 252
Issuance of Common Stock 10 - - 10
Changes in assets and liabilities:
Inventory (360) - - (360)
Accounts payable 117 270 18 405
Accrued liabilities 187 129 12 328
Receivables from related party (5) (12) - (17)
Other assets (5) (36) - (41)
-------- -------- ----- ---------
Net cash used in operating activities (2,688) (2,702) (31) (5,421)
-------- -------- ----- ---------
Cash flows from investing activities:
Acquisition of intangible assets (114) (48) (10) (172)
Purchase of property and equipment (33) (352) (3) (388)
Acquisition of leasehold improvements (2) (203) - (205)
Construction of technical equipment (279) (404) (7) (690)
Increase in certificate of deposit (88) - - (88)
-------- -------- ----- ---------
Net cash used in investing activities (516) (1,007) (20) (1,543)
-------- -------- ----- ---------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants - 6,109 - 6,109
Proceeds from sale of preferred stock and warrants - 4,978 - 4,978
Preferred stock dividend (300) (138) - (438)
Borrowings from (repayments to) stockholder (433) 641 54 262
Collection of subscription receivable - 15 - 15
Contributed capital - 976 - 976
Increase (decrease) in capital lease obligation (5) 18 - 13
-------- -------- ----- ---------
Net cash (used in) provided by financing activities (738) 12,599 54 11,915
-------- -------- ----- ---------
Increase (decrease) in cash (3,942) 8,890 3 4,951
Cash, beginning of period 8,893 3 - -
-------- -------- ----- ---------
Cash, end of period $ 4,951 $ 8,893 $ 3 $ 4,951
======== ======== ===== =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ - $ 13 $ 1 $ 14
======== ======== ===== =========
Income taxes $ - $ - $ - -
======== ======== ===== =========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- -------------------------------------------------------------------------------
1. Background
Commodore Separation Technologies, Inc. (a development stage company) (the
"Company") was incorporated on November 15, 1995, under the laws of the
state of Delaware. Effective February 29, 1996, the Company acquired the
rights to its proprietary separation technology and entered into a royalty
agreement with the inventor of the technology as described in Note 5.
Pursuant to these agreements, the Company caused its then parent, Commodore
Environmental Services, Inc. ("Environmental"), to issue 200,000 shares of
Environmental common stock to the inventor of the technology.
The Company is a process technology company which has developed and intends
to commercialize its separation technology and recovery system, known as
SLiM(TM). The Company believes SLiM(TM) is capable of effectively separating
and extracting various solubilized materials, including metals, organic
chemicals, biochemicals, radionuclides and other targeted substances, from
liquid and possibly gaseous process streams. The Company has commenced
planned principal operations but has not received significant revenue
therefrom. As such, the Company is considered a development stage company as
defined in Statement of Financial Accounting Standards ("SFAS") No. 7.
2. Summary of Significant Accounting Policies
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. As of
December 31, 1997, recorded book value approximates fair value.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include cash and
investments in commercial paper, U.S. Treasuries and Agencies and money
funds with maturities of up to 90 days.
Research and Development Expenditures
Research and development expenditures are charged to operations as incurred.
Inventory
Inventory represents finished goods and consists of machinery and equipment
built and held for sale. Inventory is recorded at historical cost per unit.
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements
are capitalized and minor replacements, maintenance and repairs which do not
increase the useful lives of the assets are expensed as incurred.
Depreciation and amortization are recorded using a straight-line method over
estimated useful lives of the assets, which vary from two to ten years.
Intangible Assets
The Company has incurred costs associated with applying for certain patents.
These costs are amortized over 17 years.
F-6
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
Income Taxes
Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Use of Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
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.
The Company is currently analyzing the effect these standards will have upon
the financial statements and notes thereto.
The Company has adopted SFAS 129, "Disclosure of Information About Capital
Structure." The financial statements and footnotes reflect the disclosures
required under this new standard.
Contracts
In November 1997, the Company entered into a contract with the State of
Maryland for the removal of chromium-contaminated leachate at the Hawkins
Point Hazardous Waste Treatment Facility at the Port of Baltimore. As of
December 31, 1997, the Company had not yet commenced work on this contract
and accordingly, had not recorded revenue related to the contract.
3. Earnings Per Share
All earnings per share amounts reflect the implementation of SFAS 128,
"Earnings per Share," which establishes new standards for computing and
presenting earnings per share and requires all prior period earnings per
share data be restated to conform with the provisions of the statement.
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted average number of shares outstanding
during the period. Diluted earnings per share are
F-7
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
computed using the weighted average number of shares determined for the
basic computation plus the number of shares of common stock that would be
issued assuming all contingently issuable shares having a dilutive effect on
earnings per share were outstanding for the period.
<TABLE>
<CAPTION>
Period from
November 15,
Six Months Year 1995
Ended Ended (Inception)
December 31, June 30, to June 30,
1997 1997 1996
------------ -------- ------------
(Dollars in thousands except per share data)
<S> <C> <C> <C>
Net loss $ (2,766) $ (3,171) $ (61)
Add: Preferred stock dividends (300) (138) -
----------- ----------- -----------
Net loss available to common shareholders $ (3,066) $ (3,309) $ (61)
=========== ============ ============
Weighted average common shares outstanding (basic) 11,502,000 10,375,000 $10,000,000
Convertible Preferred Stock (*) (*) -
Warrants issued in initial public offering (*) (*) -
Employee stock options (*) (*) -
----------- ----------- -----------
Weighted average common shares outstanding (diluted) $11,502,000 $ 10,375,000 $10,000,000
=========== ============ ============
Loss per share (basic) $ (0.27) $ (0.32) $ (0.01)
=========== ============ ============
</TABLE>
(*) Due to the Company's loss from continuing operations for the six months
ended December 31, 1997, the year ended June 30, 1997 and the period from
November 15, 1995 (inception) to June 30, 1996, the incremental shares
issuable in connection with these instruments are anti-dilutive and
accordingly not considered in the calculation.
4. Related Party Transactions
Effective December 2, 1996, Environmental transferred 100% of the capital
stock of the Company and notes receivable from the Company which aggregated
$976,200 to its then 69.3% owned subsidiary, Commodore Applied Technologies,
Inc. ("Applied") in exchange for cash and a warrant to purchase shares of
Applied common stock. Concurrent with this transaction, Applied contributed
the notes receivable from the Company as a capital contribution. The
transfer has been accounted for as a transaction between entities under
common control. Accordingly, the assets and liabilities of the Company were
recorded at Environmental's carryover basis.
For the six months ended December 31, 1997 and the year ended June 30, 1997,
the Company was charged a management fee by Applied of $911,000 and
$705,000, respectively. This management fee is a result of allocated wages
and salaries, rent, insurance (including director and officer liability
insurance) and other administrative expenses. The management fees commenced
in April 1997.
F-8
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
The Company owed unsecured advances of $54,000 as of June 30, 1996 to
Environmental, and $262,000 and $695,000 to Applied as of December 31, 1997
and June 30, 1997, respectively.
Through June 30, 1996, the Company had an unwritten agreement pursuant to
which its sole stockholder provided space for the Company's New York offices
at no cost, and another company under common control provided research and
development facility space to the Company at no cost. Subsequent to June 30,
1996, the Company paid a monthly rent of $750 for the research and
development facility.
5. Income Taxes
The difference between the income tax benefit at statutory rates for the
periods ended December 31, 1997, June 30, 1997 and June 30, 1996,
respectively, and the amount presented in the financial statements are as
follows:
(in thousands)
December 31, June 30,
1997 1997 1996
---- ---- ----
Tax benefit at statutory rates $ (940) $ (1,078) $ (21)
Valuation allowance 940 1,078 21
----- -------- -----
$ - $ - $ -
====== ======== =====
Deferred tax assets are as follows:
(in thousands)
December 31, June 30,
1997 1997 1996
---- ---- ----
Net operating loss carryforward $ (2,039) $ (1,099) $ (21)
Valuation allowance 2,039 1,099 21
-------- -------- -----
Net deferred tax asset $ - $ - $ -
======== ======== =====
At December 31, 1997, the Company had tax loss carryforwards of
approximately $5,998,000. The amount of and ultimate realization of benefit
from the net operating loss for income tax purposes is dependent, in part,
upon the tax laws in effect, future earnings of the Company, and other
future events, the effects of which cannot be determined. A change in
ownership of the Company may reduce the amount of loss allowable. These net
operating carryforwards begin to expire in 2011.
A full valuation allowance has been established because of the uncertainty
about whether the Company will realize the benefit of net operating losses.
6. Royalty Agreements
As described in Note 1, the Company has an agreement with a former officer
of the Company pursuant to which the former officer is to receive a royalty
of 2% of collected revenues from the Company's membrane separation
technology through December 3, 2002, except for applications related to the
F-9
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
radionuclides technetium and rhenium, for which the former officer is
entitled to receive a royalty of .66% of net sales (less allowances for
returns, discounts, commissions, freight and excise or other taxes).
The Company also has a license agreement with Lockheed Martin Energy
Research Corporation, manager of the Oak Ridge National Laboratory, a U.S.
Department of Energy national laboratory, for which the Company paid
Lockheed Martin a $50,000 licensing fee during the year ended June 30, 1997.
Under this agreement, Lockheed Martin is to receive a royalty of 2% of net
sales of the Company's products or processes covered under the agreement
(less allowances for returns, discounts, commissions, freight, and excise or
other taxes) up to total net sales of $4,000,000 and 1% of net sales
thereafter. In addition, the Company has agreed to guarantee Lockheed
Martin, commencing in the third year of the agreement, an annual minimum
royalty of $15,000.
7. Capital Structure
On September 5, 1996, the Company amended its Certificate of Incorporation
authorizing up to 5,000,000 shares of Preferred Stock, $.001 par value and
up to 50,000,000 shares of Common Stock, $.001 par value.
The Company also effected a stock split of 150,000 shares for one share.
This increased the total number of shares of Common Stock issued and
outstanding to 15,000,000 shares, which were all held by Environmental. On
November 26, 1996, the outstanding shares were reduced to 10,000,000 based
on a 1-for-1.50 reverse stock split. The financial statements have been
prepared as though the above changes in stockholders' equity had occurred at
November 15, 1995.
In April 1997, the Company completed an Initial Public Offering of 1,500,000
units each consisting of one share of Common Stock and a Warrant to purchase
one share of Common Stock, and 600,000 units each consisting of one share of
Convertible Preferred Stock and a Warrant to purchase one share of Common
Stock.
Proceeds from the offering were as follows:
Common Preferred
Units Units
---------- ----------
Proceeds allocated to shares $5,564,000 $5,214,000
Proceeds allocated to warrants 2,086,000 846,000
---------- ----------
Gross proceeds 7,650,000 6,060,000
Less: Discount and offering expenses 1,541,000 1,082,000
---------- ----------
Net proceeds $6,109,000 $4,978,000
========== ==========
The underwriter of the offering exercised its right to purchase an
additional 315,000 Warrants for $31,500.
Preferred Stock
The Convertible Preferred Stock has a par value of $.01 per share and a
stated value of $10.00 per share. Cumulative dividends are payable at the
rate of $ 1.00 per share per annum, payable quarterly, commencing June 30,
1997, when, and if declared by the Board of Directors, before any dividends
are
F-10
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
declared or paid on the Common Stock or any capital stock ranking junior to
the Convertible Preferred Stock. Failure to pay any quarterly dividend will
result in a reduction of the conversion price as described below.
The Convertible Preferred Stock is convertible into Common Stock at any time
prior to redemption at a conversion rate of 1.67 shares of Common Stock for
each share of Convertible Preferred Stock (an effective conversion price of
$6.00 per share of Common Stock), subject to adjustment under certain
circumstances, including the failure of the Company to pay a dividend on the
Convertible Preferred Stock within 30 days of a dividend payment date, which
will result in each instance in a reduction of $.50 per share in the
conversion price but not below $3.75 per share.
The Convertible Preferred Stock is redeemable, in whole but not in part, by
the Company upon 30 days' prior written notice after April 3, 2000 at $10.00
per share, plus accumulated and unpaid dividends, provided the closing bid
price of the Common Stock for at least 20 consecutive trading days ending
not more than 10 trading days prior to the date of the notice of redemption
equals or exceeds $10.00 per share or, after April 3, 2001, at certain cash
redemption prices plus accumulated and unpaid dividends.
The holders of Convertible Preferred Stock have the right, voting as a
class, to approve or disapprove of the issuance of any class or series of
stock ranking senior to or on a parity with the Convertible Preferred Stock
with respect to declaration and payment of dividends or the distribution of
assets on liquidation, dissolution or winding-up. In addition, if the
company fails to pay dividends on the Convertible Preferred Stock for four
consecutive quarterly dividend payment periods, holders of Convertible
Preferred Stock voting separately as a class will be entitled to elect one
director; such voting right will be terminated as of the next annual meeting
of stockholders of the Company following payment of all accrued dividends.
Upon liquidation, dissolution or winding up of the company, holders of
Convertible Preferred Stock are entitled to receive liquidation
distributions equivalent to $10.00 per share (plus accumulated and unpaid
dividends) before any distribution to holders of the Common Stock or any
capital stock ranking junior to the convertible Preferred Stock.
Warrants
Each Warrant entitles the holder thereof to purchase, at any time
from April 3, 1998 through April 3, 2002, one share of Common stock at a
price of $5.50 per share, subject to adjustment. Commencing October 3, 1998,
the Warrants are subject to redemption by the Company, in whole but not in
part, at $.10 per Warrant on 30 days' prior written notice provided that
the average closing sale price of the Common Stock equals or exceeds $15.00
per share, subject to adjustment, for any 20 trading days within a period of
30 consecutive trading days ending on the fifth trading day prior to the
date of the notice of redemption.
Representative's Warrants
In connection with the Offering, the Company sold to the Underwriter for
$.0001 per warrant, warrants to purchase from the Company up to 60,000
shares of Convertible Preferred Stock, 150,000 shares of Common Stock and/or
210,000 Warrants (the "Representative's Warrants"). The
F-11
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
Representative's Warrants are exercisable at a price of $12.00 per share of
Convertible Preferred Stock, $6.00 per share of Common Stock and $.12 per
Warrant from April 3, 1998 through April 3, 2002, and are restricted from
sale, transfer, assignment or hypothecation prior to that date, except to
officers of the Underwriter. The Representative's Warrants provide for
adjustment in the number of securities issuable upon the exercise thereof as
a result of certain subdivisions and combinations of the Common Stock. The
Representative's Warrants grant to the holders thereof certain rights of
registration for the securities issuable upon exercise thereof.
9. Stock Option Plan
The Company's 1996 Stock Option Plan (the "Plan") provides the Board of
Directors the authority to issue incentive and non-qualified stock options
to purchase up to 1,350,000 shares of the Company's Common Stock to
officers, directors, key employees and/or consultants. Through January 1997,
the Board of Directors had awarded 630,000 five-year non-qualified options
under the Plan to officers. These options became effective upon the
completion of the Company's initial public offering in April 1996 and
carried an exercise price equal to the initial public offering price. These
options vest 20% per year, with the first 20% vesting immediately upon the
date of grant.
In addition, in September 1996 the Board awarded 136,689 five-year
non-qualified options under the Plan to non-employee directors. These
options also became effective upon completion of the Company's initial
public offering and carry an exercise price equal to the initial public
offering price. These options vest 33-1/3% per year, with the first third
vesting immediately upon the date of grant.
In May and June 1997, the Company awarded 230,000 five-year incentive and
non-qualified options under the Plan to certain key employees and officers.
These options carry an exercise price of $2.50, equal to the market price at
the time of the awards. These options vest 20% per year, with the first 20%
vesting immediately upon the date of grant.
In July 1997, the Company modified the term of all existing options
outstanding under the Plan to ten years. No other terms of the existing
awards were changed. This did not result in a charge to compensation as the
market value on the date of modification was less the exercise price for all
options outstanding. For purposes of the SFAS 123 disclosures in the
following paragraphs, this modification was treated as a rescission of the
initial awards and a grant of new awards.
In December 1997, the Company awarded 45,563 ten-year non-qualified options
under the Plan to a new member of the Board of Directors. These options
carry an exercise price of $1.88, equal to the market price at the time of
the award. These options vest 33-1/3% per year, with the first third vesting
immediately upon the date of grant.
The Company has adopted the intrinsic value method of accounting for stock
options and warrants under Accounting Principles Board Opinion No. 25. Under
this standard, no compensation expense is recorded when the exercise price
of options granted to employees is equal to or less than the market price of
the underlying stock on the date of the grant. The Company has elected the
disclosure-only provisions of SFAS 123, which requires fair value accounting
for options issued to employees.
F-12
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
A summary of the status of options granted under the Plan as of June 30,
1997 and December 31, 1997 and changes during the periods then ended is
presented below:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, 1997 December 31, 1997
-------------------- -----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year - - 996,689 $ 4.42
Granted 996,689 $ 4.42 1,042,252 4.31
Exercised - - - -
Forfeited - - - -
Rescinded - - (996,689) 4.42
------- ---------
Options outstanding at end of year 996,689 4.42 1,042,252 4.31
======= =========
Options exercisable at year end 217,564 384,313
======= =========
Weighted average fair value of options
granted during the period $ 2.47 $ 1.42
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
Weighted-
Average
Remaining
Exercise Number Contractual Options
Price Outstanding Life Exercisable
---------- ----------- ----------- ------------
$ 5.00 766,689 8.79 323,125
$ 2.50 230,000 9.45 46,000
$ 1.88 45,563 9.95 15,188
--------- -------
1,042,252 8.98 384,313
========= =======
F-13
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
Had compensation expense for the Company's employee stock options been
determined based on the fair value at the grant date for awards consistent
with the provisions of SFAS 123, the Company's net loss per share would have
been increased to the pro forma amounts indicated below:
Six Months Ended Year Ended
December 31, 1997 June 30, 1997
----------------- -------------
Net loss - as reported $(2,766,000) $(3,171,000)
Net loss - pro form $(3,114,000) $(3,706,000)
Loss per share - as reported $ (.27) $ (.32)
Loss per share - pro forma $ (.30) $ (.37)
SFAS 123 requires stock options to be valued using an approach such as the
Black-Scholes option pricing model. The Black-Scholes model calculates the
fair value of the grant based upon certain assumptions about the underlying
stock. The expected dividend yield of the stock is zero, the expected life
of the options is 9 years for the six months ended December 31, 1997 and 5
years for the year ended June 30, 1997, the expected volatility is 60
percent, and the expected risk-free rate of return is 6.50 percent,
calculated as the rate offered on U.S. Government securities with the same
term at the expected life of the options.
10. Commitments and Contingencies
Leases
The Company is committed under non-cancelable leases for office space,
machinery and equipment. Future obligations under the leases for the next
five years are as follows:
Operating
Fiscal Capital Lease Lease
Year Ended Payments Payments
---------- ------------- ----------
1998 $ 10,000 $ 129,000
1999 9,000 129,000
2000 - 132,000
2001 - 132,000
2002 - -
---------- ---------
19,000 522,000
Amount representing interest (6,000)
----------
$ 13,000
==========
Property and equipment at December 31, 1997 includes the following amounts
for capitalized leases:
F-14
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
Technical equipment $26,000
Less: Accumulated Depreciation (1,000)
-------
$25,000
=======
Rent expense approximated $56,000 for the six months ended December 31, 1997
and $72,000 for the year ended June 30, 1997.
Employment Agreements
The Company has employment agreements with three executives and key
personnel. Aggregate minimum payments under the employment agreements are as
follows:
1998 $431,000
1999 431,000
--------
Total $862,000
========
In 1997, the Board of Directors approved bonuses of $187,700. These bonuses
were accrued as of December 31, 1997 and paid in January 1998.
Litigation
The Company has no 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.
11. Comparative Financial Information (Unaudited)
The selected financial data included in the following table for the six
month period ended December 31, 1996 is unaudited and, in the opinion of
management, includes all adjustments consisting of only normal recurring
adjustments necessary for a fair presentation of such data.
Cost and expenses $ (857,000)
Revenues 8,000
Interest expense (5,000)
Income taxes -
----------
Net loss $ (854,000)
==========
Net loss per share $ (.09)
==========
F-15
<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").(5)
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 By-Laws of the Company.(1)
3.3 Form of Certificate of Designation, Preferences and Rights of
10% Senior Convertible Redeemable Preferred Stock of the
Company.(6)
4.1 Specimen Common Stock Certificate.(2)
4.2 Form of Warrant Agreement among the Company, the
Representative and the Bank of New York.(5)
4.3 Specimen Warrant Certificate.(3)
4.4 Form of Representative's Warrant Agreement between the Company
and the Representative, including form of Representative's
Warrant therein.(5)
4.5 Specimen Convertible Preferred Stock Certificate.(3)
10.1 Employment Agreement, dated as of August 1, 1996, between the
Company and Alan R. Burkart.(1)
10.2 Employment Agreement, dated as of September 1, 1996, between
the Company and Carl O. Magnell.(1)
10.3 Employment Agreement, dated as of September 1, 1996, between
the Company and James M. DeAngelis.(1)
10.4 Employment Agreement, dated as of September 1, 1996, between
the Company and Srinivas Kilambi, Ph.D.(1)
10.5 Employment Agreement, dated as of September 1, 1996, between
the Company and Michael D. Kiehnau.(1)
10.6 1996 Stock Option Plan of the Company.(1)
10.7 Executive Bonus Plan of the Company.(1)
10.8 Memorandum of Understanding, dated August 30, 1996, between
the Company and Teledyne Brown Engineering, a Division of
Teledyne Industries, Inc., as amended.(1) and (5)
10.9 Memorandum of Understanding, dated August 29, 1996, between
the Company and Sverdrup Environmental, Inc., as amended.(1)
and (5)
<PAGE>
10.10 Services Agreement, dated August 31, 1996, between the Company
and Commodore CFC Technologies, Inc.(1)
10.11 Assignment of Technology Agreement, dated as of December 4,
1995, by and between the Company (formerly Commodore Membrane
Technologies, Inc.) and Srinivas Kilambi, Ph.D.(1)
10.12 Employment Agreement, dated as of October 31, 1996, between
Environmental and Edwin L. Harper, Ph.D.(3)
10.13 Undivided Rights (Sole Commercial) License Agreement, dated
January 5, 1997, between Lockheed Martin Energy Research
Corporation and the Company.(3)
10.14 Stock Purchase Agreement, dated as of December 2, 1996, by and
between Environmental and Applied.(3)
10.15 Form of Revolving Credit Agreement between the Company and
Environmental.(5)
10.16 Employment Agreement, dated as of January 27, 1997, between
the Company and Kenneth J. Houle.(4)
10.17 Employment Agreement, dated as of November 18, 1996, between
Environmental and Paul E. Hannesson.(7)
10.18 Employment Agreement, dated May 7, 1997, between Environmental
and Michael D. Fullwood.(7)
*10.19 Equipment Lease, dated as of November 25, 1997, between the
Company and Maryland Environmental Service.
*10.20 License Agreement, dated as of November 25, 1997, between the
Company and Maryland Environmental Service.
*10.21 Equipment Lease, dated as of February 5, 1998, between the
Company and Maryland Environmental Service.
*10.22 License Agreement, dated as of February 5, 1998 between the
Company and Maryland Environmental Service.
22.1 Subsidiaries of the Company.(1)
*27.1 Financial Data Schedule.
- --------------------------
* Filed herewith.
(1) Incorporated herein by reference and filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on September 12, 1996 (File No. 333-11813) (the
"Registration Statement").
(2) Incorporated herein by reference and filed as an Exhibit to Amendment No. 1
to the Registration Statement filed with the Securities and Exchange
Commission on October 18, 1996.
<PAGE>
(3) Incorporated herein by reference and filed as an Exhibit to Amendment No. 3
to the Registration Statement filed with the Securities and Exchange
Commission on January 23, 1997.
(4) Incorporated herein by reference and filed as an Exhibit to Amendment No. 4
to the Registration Statement filed with the Securities and Exchange
Commission on January 28, 1997.
(5) Incorporated herein by reference and filed as an Exhibit to Amendment No. 5
to the Registration Statement filed with the Securities and Exchange
Commission on March 13, 1997.
(6) Incorporated herein by reference and filed as an Exhibit to Amendment No. 6
to the Registration Statement filed with the Securities and Exchange
Commission on March 25, 1997.
(7) Incorporated herein by reference and filed as an Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997.
<PAGE>
EXHIBIT 10.19
EQUIPMENT LEASE
This Agreement is made as of the 25th day of November, 1997, by and
between COMMODORE SEPARATION TECHNOLOGIES, INC., a corporation organized and
existing under the laws of the State of Delaware ("Commodore"), and Maryland
Environmental Service, an agency and instrumentality of the State of Maryland
("MES").
RECITALS:
WHEREAS, Commodore owns certain proprietary technology related to a
supported liquid membrane device and process which uses a liquid membrane
support, diluent mixtures, membrane temperature gradients, carrier solutions,
and other proprietary processes for which Commodore has filed one or more patent
applications with the United States Patent and Trademark Office; Commodore also
owns proprietary know-how and other proprietary information related to its
supported liquid membrane device and process; (all of the foregoing proprietary
technology, know-how and information is hereinafter referred to as Commodore's
"Supported Liquid Membrane Technology"); Commodore's Supported Liquid Membrane
Technology has the ability to process wastewater such as landfill leachate and
separate and/or remove from the landfill leachate metals such as chromium; and
WHEREAS, Commodore has developed proprietary equipment ("Proprietary
Equipment") which incorporates and actuates the Supported Liquid Membrane
Technology for processing wastewater such as landfill leachate and for
separating and removing chromium; Commodore has also developed certain computer
software, including source code and object code (the "Software") which operates
and controls the Supported Liquid Membrane Technology and the Proprietary
Equipment in combination with other non-proprietary equipment. The Supported
Liquid Membrane Technology, the Proprietary Equipment and the Software, are
described on Schedule A attached to a License Agreement of even date herewith
between the parties and are hereinafter collectively referred to as
"Intellectual Property";
WHEREAS, Commodore Intellectual Property, when combined with certain
nonproprietary equipment and an immobilized ligand process equipment proprietary
to a third party, all described on Schedule 2.5 attached hereto (the
"Equipment") can separate and remove, total chromium from wastewater such as
landfill leachate;
WHEREAS, MES operates leachate treatment facilities ("Leachate
Treatment Facilities") at the Hawkins Point Hazardous Waste Treatment Facility
at the Port of Baltimore, Maryland ("Hawkins Point") at which it must, inter
alia remove total chromium from landfill leachate before discharging the
landfill leachate;
WHEREAS, Commodore has licensed its Intellectual Property to MES
pursuant to a License Agreement of even date herewith and Commodore is hereby
willing to lease the Equipment to MES under and subject to the terms and
conditions of this Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing recitals and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and for and in consideration of the terms and conditions
hereinafter set forth, and intending to be legally bound, the parties hereto
agree as follows:
ARTICLE I
1.1 Recitals. The foregoing recitals are incorporated herein as if set
forth at length.
ARTICLE II
Lease of Equipment
2.1 Initial Lease Price. Subject to the terms and condition of this
Agreement and the License Agreement of even date herewith between the parties
hereto (the "License Agreement"), Commodore hereby agrees to lease and does
hereby lease the Equipment to MES and MES hereby agrees to lease and does hereby
lease the Equipment from Commodore for an initial one time, non-refundable sum
of Two Hundred Fifty Thousand Dollars ($250,000.00) (the "Initial Lease Price")
the Equipment as more fully described on Schedule 2.5 hereto which is
incorporated herein by reference.
2.2 Delivery, Installation and Start-Up. As part of the Initial Lease
Price, Commodore hereby agrees, at its sole cost and expense, to deliver the
Equipment at Hawkins Point, to make all necessary electrical and plumbing
connections from a building (the "Building") to be erected by MES at Hawkins
Point (the "Building") to the Equipment, and test the Equipment through the
"Commissioning Date" as hereinafter defined in Section 2.7 hereof.
2.3 Payment Terms. MES shall pay the Initial Lease Price to Commodore
as follow: (i) 25% of the Initial Lease Price, or Sixty-Two Thousand Five
Hundred Dollars ($62,500.00), within ten (10) days of execution and delivery of
this Agreement and the License Agreement and delivery to MES of a Bond or Letter
of Credit referred to in Section 4.2 hereof; (ii) Fifty percent, (50%) of the
Initial Lease Price, or One Hundred Twenty-Five Thousand Dollars ($125,000.00)
within ten (10) days of delivery to MES and installation of the Equipment at
Hawkins Point and (iii) the balance of the Initial Lease Price, i.e., twenty
five percent (25%) or Sixty Two Thousand Five Hundred Dollars ($62,500.00)
within ten (10) days after the Commissioning Date (as hereinafter defined) of
the Equipment.
2.4 Commissioning Date: For purposes of this Agreement, "Commissioning
Date" means and refers to the date on which the Equipment has been installed,
fully tested and processes 14,000 gallons of landfill leachate to meet the
Effluent Limitations as hereinafter defined in Section 5.2 hereof during an
operational period of 48 hours which operational period may either consist of 48
continuous hours or four consecutive 12 hour work days.
2.5 Description of Equipment. The Equipment which Commodore hereby
leases to MES is a part of a CST System which consists of the Equipment
described on Schedule 2.5 attached hereto and incorporated herein. Commodore
reserves the right, at its sole cost and expense, to provide substitute or
supplementary trichromium removal equipment.
2
<PAGE>
2.6 Shipping Costs. Commodore agrees to pay, at its sole cost and
expense, all costs and expenses associated with shipping and transporting the
Equipment from Commodore's manufacturing facility at Dublin, Ohio to Hawkins
Point.
2.7 Installation Date: CST will be ready to deliver and install the
Equipment to meet the start date specified in MES' Project I.D. No. 97-03-44R
(the "Project").
2.8 Acceptance. MES shall have no duty to accept the Equipment until it
meets the performance specified in Section 2.4 hereof. MES shall accept the
Equipment on the Commissioning Date as defined in Section 2.4 hereof.
2.9 Additional Lease Payments. In addition to the Initial Lease Price,
during the term of this Agreement, MES shall pay a fixed, flat monthly lease
payment (the "Additional Lease Payment") to Commodore equivalent to 50% of the
chemical cost savings and sludge disposal cost savings realized by using the
Intellectual Property and the Equipment compared to the cost of using a chemical
precipitation system for processing the chromium generated by Hawkins Point
Leachate Treatment Facilities. The parties acknowledge and agree that the
chemical cost savings have been calculated by Black & Veatch in an April 1-3
Value Engineering Report, amended May 1, 1997, and as further amended on August,
1997, using value engineering principles based on a complete life cycle analysis
(including the capital costs, and cost of operation, maintenance and repair) of
using Commodore's Intellectual Property and the Equipment compared to a
chemical precipitation method (the "Baseline Cost Savings"). The Baseline
Savings Cost shall be computed and expressed on a unit price basis for each
gallon of leachate actually processed by the Equipment and for the cost of each
gallon of sludge actually disposed of (if any). The Baseline Cost Savings shall
remain effective from the Effective Date hereof and during the Initial Term (as
hereinafter defined) hereof. Thereafter, during any renewal period of the term
of this Agreement, based on price indexing for variable components (such as
fluctuating costs for chemicals and sludge disposal), the parties shall annually
review and on or before each anniversary of the Commissioning Date, agree upon
adjustments to the Baseline Cost Savings and adjust the Additional Lease
Payment, payable monthly, accordingly.
2.10 Baseline Cost Savings Determination. The parties shall agree on
the Baseline Cost Savings on or before the execution of this Agreement. If the
parties execute and deliver this Agreement prior to their having reached
agreement on the Baseline Cost Savings, and they are unable to thereafter agree
upon the Baseline Cost Savings, they shall submit any dispute in regard thereto
to arbitration by the American Arbitration Association conducted in accord with
the rules of commercial arbitration then in effect.
2.11 Time for Payment. MES shall remit all Additional Lease Payments to
Commodore on or before the 20th day of each calendar month for the usage of the
Equipment with the Intellectual Property during the preceding calendar month.
2.12 Additional Potential Future Consideration: Commodore and MES will
cooperate in determining whether the residual chromium separated by the
Intellectual Property and the Equipment and/or any related immobilized ligand
process has commercial value. The "Net Residual Commercial Value" as hereinafter
defined in this section, if any, will be divided and allocated 50% to Commodore
and 50% to MES. The Net Residual Value shall be the
3
<PAGE>
difference between the gross sales price of the residual chromium and Residual
Chromium Sales Costs (as defined in this Section 2.12). Residual Chromium Sales
Costs shall be the sum of MES' cost of removal of the residual chromium or strip
solution from the Equipment, and storage, treatment and transportation of the
residual chromium or strip solution. Commodore will have the exclusive first
right to broker the residual chromium, but Commodore shall never own, take title
to, arrange for transportation of, store or, except as hereinafter set forth in
Section 8.2, have responsibility to dispose of the residual chromium or the
strip solution from the Equipment or any related immobilized ligand process in
which it is contained.
2.13 Initial Term. This Agreement shall become effective on the day and
date above written and except as hereinafter provided in Section 9.1 continue
in full force and effect for a minimum term of two years (the "Initial Term")
from the Commissioning Date.
2.14 Renewal. Either party may unilaterally terminate this Agreement at
the expiration of the Initial Term by giving notice to the other party of its
intention to do so at least 90 days prior to the expiration of the Initial Term.
In the absence of notice by either party to the other within 90 days of the
expiration of the Initial Term of their intention to terminate this Agreement,
the Initial Term shall be deemed to be extended from year to year. Thereafter,
either party may unilaterally terminate this Agreement at the end of any one (1)
year renewal term by giving the other party at least 90 days prior written
notice to the other whereupon this Agreement shall terminate upon the expiration
of any such renewal term.
2.15 Option to Purchase. At the expiration or termination of this
Agreement, and provided that MES is not in default of any term or provision of
this Agreement or of the License Agreement, MES may, at its option, purchase the
Equipment for the sum of Ten ($10.00) Dollars. The Equipment shall not include
the Intellectual Property, any metal concentration monitoring device affixed to
the Equipment, or any other item not described on Schedule 2.5 hereto.
2.16 Termination. In addition to any other basis for expiration or
termination of this Agreement, except as hereinafter provided, this Agreement
and the License Agreement shall terminate upon MES making any claim against the
Bond referred to in Section 4.2 hereof. Upon MES making any claim against the
Bond referred to in Section 4.2 hereof, this Agreement shall terminate and MES
shall, at Commodore's sole cost and expense, return the Equipment and the
Intellectual Property to Commodore. Provided, however, notwithstanding anything
herein to the contrary, in the event MES makes a claim against the Bond, MES may
elect to maintain this Agreement in force and effect for a reasonable period of
time to secure a replacement system to treat the landfill leachate.
2.17 Remedies upon Termination for Cause. Except as otherwise set forth
to the contrary in this Agreement, nothing in this Agreement shall be construed
as a waiver by either party of its rights and remedies against the other party
in the event this Agreement is terminated as a result of a breach of this
Agreement by the other party. In that event, except as otherwise set forth
herein, all such rights and remedies are reserved.
4
<PAGE>
ARTICLE III
Limitations
3.1 Limitations on Use. MES covenants and agrees that, except as
hereinafter provided, and as long as this Agreement and the License Agreement
remain in force and effect, it shall use the Equipment: (i) exclusively for the
purpose of removing and separating total chromium and/or chromium VI from MES'
Hawkins Point Leachate Treatment Facilities and for no other purpose whatsoever,
and (ii) strictly in accord with the License Agreement. Provided, however, that
subject to the terms of this Agreement and the License Agreement, MES may
process landfill leachate or leachate generated from materials placed at Hawkins
Point by or on behalf of Allied Signal Corporation through the Equipment for the
purpose of separating and/or removing chromium.
3.2 Restriction of Transfer and Use. MES covenants and agrees that as
long as this Agreement and the License Agreement remain in force and effect, it
will not sell, lease, license, sublicense, lend or otherwise transfer possession
of or title to the Equipment to any third party or engage any third party to
operate the Equipment without the express written consent of Commodore which may
be withheld for any reason or for no reason. MES further covenants and agrees
that it will not and it will not permit others to disassemble, decompile,
reverse engineer, modify, alter, or tamper with or service the Equipment without
the express written consent of Commodore which may be withheld for any reason or
for no reason. Notwithstanding the foregoing, MES may disassemble, alter, or
remove the Equipment if (i) MES is ordered to do so by a judicial, environmental
or public safety authority, or (ii) there exists fire, storm or other extreme
conditions at Hawkins Point that require immediate action by MES. In either
event, MES shall promptly notify Commodore of its actions, and it shall take
reasonable actions to prevent others from gaining access to the Equipment. MES
further covenants and agrees it will not permit others to commercially exploit
the Equipment in any way.
3.3 Use Upon Breach. In the event of a breach of this Agreement or the
License Agreement by MES, it shall immediately discontinue using the Equipment
and the Intellectual Property until or unless said breach is cured.
ARTICLE IV
Design and Performance of Equipment
4.1 Equipment Design. MES hereby acknowledges that it has made
representations to Commodore about the Hawkins Point volume of landfill leachate
and the concentrations of total chromium contained therein, the pH, temperature
of the landfill leachate stream and the concentrations of total suspended solids
contained therein (the "Leachate Representations") which it will or intends to
process per 24-hour period at the Hawkins Point Leachate Treatment Facilities,
to-wit, MES has represented and hereby represents that it intends to process a
maximum daily volume of 7,000 gallons of landfill leachate which will have a
maximum concentration of 700 parts per million (ppm) of total chromium and 600
ppm of
5
<PAGE>
chromium VI; MES further has represented that the landfill leachate stream will
have (i) a pH ranging between 12.0 and 13.5, (ii) a temperature ranging between
45 degrees F and 100 degrees F, and (iii) will be filtered so that it is free of
debris and/or total suspended solids exceeding 10 microns in size. MES also
acknowledges that Commodore has relied on the Leachate Representations to design
the Equipment which is the subject of this Agreement and to make the
representations and warranties contained herein.
4.2 Performance Bond. At or before the delivery of the Equipment to
Hawkins Point, and during the Initial Term hereof, Commodore will post and
maintain in force and effect a performance bond (the "Bond"), in favor of MES,
either in a form of a surety bond issued by a surety licensed to write surety
bonds in Maryland, or in the form of a letter of credit issued by a prime United
States bank, in the amount of Two Hundred Fifty Thousand Dollars ($250,000.00).
The Bond will provide assurance that, except for normal equipment failure, acts
of God and similar interruptions over which Commodore has no control, the
Equipment will meet the Effluent Limitations (as hereinafter defined in Section
5.2 hereof). Provided, that the Equipment shall not be deemed to have failed to
meet Effluent Limitations until after notice to Commodore and reasonable
opportunity to cure. In the event that the Equipment fails to meet Effluent
Limitations, MES shall be entitled to demand payment on the Bond for an amount
up to, but not to exceed, the face amount of the Bond, to cover the acquisition,
installation and commissioning of a substitute chemical precipitation unit and
incidental damages directly related to installing a substitute chemical
precipitation unit (including any cost needed for replumbing and installation of
necessary controls for a substitute chemical precipitation unit) and the costs
of disposal, if any, of leachate until the substitute chemical precipitation
unit is installed and commissioned, said period not to exceed 180 days. Upon
such demand, this Agreement and the License Agreement shall terminate. All other
liability for breach of warranty, including, without limitation, liability for
incidental and consequential damages, are hereby disclaimed by Commodore and
waived by MES. Any claim by MES for liability on the Bond must be made within
two (2) years from the Commissioning Date, or else liability on the Bond will
expire. In the event that MES exercises its option to purchase the Equipment
pursuant to Section 2.15 hereof, the liability on the Bond shall automatically
expire. Nothing herein shall be construed as a waiver of (i) Commodore's right
to contest the validity of MES' demand for payment on the Bond, (ii) Commodore's
right to contest any contention by MES that the Equipment failed to process
landfill leachate to meet the Effluent Limitations or (iii) any other right or
defense of Commodore. Notwithstanding anything herein to the contrary, in the
event that MES exercises its option to purchase the Equipment, liability on the
Bond shall expire upon the giving of the notice of such exercise. Upon
expiration of liability on the Bond, MES shall either issue a letter advising
Commodore and the surety or issuing bank that liability on the Bond has
terminated or return the original of any surety bond or letter of credit to the
issuing surety or bank.
6
<PAGE>
ARTICLE V
Representations and Warranties
A. By Commodore
5.1 Disclaimer. Commodore, for itself, its predecessors, successors,
agents, servants, contractors, vendors and supplies, hereby expressly disclaims
any warranty, express or implied, including, without limitation, any warranty as
to fitness for a particular purpose, which is not expressly set forth herein.
5.2 Performance Warranties. Commodore hereby warrants that the
Equipment, when properly maintained, serviced, and used as intended and used in
conjunction with the Intellectual Property, and when processing leachate which
falls within the parameters of the Leachate Representations, will meet the
Effluent Limitations at the Hawkins Point Leachate Treatment Facilities for
chromium VI and total chromium, that is a maximum daily average of 0.1 ppm for
chromium VI and 1.0 ppm for total chromium, and a monthly average of 0.05 ppm
for chromium VI and 0.5 ppm for total chromium ("Effluent Limitations"). The pH
of all discharged effluent shall be between 6.0 and 9.0. The parties agree that
for purposes of this Agreement, the exclusive analytical method for analyzing
the concentration of Total Chromium shall be the inductively coupled plasma
("ICP") methodology and that the exclusive method for analyzing Chromium VI
shall be the atomic absorption spectrophotometric methodology. Commodore hereby
covenants and agrees that the warranties set forth in this section shall remain
in full force and effect notwithstanding the failure of Commodore to perform the
services specified in Section 6.1 hereof
5.3 Manufacturers' Warranty. Commodore shall, to the extent authorized
and permitted by law and agreement, transfer to MES the benefit of each and
every manufacturer's warranty (if any) for each and every part or component of
the Equipment which is subject to a third party manufacturer's warranty.
Commodore shall take all reasonable steps to assist MES in processing any such
manufacturer's warranty claims. Commodore shall not take any action to waive or
void any third party manufacturer's warranty without the express written consent
of MES.
5.4 Commodore's Limited Warranty. Commodore hereby warrants that each
SLM cartridge, consisting of the hollow' porous fiber membrane in a casing,
which is a part of the Intellectual Property and connected to in the Equipment
but not Commodore's proprietary solution inside the cartridge an the other
Intellectual Property, for a period of one year will be free of defects in
workmanship and materials. Except as hereinafter provided, Commodore warrants
that when properly maintained and used as intended, and when processing leachate
which falls within the parameters of the Leachate Representations, the Equipment
will be free of defects in workmanship or materials for a period of one (1) year
from the Commissioning Date. After the one (1) year warranty period, Commodore
will transfer the manufacturers' warranties for all non-Commodore parts and
materials, if any, to the extent it is able. All other warranties not expressly
made in this section or elsewhere in this Agreement are hereby disclaimed.
Except as otherwise set forth in this Agreement, Commodore shall not be liable,
and MES hereby acknowledges and agrees that Commodore shall not be liable for
any incidental or consequential damages of any type whatsoever.
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B. By MES
5.5 Leachate Parameters. MES hereby represents and warrants that all
Hawkins Point Leachate Treatment Facilities such as landfi11 leachate entering
Commodore's Equipment for processing will have the following characteristics:
(i) volume not to exceed 7,000 gpd; (ii) total chromium not to exceed 700 ppm;
(iii) chromium VI not to exceed 600 ppm; (iv) pH between 12.0 and 13.5, (v)
temperature between 45 degrees F and 100 degrees F and (vi) shall be free of
debris or suspended solids which exceed 10 microns in size.
ARTICLE VI
Service
6.1 Service of Equipment. Commodore will have the exclusive right to
service any aspect of its Intellectual Property which is attached to the
Equipment. During the first year following the Commissioning Date, MES shall pay
to Commodore $44.00 per hour for each hour of on-site labor required to service
the Intellectual Property (the "Equipment Service Rate"). In no event will
Commodore charge MES for more than the aggregate amount of $450.00 for air fare,
automobile rental and lodging in respect to each necessary trip for service to
the Intellectual Property or the Equipment. The Equipment Service Rate will only
be paid for non-warranty services provided at Hawkins Point, and shall not
include any travel time. MES will not be obligated to pay for more than one
technician or other labor unless it agrees in writing prior to the arrival of
the technician to Hawkins Point. After the first year the Equipment Service Rate
may be increased by mutual agreement of the parties, but in no event will the
Equipment Service Rate increase by more than the Consumer Price Index for the
Baltimore-Washington area. The repair of other non-Commodore parts or materials,
which Commodore is able to service will be serviced at the same rate. If
Commodore is unable to repair any non-Commodore parts or materials, Commodore
shall immediately notify MES, and MES shall promptly arrange for the repair of
such parts or materials. Commodore shall honor any express warranty made herein
at its sole cost and expense.
6.2 Proprietary Solution. MES hereby acknowledges and agrees that the
proprietary solution inside the SLM cartridge must be changed periodically for
the Equipment and Intellectual Property to meet Commodore's performance
warranties. Commodore shall be exclusively responsible for changing the solution
in the SLM cartridge on a regular basis so that the Equipment and Intellectual
Property fully meets or exceeds, at all times, the performance warranties set
forth in Section 5.2 of this Agreement. MES shall pay the sum of $1,890.00 per
gallon for each gallon of solution placed in the Equipment, not to exceed
$19,375.00 per calendar year.
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ARTICLE VII
MES Covenants
7.1 Applicable Laws. MES agrees to operate the Equipment and to carry
on its business involving the Equipment in accordance with all applicable laws,
rules, regulations, orders or other requirements. Without in any way limiting
the generality of the foregoing, and except as hereinafter set forth in Section
8.2 hereof, MES, at its sole cost and expense, hereby covenants and agrees to
property dispose of (i) all chromium (including total chromium) contained in the
strip solution which cannot be resold or recycled (ii) all chromium (including
total chromium) contaminated sludge generated by the CST System (iii) all other
hazardous substances contained in or mixed with the landfill leachate or the
strip solution and (iv) all components of the Equipment contaminated with any
hazardous or toxic substances which are discarded during the term of this
Agreement or, at Commodore's election, which MES does not exercise its option to
purchase pursuant to Section 2.14 hereof.
7.2 Equipment. MES covenants to supply, on or before the start date, at
the Hawkins Point Leachate Treatment Facilities a building, the Equipment, the
equipment and services on Schedule 7.2 hereof.
ARTICLE VIII
Commodore Covenants
8.1 Consultation. Commodore covenants to make its representatives
available for consultation and support of the Intellectual Property. Except with
respect to warranty services provided under Article V hereof, all
representatives will be billed to MES according to Commodore's standard schedule
of rates for its employees and representatives, a copy of which is attached
hereto as Schedule 8.1 and incorporated herein by reference. MES shall have no
obligation to pay any consultation fees provided pursuant to this section unless
specifically authorized in advance by MES.
8.2 Commodore's Costs of Chromium Disposal. Notwithstanding anything to
the contrary in this Agreement, if, despite due diligence and best efforts, the
parties are unable to sell or MES is otherwise unable to dispose of at no cost
to it, the residual chromium separated by the Equipment and/or any related
immobilized ligand process, then and in that event, during the Initial Term of
this Agreement, and during any renewal term thereof, Commodore agrees to pay
one-half of the costs to dispose of the chromium (but no other hazardous
substances) and/or strip solution containing the chromium (whether from the
Equipment or related immobilized ligand process) (but no other hazardous
substances) in accordance with all applicable laws, rules, regulations, orders
or other requirements.
8.3 Training. Commodore will provide, at its sole cost and expense, the
equivalent of five (5) business days of training to MES' personnel for purposes
of instructing them in the operation of the Equipment and Proprietary
Information. Any additional training necessary to
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instruct MES' personnel shall be provided by Commodore at MES' cost and
expense according to the Schedule of Rates set forth on Schedule 8.1 hereof.
ARTICLE IX
Miscellaneous
9.1 Survival. Upon the expiration or termination of this Agreement for
any reason, the parties hereto agree that all of the representations,
warranties, terms, conditions, undertakings, covenants and promises (whether or
not so captioned) contained herein by either one of them with respect to
limitations on use of the Proprietary Information, remedies, the covenants
against non-disclosure, confidentiality, indemnification, set-off, of
Intellectual Property, repurchase of the Equipment and other similar terms and
conditions which would survive termination or expiration of an agreement of this
nature in order to fully effectuate the intention of the parties shall survive
and shall not be affected by said expiration or termination.
9.2 Notices. All notices, requests, consents and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to be duly given if delivered personally or sent by telefax or by
registered or certified mail (notices sent by telefax or mailed shall be deemed
to have been given on the date received), as follows (or to such other address
as any party shall designate by notice in writing to the others in accordance
herewith):
(i) To: Commodore Separation Technologies, Inc.
c/o, James M. DeAngelis
3240 Town Point Drive
Suite 200
Kennesaw, GA 30144
(ii) To: Maryland Environmental Service
Attention: Director
2011 Commerce Park Drive
Annapolis, Maryland 21401-2911
9.3 Entire Agreement. This Agreement (including the Schedules) contains
the entire agreement among the parties. This Agreement shall be construed and
interpreted in pari materia with the License Agreement of even date herewith
between the parties hereto and supersedes all prior arrangements or
understandings, written or oral, with respect thereto.
9.4 Amendments. Any term or condition of this Agreement may be amended
or modified in whole or in part at any time, to the extent authorized by
applicable law, by an agreement in writing, authorized and executed in the same
manner as this Agreement by the parties hereto. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any right,
power of privilege hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of
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any other right, power or privilege hereunder. The rights and remedies herein
provided are cumulative and are not exclusive of any rights or remedies which
any party may otherwise have at law or in equity. The rights and remedies of any
party arising out of or otherwise in respect of any inaccuracy in or breach of
any representation, warranty, covenant or agreement contained in this Agreement
shall in no way be limited by the fact that the act, omission, occurrence or
breach is based may also be the subject matter of any other representation,
warranty, covenant or agreement contained in this Agreement (or in any other
agreement between the parties) as to which there is no inaccuracy or breach.
9.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.6 Exhibits. The Exhibits and other documents attached to or delivered
herewith are hereby incorporated and made a part of this Agreement as if set
forth in full herein.
9.7 Drafting. No presumption shall operate in favor of or against any
party in the construction or interpretation of this Agreement as a consequence
of a party's responsibility for drafting this Agreement.
9.8 Attorney and Professional Fees. Each party will pay his/her own
attorney or professional fees in connection with this Agreement or settlement
discussions leading to this Agreement.
9.9 Recitals. The foregoing recitals are incorporated herein as if set
forth at length.
9.10 Captions. The captions of Sections hereof are for convenience only
and shall not control or affect the meaning or construction of any of the
provisions of this Agreement.
9.11 Binding Agreement. This Agreement shall be binding upon, and inure
to the benefit of, the parties hereto and their respective designees,
successors, heirs and assigns.
9.12 Choice of Law and Forum: Severability. This Agreement shall be
governed by and construed in accordance with the laws of State of Maryland
without regard to conflict of law rules.
9.13 Access to Hawkins Point. To the extent permitted by law, MES
agrees to allow Commodore access to Hawkins Point for the sole purpose of
showing third parties the Equipment in operation. In order to enter Hawkins
Point, Commodore must first provide to MES the name of each individual for whom
permission to enter is sought, along with the individuals' address, business
affiliation, and such other information as MES may reasonably request.
Commodore and its party may not enter Hawkins Point until MES first provides
permission, which permission shall not be unreasonably denied. MES may require
that all persons entering Hawkins Point first agree to release, hold harmless
and indemnify MES, MPA, the State of Maryland, and all their officers and
employees from liability for any injury or damage incurred as a result of the
persons entering Hawkins Point.
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9.14 Publication. Except as hereinafter provided, Commodore reserves
the prior right to approve all publications or press releases by MES relating to
the Intellectual Property or its performance which approval should not be
unreasonably withheld. Provided, that this reservation shall not apply to any
information which MES is obligated to report to the Maryland General Assembly
or Executive Branch agency or which it must provide pursuant to a judicial or
administrative order or subpoena.
9.15 Data Sharing MES. MES covenants and agrees to share with Commodore
on a timely and periodic basis all performance related data from the Equipment.
Commodore covenants and agrees to pay for or reimburse MES for the reasonable
cost of providing photocopies of such data, postage and other similar
out-of-pocket expenses for same.
9.16 Testing. Commodore hereby reserves the right, and MES hereby
agrees that Commodore may, upon reasonable advance notice to MES, institute any
tests of the Equipment or install any items of hardware as part of the Equipment
and/or remove or replace same, provided that all of the foregoing is carried out
at Commodore's sole cost and expense and that it does not in any way interfere
with the operation of the Equipment or separating and removing the chromium from
the Hawkins Point leachate, or does not, in any way, interfere with or prevent
the Equipment from meeting any of the warranties set forth in Article V hereof.
IN WITNESS WHEREOF and intending to be legally bound, the said parties
have hereunto set their hands and seals this 25th day of November, 1997.
Attest: Commodore Separation Technologies, Inc.
/s/ James DeAngelis By: /s/ Kenneth J. Houle
- ---------------------------- -----------------------------------
James DeAngelis Kenneth J. Houle
Title: Sr. V.P Sales & Marketing Title: President and C.O.O.
Witness: Maryland Environmental Service
/s/ Cheryl Kidwell By: /s/ James W. Peck
- ----------------------------- --------------------------------
James W. Peck
Title: Director
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EXHIBIT 10.20
LICENSE AGREEMENT
This Agreement is made as of the 25th day of November, 1997, by and
between COMMODORE SEPARATION TECHNOLOGIES, INC., a corporation organized and
existing under the laws of the State of Delaware ("Commodore"), and Maryland
Environmental Service, an agency and instrumentality of the State of Maryland
("MES").
RECITALS:
WHEREAS, Commodore owns certain proprietary technology related to a
supported liquid supported membrane device and process which uses a liquid
membrane support, diluent mixtures, membrane temperature gradients, carrier
solutions, and other proprietary processes for which Commodore has filed one or
more patent applications with the United States Patent and Trademark Office,
which are described on Schedule A hereto which is incorporated by reference
herein; Commodore also owns proprietary know-how and other proprietary
information related to its supported liquid membrane device and process; (all of
the foregoing proprietary technology, know-how and information is hereinafter
referred to as Commodore's "Supported Liquid Membrane Technology"); Commodore's
Supported Liquid Membrane Technology has the ability to process wastewater and
separate and/or remove from the wastewater metals such as chromium; and
WHEREAS, Commodore has developed proprietary equipment ("Proprietary
Equipment") which incorporates and actuates the Supported Liquid Membrane
Technology for processing wastewater and for separating and removing chromium;
Commodore has also developed certain computer software, including source code
and object code (the "Software") which operates and controls the Supported
Liquid Membrane Technology and the Proprietary Equipment in combination with
other non-proprietary equipment. The Proprietary Equipment and the Software are
also described on Schedule A hereto and, together with the Supported Liquid
Membrane Technology, are hereinafter collectively referred to as "Intellectual
Property");
WHEREAS, MES operates leachate treatment facilities ("Leachate
Treatment Facilities") at the Hawkins Point Hazardous Waste Facility at the Port
of Baltimore, Maryland ("Hawkins Point") at which it must inter alia, remove
chromium from landfill leachate before discharging the landfill leachate;
WHEREAS, pursuant to an Equipment Lease of even date herewith between the
parties hereto (the "Equipment Lease"); MES has agreed to lease certain
equipment (the "Equipment") and by this Agreement, MES has agreed to license the
Intellectual Property described on Schedule A hereto from Commodore under the
terms and conditions of this Agreement for the purpose of separating and
removing chromium from the landfill leachate generated by MES at the Hawkins
Point Leachate Treatment Facilities; Commodore is willing to (i) lease the
Equipment to MES pursuant to the Equipment Lease (subject to certain
non-disclosure and other provisions) and (ii) license its Intellectual Property
with a right to use it with the Equipment to MES, all in accord with the terms
and conditions hereinafter set forth.
<PAGE>
NOW, THEREFORE, in consideration of the foregoing recitals and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and for and in consideration of the terms and conditions
hereinafter set forth, and intending to be legally bound, the parties hereto
agree as follows:
ARTICLE I
1.1 Recitals. The foregoing recitals are incorporated herein as if set
forth at length.
ARTICLE II
License of Intellectual Property
2.1 License. Subject to the terms and conditions of this Agreement,
Commodore hereby licenses fo MES (sometimes hereinafter referred to as the
"Licensee"), and MES hereby licenses from Commodore, for "Use" exclusively at
the Hawkins Point Leachate Treatment Facilities, the right and license to Use
the Intellectual Property. For purposes of this Agreement, "Use" shall mean and
include the right to use, but not to sublicense, the Intellectual Property
hereby licensed together with the Equipment leased by Commodore to MES by an
Equipment Lease of even date herewith, solely for the purpose of separating and
removing chromium from the landfill leachate generated by the Hawkins Point
Leachate Treatment Facilities; MES shall not use or commercially exploit the
Intellectual Property for any other purpose without the express written consent
of Commodore which consent Commodore may withhold for any reason or for no
reason.
2.2 Improvements and Modifications. Commodore also hereby licenses to
MES, solely for the purposes stated in Section 2.1 hereof, all improvements or
modifications to the Intellectual Property described on Schedule A hereto
developed by Commodore (if any) and, for purposes of this Agreement,
"Intellectual Property" shall include all improvements and modifications thereto
developed by Commodore. Provided, that if any such improvements or modifications
include Proprietary or non-proprietary equipment or hardware, MES shall
exclusively bear the cost of same. Commodore shall sell such equipment or
hardware to MES on terms no less favorable that it sells it to other third
parties. Provided, that nothing in this Agreement shall be construed to obligate
MES to license such improvements or modifications, to pay for the cost of same,
if it does not desire to license such improvements or modifications.
2.3 (a) Infringement. MES shall promptly notify Commodore of any
alleged infringement of the Intellectual Property described in Article II hereof
of which MES becomes aware.
(b) Commodore, as the owner of such Intellectual Property,
shall have the exclusive right, but shall not be obligated, to commence suit for
any such infringement of such intellectual property, and MES agrees that
Commodore, with the prior approval of the Attorney General of the State of
Maryland, may cause MES to join it as a plaintiff to any such suit. The cost of
any such infringement action commenced by Commodore, including all out-of-pocket
expenses incurred by MES as a result of its participation in such action, shall
be borne by Commodore and Commodore shall promptly reimburse MES its
out-of-pocket costs
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upon demand by MES, but in no event later than thirty (30) days following such
demand by MES. Any recovery or damages awarded in such action shall be applied,
first to reimbursement of MES out-of-pocket litigation costs and fees, and
second, to the reimbursement of Commodore litigation costs and fees, and the
balance of such recovery or damages, if any, shall be retained by Commodore.
(c) If within two (2) months after notice by MES to
Commodore, Commodore has been unsuccessful in persuading the alleged infringer
to desist and has not brought an infringement action, or if Commodore notifies
MES at any time of its intention not to bring suit against the alleged
infringer, or to discontinue any suit commenced against an infringer, MES shall
have the right, but shall not be obligated, to commence suit for such
infringement, or to continue to prosecute the existing suit as the case may be,
and MES may, in such suit, use the name of Commodore as a party plaintiff
and/or may cause Commodore to join it as a party to such suit and/or MES may
substitute itself as the party plaintiff/successor to Commodore, as the case may
be. The cost of any such infringement action commenced and/or continued by MES
shall be born by MES. Any recovery or damages awarded in such action shall be
applied, first, to the reimbursement of MES litigation costs and fees, and the
balance of such recovery or damages, if any, shall be retained by MES.
ARTICLE III
Royalty Payments/Consideration
3.1 Royalty. For the Intellectual Property licensed pursuant to this
Agreement, MES shall pay to Commodore and Commodore agrees to accept a royalty
of Ten ($10.00) Dollars.
ARTICLE IV
Indemnification
4.1 Obligation of MES to Indemnify. Provided that Commodore is not in
default of its obligations under this Agreement, MES shall indemnify and hold
harmless Commodore and its predecessors, successors and assigns and their
respective agents, servants, employees, officers, directors, and members
(collectively, the "Indemnitees"), from and against any and all losses,
liabilities, damages or deficiencies (including interest, penalties and
reasonable attorneys' fees) arising out of or due to any breach of any of the
representations, warranties, covenants or undertakings (whether or not so
captioned) of MES contained in this Agreement or in any document, certificate or
schedule annexed hereto or delivered to Commodore pursuant to this Agreement or
contained in the Equipment Lease of even date herewith between the parties
hereto. (This indemnification undertaking does not extend to or cover actions or
claims arising in tort and which are not from a breach of this Agreement.)
4.2 Obligation of Commodore to Indemnify. Provided that MES is not in
default of its obligations under this Agreement, Commodore shall indemnify and
hold harmless MES and its successors and assigns and its respective agents,
servants, employees, officers, directors
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and shareholders (collectively, the "Indemnitees"), from and against any and all
losses, liabilities, damages or deficiencies (including interest, penalties and
reasonable attorneys' fees) arising out of or due to any breach of any of the
representations, warranties, covenants or undertakings (whether or not so
captioned) of Commodore contained in this Agreement or in any document,
certificate or schedule annexed hereto or delivered to MES pursuant to this
Agreement or contained in the Equipment Lease of even date herewith between the
parties hereto. (This indemnification undertaking does not extend to or cover
actions or claims arising in tort and which are not from a breach of this
Agreement.)
4.3 Notice to Indemnifying Party. Promptly after the receipt by the
party ("Indemnitee") hereto of formal notice of any claim or the commencement of
any action or proceeding giving rise to a right to indemnity, such Indemnitee
shall, if a claim with respect thereto is to be made against any party or
parties, as the case may be, obligated to provide indemnification ("Indemnifying
Party") pursuant to Article IV hereof, give such Indemnifying Party written
notice of such claim or the commencement of such action or proceeding. Such
notice shall be a condition precedent to any liability of the Indemnifying Party
under the indemnification agreements contained herein. In any event, the
Indemnitee, the Indemnifying Party and their counsel shall cooperate in the
compromise of, or defense against, any such asserted liability and both the
Indemnitee and the Indemnifying Party shall have the right to participate in the
defense of such asserted liability and neither may settle or compromise any
claim over the objection of the other.
4.4 Setoff. With respect to any indemnity claim made by an Indemnitee,
in the event that such Indemnitee suffers any loss, liability, damages or
deficiencies (including interest, penalties and reasonable attorneys' fees)
arising out of or due to any breach of any of the representations, warranties or
covenants or undertakings (whether or not so captioned) of the other (i.e., the
Indemnitor) contained in this Agreement or in any document, certificate or
schedule annexed hereto, and provided said Indemnitee gives notice to the other
in accordance with Section 4.3 of this Agreement, then said Indemnitee shall be
entitled to withhold payment of and/or set-off any monies or in-kind payment to
the extent of such indemnifiable loss which it owes or may hereafter become
liable to pay to said other party under this Agreement.
ARTICLE V
MES Covenants
MES hereby covenants and agrees that:
5.1 Work Product. For a period beginning with MES's first exposure to
Commodore's Intellectual Property or beginning on the effective date hereof,
whichever first occurs, and expiring ten (10) years from the expiration of this
Agreement (i) Commodore shall have and, except as hereinafter provided,
exclusively own the sole proprietary interest in any Work Product of MES or its
employees (as hereinafter defined) or any Other Confidential Information as
hereinafter defined relating to Commodore's Intellectual Property or Proprietary
Information (as hereinafter defined), and (ii) except as hereinafter provided,
MES hereby expressly, irrevocably and perpetually transfers and assigns
exclusively to Commodore or its designee, all rights to, title and interest in,
any such MES Work Product. For purposes
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of this Agreement, the term "Work Product" means and refers to any and all
ideas, inventions, know-how, copyrights, patents, trade secrets, improvements,
modifications, sketches, models and all documents thereto, any other work
product and/or intellectual property developed by MES either solely or jointly
with others, where said MES's Work Product relates to the Intellectual Property
hereby licensed or Commodore's Proprietary Information, or where said Work
Product is developed wholly or partly with the use of Commodore's time,
material, personnel, facilities, Intellectual Property or Proprietary
Information and MES further agrees, immediately upon discovery, to disclose any
and all such Work Product to Commodore without delay. MES shall, from time to
time as requested by Commodore, take all appropriate steps to establish or
document Commodore's ownership in and place Commodore in possession of such Work
Product, including but not limited to, the execution of appropriate copyright
and/or patent applications or assignments, and MES agrees not to disclose any
knowledge of the existence and contents of such Work Product herein unless and
until released in writing by Commodore from such obligations. All such MES's
Work Product shall automatically be and become Proprietary Information of
Commodore. For purposes of this Agreement, "Other Confidential Information"
means and refers to drawings, blueprints, other reproductions, models, patterns,
samples, devices or parts thereof, data, data sheets, data books, reports,
client lists, any information provided by Commodore, or any other object or
document developed for Commodore's Intellectual Property or Proprietary
Information. All such information, in addition to MES's Work Product, shall be
confidential. Provided, however, that with respect to MES Work Product which
would be considered a "public record" within the meaning of Section 10-611(g)
of the State Government Article of the Maryland Code Annotated (the "Maryland
Code") or which would be considered a record which must be archived pursuant to
subtitle V of the Maryland Code, then MES, may own the documentary material
embodying such Work Product but (i) the intangible Work Product referred to or
contained within that documentary material shall nonetheless be considered
"Commercial Information" within the meaning of Section 10-617(d) of the Maryland
Code and (ii) Commodore shall nonetheless own the intangible Work Product
referred to or contained within that documentary material.
5.2 Non-Disclosure.
(a) It shall hold in strict confidence all of Commodore's Intellectual
Property, Other Confidential Information, and other Proprietary Information,
including MES, Work Product, and all Other Confidential Information, and any
information, either written or oral, originated by or peculiarly within the
knowledge of Commodore and MES agrees it will disclose any of the foregoing
within its own organization only to its employees or authorized contractors who
are (i) directly assigned to work within the scope of this Agreement, (ii) have
a bona fide need to know and use such Intellectual Property, Other Confidential
Information and (iii) have executed an agreement with MES prohibiting the
unauthorized use, duplication and disclosure of all such information in
accordance with this Agreement. Without limiting the generality of the
foregoing, MES will exercise no less care to safeguard such Information acquired
from Commodore than MES exercises in safeguarding its own competitive sensitive
or proprietary information.
(b) It will not disclose, duplicate or use any such information
acquired from Commodore, in whole or in part, for any purposes other than those
expressly permitted herein. MES agrees that it will not disclose any such
information to any third party,
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commercially exploit in any manner whatsoever, or use same for its benefit or
the benefit of any third party without the express written consent of Commodore.
MES shall not perform or permit others to perform decompilation, disassembly or
reverse engineering of any items of such Information disclosed hereunder.
Violation of the terms of this Paragraph shall be cause for appropriate
injunctive relief to stop such unauthorized disclosure, in addition to any other
available legal or equitable remedy.
The foregoing restrictions on MES's disclosure and use of such information
acquired from Commodore shall not apply to information;
(i) known to NES prior to receipt from Commodore;
(ii) which is in public knowledge, or becomes so, without breach of
MES's obligations hereunder or the breach of MES's agents,
servants, employees of contractors;
(iii) rightfully acquired by MES prior to the time of disclosure
hereunder from a third party without restriction on disclosure
or use;
(iv) disclosed by Commodore to an unaffiliated third party without
restriction on disclosure or use,
(v) independently developed by MES without resort to Information
provided by Commodore, or;
(vi) as to which MES has received express written consent from an
authorized officer of Commodore to disclose or use.
(vii) except as otherwise provided, required to be disclosed by law,
subpoena or court order. Provided, that should MES receive a demand
for disclosure of any of Commodore's Intellectual Property, Other
Confidential Information or other Proprietary Information, or
should MES receive a subpoena or court order to produce same, it
shall immediately notify Commodore of said demand, subpoena or
court order to afford Commodore the earliest opportunity to
interpose any objection to such demand, subpoena or court order.
In the case of any of events (i), (ii), (iii), (iv), (v), (vi) or (vii)
above, the removal of restrictions shall be effective only from and after the
date of occurrence of the applicable event and shall only apply to the portion
of Information which falls within the scope of such events.
(c) It waives its right to argue that Commodore's Intellectual Property
is not proprietary or confidential "Commercial Information" within the meaning
of Section 10-617(d) of the Maryland Code or that it falls within any exception
to non-disclosure allowed in subparagraph (b) of this of this Paragraph 7.3.
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5.3 Remedies. The parties agree to the reasonableness of the restrictions
in this Article and otherwise contained in this Agreement and acknowledge that
they have been negotiated at arms-lengths for fair and adequate consideration,
that they are of the essence of Commodore's willingness to enter into this
Agreement with MES and MES agrees that such restrictions shall be legally
enforceable and shall not be challenged by MES in any court proceeding. MES
agrees that Commodore's remedies at law for a breach of such restrictions will
be inadequate and that, in connection with any such breach, Commodore will be
entitled, in addition to any other available remedies, to temporary and
permanent injunctive relief without the necessity of proving actual damage or
immediate or irreparable harm. Notwithstanding the foregoing, if any court shall
determine such restrictions to be unreasonable, the parties agree to the
reformation of such restrictions by the court to limits which it finds to be
reasonable and that MES will not assert that such restrictions should be
eliminated in their entirety by such court or that this Agreement shall be
nullified in its entirety.
5.4 Applicable Laws. MES agrees to operate the Equipment and to carry on
its business involving the Intellectual Property in accordance with all
applicable laws, rules, regulations, orders or other requirements. Without in
any way limiting the generality of the foregoing, and except as set forth in
Section 8.2 of the Equipment Lease, MES, at its sole cost and expense, hereby
covenants and agrees to properly dispose of (i) all chromium (including total
chromium) contained in the strip solution which cannot be resold or recycled
(ii) all chromium (including total chromium) contaminated sludge generated by
the CST System (iii) all other hazardous substances contained in or mixed with
the wastewater such as landfill leachate or the strip solution and (iv) all
components of the Equipment contaminated with any hazardous or toxic substances
which are discarded during the term of this Agreement or, at Commodore's
election, which MES does not exercise its option to purchase pursuant to Section
2.14 of the Equipment Lease.
ARTICLE VI
Commodore Covenants
6.1 Non-Disclosure.
(a) Commodore agrees to hold in strict confidence all of MES's
Intellectual Property, Other Confidential Information, and other Proprietary
Information, including Commodore Work Product, and any information, either
written or oral, originated by or peculiarly within the knowledge of MES and
Commodore agrees it will disclose any of the foregoing within its own
organization only to its employees or authorized contractors who are (i)
directly assigned to work within the scope of this Agreement, (ii) have a bona
fide need to know and use such Intellectual Property, Other Confidential
Information and (iii) have executed an agreement with Commodore prohibiting the
unauthorized use, duplication and disclosure of all such information in
accordance with this Agreement. Without limiting the generality of the
foregoing, Commodore will exercise no less care to safeguard such Information
acquired from MES than Commodore exercises in safeguarding its own competitive
sensitive or proprietary information.
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(b) Commodore agrees that it will not disclose, duplicate or use any such
information acquired from MES, in whole or in part, for any purposes other than
those expressly permitted herein. Commodore agrees that it will not disclose any
such information to any third party, commercially exploit in any manner
whatsoever, or use same for its benefit or the benefit of any third party
without the express written consent of MES. Violation of the terms of this
Paragraph shall be cause for appropriate injunctive relief to stop such
unauthorized disclosure, in addition to any other available legal or equitable
remedy.
The foregoing restrictions on Commodore's disclosure and use of such information
acquired from MES shall not apply to information;
(i) known to Commodore prior to receipt from MES;
(ii) which is in public knowledge, or become so, without breach of
Commodore's obligations hereunder or the breach of Commodore's
agents, servants, employees of contractors;
(iii) rightfully acquired by Commodore prior to the time of disclosure
hereunder from a third party without restriction on disclosure or
use;
(iv) disclosed by MES to an unaffiliated third party without
restriction on disclosure or use,
(v) independently developed by Commodore without resort to Information
provided by MES, or;
(vi) as to which Commodore has received express written consent from
an authorized officer of MES to disclose or use.
In the case of any of events (i), (ii), (iii), (iv), (v), or (vi) above,
the removal of restrictions shall be effective only from and after the date of
occurrence of the applicable event and shall only apply to the portion of
Information which falls within the scope of such events.
6.2 Commodore covenants to make its representatives available for
consultation and support of the Intellectual Property. All representatives will
be billed to MES according to Commodore's standards schedule of rates for its
employees and representatives at the rates shown on Schedule 8.2 attached hereto
and incorporated by reference herein. MES shall have no obligation to pay any
consultation fees provided pursuant to this section unless specifically
authorized in advance by MES.
ARTICLE VII
Commodore Warranties and Representations
Commodore hereby represents and warrants that:
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7.1 No Infringement To the best of its knowledge, information and
belief, the Intellectual Property does not infringe any proprietary rights or
interests of others.
7.2 No Liens. It owns the Intellectual Property free and clear of any
lien or encumbrance, or right or claim of any third party.
ARTICLE VIII
Term
8.1 Initial Term. Except as hereinafter provided in Section 8.3 and 9.3
hereof, this Agreement shall become effective on the day and date above written
and continue in full force and effect for a minimum term of two years (the
"Initial Term") from the Commissioning Date of the Equipment at Hawkins Point as
defined in the Equipment Lease between the parties hereto.
8.2 Renewal. Either party may unilaterally terminate this Agreement at
the expiration of the Initial Term by giving notice to the other party of its
intention to do so at least 90 days prior to the expiration of the Initial Term.
In the absence of notice by either party to the other within 90 days of the
expiration of the Initial Term of their intention to terminate this Agreement,
the Initial Term shall be deemed to be extended from year to year. Thereafter,
either party may unilaterally terminate this Agreement at the end of any one (1)
year renewal term by giving the other party at least 90 days prior written
notice to the other whereupon this Agreement shall terminate upon the expiration
of any such renewal term.
8.3 Termination. This Agreement shall automatically and immediately
terminate upon:
(a) the expiration of the Initial Term or if not then terminated,
upon expiration of any extension thereof in accordance with the
Section 10.2 hereof;
(b) at Commodore's option, a breach of this Agreement or the
Equipment Agreement of even date herewith and a failure by MES
to cure after 10 days written notice of said breach to MES.
(c) the valid termination of this Agreement or the Equipment Lease
for any other reason.
ARTICLE IX
Miscellaneous
9.1 Inspection and Audit. The parties agree that Commodore may, upon
reasonable advance notice, inspect MES's facilities at any time to verify the
adherence to the terms of this Agreement. MES agrees that Commodore may, at its
sole cost and expense, audit its books and records at any time, upon reasonable
notice, to ensure compliance with this Agreement.
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9.2 Metering. The parties agree that Commodore may install a wastewater
volume or flow metering device to measure the volume of water processed by its
Intellectual Property hereby licensed and by the Intellectual Property sold to
MES pursuant to the Equipment Lease of even date herewith.
9.3 Survival. Upon the expiration or termination of this Agreement for
any reason, the parties hereto agree that all of the representations,
warranties, terms, conditions, undertakings, covenants and promises (whether or
not so captioned) contained herein by either one of them with respect to
remedies, the covenants against competition, confidentiality, non-disclosure,
indemnification, set-off, return of Intellectual Property and other similar
terms and conditions which would survive termination or expiration of an
agreement of this nature in order to fully effectuate the intention of the
parties shall survive and shall not be affected by said expiration or
termination.
9.4 Notices. All notices, requests, consents and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to be duly given if delivered personally or sent by telefax or by
registered or certified mail (notices sent by telefax or mailed shall be deemed
to have been given on the date received), as follows (or to such other address
as any party shall designate by notice in writing to the others in accordance
herewith):
(i) To: Commodore
c/o James DeAngelis
Commodore Separation Technologies, Inc.
3240 Town Point Drive
Suite 200
Kennesaw, GA 30144
(ii) To: Maryland Environmental Service
Attention: Director
2011 Commerce Park Drive
Annapolis, Maryland 21401-2911
9.5 Entire Agreement. This Agreement (including the Schedules and
Exhibits) contains the entire agreement among the parties. This Agreement shall
be construed and interpreted in pari materia with the Property Equipment Lease
of even date herewith between the parties hereto and supersedes all prior
arrangements or understandings, written or oral, with respect thereto.
9.6 Amendments. Any term or condition of this Agreement may be amended
or modified in whole or in part at any time, to the extent authorized by
applicable law, by an agreement in writing, authorized and executed in the same
manner as this Agreement by the parties hereto. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any right,
power of privilege hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of
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any other right, power or privilege hereunder. The rights and remedies herein
provided are cumulative and are not exclusive of any rights or remedies which
any party may otherwise have at law or in equity. The rights and remedies of any
party arising out of or otherwise in respect of any inaccuracy in or breach of
any representation, warranty, covenant or agreement contained in this Agreement
shall in no way be limited by the fact that the act, omission, occurrence or
breach is based may also be the subject matter of any other representation,
warranty, covenant or agreement contained in this Agreement (or in any other
agreement between the parties) as to which there is no inaccuracy or breach.
9.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.8 Exhibits. The Exhibits and other documents attached to or delivered
herewith are hereby incorporated and made a part of this Agreement as if set
forth in full herein.
9.9 Drafting. No presumption shall operate in favor of or against any
party in the construction or interpretation of this Agreement as a consequence
of a party's responsibility for drafting this Agreement.
9.10 Attorney and Professional Fees. Each party will pay his/her own
attorney or professional fees in connection with this Agreement or settlement
discussions leading to this Agreement.
9.11 Recitals. The foregoing recitals are incorporated herein as if set
forth at length.
9.12 Captions. The captions of Sections hereof are for convenience only
and shall not control or affect the meaning or construction of any of the
provisions of this Agreement.
9.13 Binding Agreement. This Agreement shall be binding upon, and inure
to the benefit of, the parties hereto and their respective designees,
successors, agents, servants or employees, heirs and assigns.
9.14 Choice of Law and Forum: Severability. This Agreement shall be
governed by and construed in accordance with the laws of State of Maryland
without regard to conflict of law rules.
9.15 Access to Hawkins Point. To the extent permitted by law, MES agrees
to allow Commodore access to Hawkins Point for the sole purpose of showing third
parties the Equipment in operation. In order to enter Hawkins Point, Commodore
must first provide to MES the name of each individual for whom permission to
enter is sought, along with the individuals' address, business affiliation, and
such other information as MES may reasonably request. Commodore and its party
may not enter Hawkins Point until MES first provides permission, which
permission shall not be unreasonably denied. MES may require that all persons
entering Hawkins Point first agree to release, hold harmless and indemnify MES,
MPA, the State of Maryland, and all their officers and employees from liability
for any injury or damage incurred as a result of the persons entering Hawkins
Point.
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9.16 Publication. Except as hereinafter provided, Commodore reserves
the prior right to approve all publications or press releases by MES relating
to the Intellectual Property or its performance which approval should not be
unreasonably withheld. Provided, that this reservation shall not apply to any
information which MES is obligated to report to the Maryland General Assembly
or Executive Branch agency or which it must provide pursuant to a judicial or
administrative order or subpoena.
9.17 Removal. Upon termination of this Agreement, Commodore shall have
a reasonable time within which to enter the site where the Intellectual
Property is located and to remove the Intellectual Property.
9.18 Data Sharing MES. MES covenants and agrees to share with Commodore
on a timely and periodic basis all performance related data from the Equipment.
Commodore covenants and agrees to pay for or reimburse MES for the reasonable
cost of providing photocopies of such data, postage and other similar
out-of-pocket expenses for same.
IN WITNESS WHEREOF and intending to be legally bound, the said parties
have hereunto set their hands and seals this 25 day of November, 1997.
Attest: Commodore Separation Technologies, Inc.
/s/ James DeAngelis By: /s/ Kenneth J. Houle
- ------------------------------------- ----------------------------------------
James DeAngelis Kenneth J. Houle
Title: Sr. V.P. Sales & Marketing Title: President and C.O.O.
Attest: Maryland Environmental Service
/s/ Cheryl Kidwell By: /s/ James W. Peck
- -------------------------------------- ----------------------------------------
James W. Peck
Title: Director
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EXHIBIT 10.21
EQUIPMENT LEASE
This Agreement is made as of the 5th day of February 1998, by and
between COMMODORE SEPARATION TECHNOLOGIES, INC., a corporation organized and
existing under the laws of the State of Delaware ("Commodore"), and Maryland
Environmental Service, an agency and instrumentality of the State of Maryland
("MES").
RECITALS:
WHEREAS, Commodore owns certain proprietary technology related to a
supported liquid membrane device and process which uses a liquid membrane
support, diluent mixtures, membrane temperature gradients, carrier solutions,
and other proprietary processes for which Commodore has filed one or more patent
applications with the United States Patent and Trademark Office; Commodore also
owns proprietary know-how and other proprietary information related to its
supported liquid membrane device and process; (all of the foregoing proprietary
technology, know-how and information is hereinafter referred to as Commodore's
"Supported Liquid Membrane Technology"); Commodore's Supported Liquid Membrane
Technology has the ability to process wastewater such as leachate and separate
and/or remove from the leachate metals such as chromium; and
WHEREAS, Commodore has developed proprietary equipment ("Proprietary
Equipment") which incorporates and actuates the Supported Liquid Membrane
Technology for processing wastewater such as leachate and for separating and
removing chromium; Commodore has also developed certain computer software,
including source code and object code (the "Software") which operates and
controls the Supported Liquid Membrane Technology and the Proprietary Equipment
in combination with other non-proprietary equipment. The Supported Liquid
Membrane Technology, the Proprietary Equipment and the Software, are described
on Schedule A attached to a License Agreement of even date herewith between the
parties and are hereinafter collectively referred to as "Intellectual Property";
WHEREAS, Commodore's Intellectual Property, when combined with certain
non-proprietary equipment and an immobilized ligand process equipment
proprietary to a third party, all described on Schedule 2.5 attached hereto (the
"Equipment") can separate and remove total chromium from wastewater such as
leachate;
WHEREAS, MES operates leachate treatment facilities ("Leachate
Treatment Facilities") at the Dundalk Marine Terminal Waste Treatment Facility
at the Port of Baltimore, Maryland ("Dundalk Marine Terminal") at which it must,
inter alia, remove total chromium from leachate before, discharging the
leachate;
WHEREAS, Commodore has licensed its Intellectual Property to MES
pursuant to a License Agreement of even date herewith and Commodore is hereby
willing to lease the Equipment to MES under and subject to the terms and
conditions of this Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing recitals and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and for and in consideration of the terms and conditions
hereinafter set forth, and intending to be legally bound, the parties hereto
agree as follows:
ARTICLE I
1.1 Recitals. The foregoing recitals are incorporated herein as if set
forth at length.
ARTICLE II
Lease of Equipment
2.1 Initial Lease Price. Subject to the terms and condition of this
Agreement and the License Agreement of even date herewith between the parties
hereto (the "License Agreement"), Commodore hereby agrees to lease and does
hereby lease the Equipment to MES and MES hereby agrees to lease and does hereby
lease the Equipment from Commodore for an initial, one time, non-refundable sum
of Three Hundred Fifty Thousand Do1lars ($350,000.00) (the "Initial Lease
Price") the Equipment as more fully described on Schedule 2.5 hereto which is
incorporated herein by reference.
2.2 Delivery, Installation and Start-Up. As part of the Initial Lease
Price, Commodore hereby agrees, at its sole cost and expense, to deliver the
Equipment at Dundalk Marine Terminal. MES agrees to make all necessary
electrical and plumbing connections from a building (the "Building") to be
erected by MES at Dundalk Marine Terminal (the "Building") to the Equipment.
Commodore agrees to test the Equipment through the "Commissioning Date" as
hereinafter defined in Section 2.7 hereof.
2.3 Payment Terms. MES shall pay the Initial Lease Price to Commodore
as follows (i) 25% of the Initial Lease Price, or Eighty-Seven Thousand Five
Hundred Dollars ($87,500.00), within ten (10) days of execution and delivery of
this Agreement and the License Agreement and delivery to MES of a Bond or Letter
of Credit referred to in Section 4.2 hereof; (ii) Fifty percent (50%) of the
Initial Lease Price, or One Hundred Seventy-Five Thousand Dollars ($175,000.00)
within ten (10) days of delivery to MES and installation of the Equipment at
Dundalk Marine Terminal and (iii) the balance of the Initial Lease Price, i.e.,
twenty five percent (25%) or Eighty Seven Thousand Five Hundred Dollars
($87,500.00) within ten (10) days after the Commissioning Date (as hereinafter
defined) of the Equipment.
2.4 Commissioning Date: For purposes of this Agreement, "Commissioning
Date" means and refers to the date on which the Equipment has been installed,
fully tested and processes 100,000 gallons of leachate to meet the Effluent
Limitations as hereinafter defined in Section 5.2 hereof during an operational
period of 48 hours which operational period may either consist of 48 continuous
hours or four consecutive 12 hour work days.
2.5 Description of Equipment. The Equipment which Commodore hereby
leases to MES is a part of a CST System which consists of the Equipment
described on Schedule 2.5 attached hereto and incorporated herein. Commodore
reserves the right, at its sole cost and expense, to provide substitute or
supplementary trichromium removal equipment.
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2.6 Shipping Costs. Commodore agrees to pay, at its sole cost and
expense, all costs and expenses associated with shipping and transporting the
Equipment from Commodore's manufacturing facility at Dublin, Ohio to Dundalk
Marine Terminal.
2.7 Installation Date: CST will be ready to deliver and install the
Equipment to meet the start date specified in MES' Project I.D. No. 97-03-45
(the "Project").
2.8 Acceptance. MES shall have no duty to accept the Equipment until it
meets the performance specified in Section 2.4 hereof. MES shall accept the
Equipment on the Commissioning Date as defined in Section 2.4 hereof.
2.9 Additional Lease Payments. In addition to the Initial Lease Price,
during the term of this Agreement, MES shall pay a fixed, flat monthly lease
payment (the "Additional Lease Payment") to Commodore equivalent to 50% of the
chemical cost savings and sludge disposal cost savings realized by using the
Intellectual Property and the Equipment compared to the cost of using a chemical
precipitation system for processing the chromium generated by Dundalk Marine
Terminal Leachate Treatment Facilities. The parties acknowledge and agree that
the chemical cost savings have been calculated by Black & Veatch in an April 1-3
Value Engineering Report, amended May 1, 1997, and as further amended on August,
1997, using value engineering principles based on a complete life cycle analysis
(including the capital costs, and cost of operation, maintenance and repair) of
using Commodore's Intellectual Property and the Equipment compared to a
chemical precipitation method (the "Baseline Cost Savings"). The Baseline
Savings Cost shall be computed and expressed on a unit price basis for each
gallon of leachate actually processed by the Equipment and for the cost of each
gallon of sludge actually disposed of (if any). The Baseline Cost Savings shall
remain effective from the Effective Date hereof and during the Initial Term (as
hereinafter defined) hereof. Thereafter, during any renewal period of the term
of this Agreement, based on price indexing for variable components such as
fluctuating costs for chemicals and sludge disposal, the parties shall annually
review and on or before each anniversary of the Commissioning Date, agree upon
adjustments to the Baseline Cost Savings and adjust the Additional Lease
Payment, payable monthly, accordingly.
2.10 Baseline Cost Savings Determination. The parties shall agree on
the Baseline Cost Savings on or before the execution of this Agreement. If the
parties execute and deliver this Agreement prior to their having reached
agreement on the Baseline Cost Savings, and they are unable to thereafter agree
upon the Baseline Cost Savings, they shall submit any dispute in regard thereto
to arbitration by the American Arbitration Association conducted in accord with
the rules of commercial arbitration then in effect.
2.11 Time for Payment. MES shall remit all Additional Lease Payments to
Commodore on or before the 20th day of each calendar month for the usage of the
Equipment with the Intellectual Property during the preceding calendar month.
2.12 Additional Potential Future Consideration: Commodore and MES will
cooperate in determining whether the residual chromium separated by the
Intellectual Property and the Equipment and/or any related immobilized ligand
process has commercial value. The "Net Residual Commercial Value" as hereinafter
defined in this section, if any, will be divided and allocated 50% to Commodore
and 50% to MES. The Net Residual Value shall be the difference between the gross
sales price of the residual chromium and Residual Chromium Sales Costs (as
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defined in this Section 2.12). Residual Chromium Sales Costs shall be the sum of
MES' cost of removal of the residual chromium or strip solution from the
Equipment, and storage, treatment and transportation of the residual chromium or
strip solution. Commodore will have the exclusive first right to broker the
residual chromium, but Commodore shall never own, take title to, arrange for
transportation of, store or, except as hereinafter set forth in Section 8.2,
have responsibility to dispose of the residual chromium or the strip solution
from the Equipment or any related immobilized ligand process in which it is
contained.
2.13 Initial Term. This Agreement shall become effective on the day and
date above written and except as hereinafter provided in Section 9.1 continue in
full force and effect for a minimum term of two years (the "Initial Term") from
the Commissioning Date.
2.14 Renewal. Either party may unilaterally terminate this Agreement at
the expiration of the Initial Term by giving notice to the other party of its
intention to do so at least 90 days prior to the expiration of the Initial Term.
In the absence of notice by either party to the other within 90 days of the
expiration of the Initial Term of their intention to terminate this Agreement,
the Initial Term shall be deemed to be extended from year to year. Thereafter,
either party may unilaterally terminate this Agreement at the end of any one (1)
year renewal term by giving the other party at least 90 days prior written
notice to the other whereupon this Agreement shall terminate upon the
expiration of any such renewal term.
2.15 Option to Purchase. At the expiration or termination of this
Agreement, and provided that MES is not in default of any term or provision of
this Agreement or of the License Agreement, MES may, at its option, purchase the
Equipment for the sum of Ten ($10.00) Dollars. The Equipment shall not include
the Intellectual Property, any metal concentration monitoring device affixed to
the Equipment, or any other item not described on Schedule 2.5 hereto.
2.16 Termination. In addition to any other basis for expiration or
termination of this Agreement, except as hereinafter provided, this Agreement
and the License Agreement shall terminate upon MES making any claim against the
Bond referred to in Section 4.2 hereof. Upon MES making any claim against the
Bond referred to in Section 4.2 hereof, this Agreement shall terminate and MES
shall, at Commodore's sole cost and expense, return the Equipment and the
Intellectual Property to Commodore. Provided, however, notwithstanding anything
herein to the contrary, in the event MES makes a claim against the Bond, MES may
elect to maintain this Agreement in force and effect for a reasonable period of
time to secure a replacement system to treat the leachate.
2.17 Remedies upon Termination for Cause. Except as otherwise set forth
to the contrary in this Agreement, nothing in this Agreement shall be construed
as a waiver by either party of its rights and remedies against the other party
in the event this Agreement is terminated as a result of a breach of this
Agreement by the other party. In that event, except as otherwise set forth
herein, all such rights and remedies are reserved.
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ARTICLE III
Limitations
3.1 Limitions on Use. MES covenants and agrees that, except as
hereinafter provided, and as long as this Agreement and the License Agreement
remain in force and effect, it shall use the Equipment: (i) exclusively for the
purpose of removing and separating total chromium and/or chromium VI from MES'
Dundalk Marine Terminal Leachate Treatment Facilities and for no other purpose
whatsoever, and (ii) strictly in accord with the License Agreement.
3.2 Restriction of Transfer and Use. MES covenants and agrees that as
long as this Agreement and the License Agreement remain in force and effect, it
will not sell, lease, license, sublicense, lend or otherwise transfer possession
of or title to the Equipment to any third party or engage any third party to
operate the Equipment without the express written consent of Commodore which may
be withheld for any reason or for no reason. MES further covenants and agrees
that it will not and it will not permit others to disassemble, decompile,
reverse engineer, modify, alter, or tamper with or service the Equipment without
the express written consent of Commodore which may be withheld for any reason or
for no reason. Notwithstanding the foregoing, MES may disassemble, alter, or
remove the Equipment if (i) MES is ordered to do so by a judicial, environmental
or public safety authority, or (ii) there exists fire, storm or other extreme
conditions at Dundalk Marine Terminal that require immediate action by MES. In
either event, MES shall promptly notify Commodore of its actions, and it shall
take reasonable actions to prevent others from gaining access to the Equipment.
MES further covenants and agrees it will not permit others to commercially
exploit the Equipment in any way.
3.3 Use Upon Breach. In the event of a breach of this Agreement or the
License Agreement by MES, it shall immediately discontinue using the Equipment
and the Intellectual Property until or unless said breach is cured.
ARTICLE IV
Design and Performance of Equipment
4.1 Equipment Design. MES hereby acknowledges that it has made
representations to Commodore about the Dundalk Marine Terminal volume of
leachate and the concentrations of total chromium contained therein, the pH,
temperature of the leachate stream and the concentrations of total suspended
solids contained therein (the "Leachate Representations") which it will or
intends to process per 24-hour period at the Dundalk Marine Terminal Leachate
Treatment Facilities, to-wit, MES has represented and hereby represents that it
intends to process a maximum daily volume of 50,000 gallons of leachate which
will have a maximum concentration of 100 parts per million (ppm) of total
chromium and 60 ppm of chromium VI; MES further has represented that the
leachate stream will have (i) a pH ranging between 12.0 and 13.5, (ii) a
temperature ranging between 45 degrees F and 100 degrees F, and (iii) will be
filtered so that it is free of debris and/or total suspended solids exceeding 10
microns in size. MES also acknowledges that
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Commodore has relied on the Leachate Representations to design the Equipment
which is the subject of this Agreement and to make the representations and
warranties contained herein.
4.2 Performance Bond. At or before the delivery of the Equipment to
Dundalk Marine Terminal, and during the Initial Term hereof, Commodore will post
and maintain in force and effect a performance bond (the "Bond"), in favor of
MES, either in a form of a surety bond issued by a surety licensed to write
surety bonds in Maryland, or in the form of a letter of credit issued by a prime
United States bank, in the amount of Three Hundred Fifty Thousand Dollars
($350,000.00). The Bond will provide assurance that, except for normal equipment
failure, acts of God and similar interruptions over which Commodore has no
control, the Equipment will meet the Effluent Limitations (as hereinafter
defined in Section 5.2 hereof). Provided, that the Equipment shall not be deemed
to have failed to meet Effluent Limitations until after notice to Commodore and
reasonable opportunity to cure. In the event that the Equipment fails to meet
Effluent Limitations, MES shall be entitled to demand payment on the Bond for an
amount up to, but not to exceed, the face amount of the Bond, to cover the
acquisition, installation and commissioning of a substitute chemical
precipitation unit and incidental damages directly related to installing a
substitute chemical precipitation unit (including any cost needed for replumbing
and installation of necessary controls for a substitute chemical precipitation
unit) and the costs of disposal, if any, of leachate until the substitute
chemical precipitation unit is installed and commissioned, said period not to
exceed 180 days. Upon such demand, this Agreement and the License Agreement
shall terminate. All other liability for breach of warranty, including, without
limitation, liability for incidental and consequential damages, are hereby
disclaimed by Commodore and waived by MES. Any claim by MES for liability on the
Bond must be made within two (2) years from the Commissioning Date, or else
liability on the Bond will expire. In the event that MES exercises its option to
purchase the Equipment pursuant to Section 2.15 hereof, the liability on the
Bond shall automatically expire. Nothing herein shall be construed as a waiver
of (i) Commodore's right to contest the validity of MES' demand for payment on
the Bond, (ii) Commodore's right to contest any contention by MES that the
Equipment failed to process leachate to meet the Effluent Limitations or (iii)
any other right or defense of Commodore. Notwithstanding anything herein to the
contrary, in the event that MES exercises its option to purchase the Equipment,
liability on the Bond shall expire upon the giving of the notice of such
exercise. Upon expiration of liability on the Bond, MES shall either issue a
letter advising Commodore and the surety or issuing bank that liability on the
Bond has terminated or return the original of any surety bond or letter of
credit to the issuing surety or bank.
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ARTICLE V
Representations and Warranties
A. By Commodore
5.1 Disclaimer. Commodore, for itself, its predecessors, successors,
agents, servants, contractors, vendors and supplies, hereby expressly disclaims
any warranty, express or implied, including, without limitation, any warranty as
to fitness for a particular purpose, which is not expressly set forth herein.
5.2 Performance Warranties, Commodore hereby warrants that the
Equipment, when properly maintained, serviced, and used as intended and used in
conjunction with the Intellectual Property, and when processing leachate which
falls within the parameters of the Leachate Representations, will meet the
Effluent Limitations at the Dundalk Marine Terminal Leachate Treatment
Facilities for chromium VI and total chromium, that is a maximum daily average
of 0.1 ppm for chromimn VI and 1.0 ppm. for total chromium, and a monthly
average of 0.05 ppm. for chromium VI and 0.5 ppm for total chromium ("Effluent
Limitations"). The pH of all discharged effluent shall be between 6.0 and 9.0.
The parties agree that for purposes of this Agreement, the exclusive analytical
method for analyzing the concentration of Total Chromium shall be the
inductively coupled plasma ("ICP") methodology and that the exclusive method for
analyzing Chromium VI shall be the atomic absorption spectrophotometric
methodology. Commodore hereby covenants and agrees that the warranties set forth
in this section shall remain in full force and effect notwithstanding the
failure of Commodore to perform the services specified in Section 6.1 hereof.
5.3 Manufacturers' Warranty. Commodore shall, to the extent authorized
and permitted by law and agreement, transfer to MES the benefit of each and
every manufacturer's warranty (if any) for each and every part or component of
the Equipment which is subject to a third party manufacturer's warranty.
Commodore shall take all reasonable steps to assist MES in processing any such
manufacturer's warranty claims. Commodore shall not take any action to waive or
void any third party manufacturer's warranty without the express written consent
of MES.
5.4 Commodore's Limited Warranty. Commodore hereby warrants that each
SLM camidge, consisting of the hollow porous fiber membrane in a casing, which
is a part of the Intellectual Property and connected to in the Equipment but not
Commodore's proprietary solution inside the cartridge an the other Intellectual
Property, for a period of one year will be free of defects in workmanship and
materials. Except as hereinafter provided, Commodore warrants
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B. By MES
5.5 Leachate Parameters. MES hereby represents and warrants that all
Dundalk Marine Terminal Leachate Treatment Facilities such as leachate entering
Commodore's Equipment for processing will have the following characteristics:
(i) volume not to exceed 50,000 gpd; (ii) total chromium not to exceed 100 ppm;
(iii) chromium VI not to exceed 60 ppm, (iv) pH between 12.0 and 13.5, (iv)
temperature between 45 degrees F and 1000 degrees F and (v) shall be free of
debris or suspended solids which exceed 10 microns in size.
ARTICLE VI
Service
6.1 Service of Equipment. Commodore will have the exclusive right to
service any aspect of its Intellectual Property which is attached to the
Equipment. During the first year following the Commissioning Date, MES shall pay
to Commodore $44.00 per hour for each hour of on-site labor required to service
the Intellectual Property (the "Equipment Service, Rate"). In no event will
Commodore charge MES for more than the aggregate amount of $450.00 for air fare,
automobile rental and lodging in respect to each necessary trip for service to
the Intellectual Property or the Equipment. The Equipment Service Rate will only
be paid for non-warranty services provided at Dundalk Marine Terminal, and shall
not include any travel time. MES will not be obligated to pay for more than one
technician or other labor unless it agrees in writing prior to the arrival of
the technician to Dundalk Marine Terminal. After the first year the Equipment
Service Rate may be increased by mutual agreement of the parties, but in no
event will the Equipment Service Rate increase by more than the Consumer Price
Index for the Baltimore-Washington area. The repair of other non-Commodore parts
or materials, which Commodore is able to service will be serviced at the same
rate. If Commodore is unable to repair any non-Commodore parts or materials,
Commodore shall immediately notify MES, and MES shall promptly arrange for the
repair of such parts or materials. Commodore shall honor any express warranty
made herein at its sole cost and expense.
6.2 Proprietary Solution. MES hereby acknowledges and agrees that the
proprietary solution inside the SLM cartridge must be changed periodically for
the Equipment and Intellectual Property to meet Commodore's performance
warranties. Commodore shall be exclusively responsible for changing the solution
in the SLM cartridge on a regular basis so that the Equipment and Intellectual
Property fully meets or exceeds, at all times, the performance warranties set
forth in Section 5.2 of this Agreement. MES shall pay the sum of One Thousand
Eight Hundred Ninety Dollars ($1,890.00) per gallon for each gallon of solution
placed in the Equipment, not to exceed Thirty Eight Thousand Seven Hundred Fifty
Dollars ($38,750.00) per calendar year.
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ARTICLE VII
MES Covenants
7.1 Applicable Laws. MES agrees to operate the Equipment and to carry
on its business involving the Equipment in accordance with all applicable laws,
rules, regulations, orders or other requirements. Without in any way limiting
the generality of the foregoing, and except as hereinafter set forth in Section
8.2 hereof, MES, at its sole cost and expense, hereby covenants and agrees to
properly dispose of (i) all chromium (including total chromium) contained in the
strip solution which cannot be resold or recycled (ii) all chromium (including
total chromium) contaminated sludge generated by the CST System (iii) all other
hazardous substances contained in or mixed with the leachate or the strip
solution and (iv) all components of the Equipment contaminated with any
hazardous or toxic substances which are discarded during the term of this
Agreement or, at Commodore's election, which MES does not exercise its option to
purchase pursuant to Section 2.14 hereof.
7.2 Equipment. MES covenants to supply, on or before the start date, at
the Dundalk Marine Terminal Leachate Treatment Facilities a building, the
equipment and services on Schedule 7.2 hereof.
ARTICLE VIII
Commodore Covenants
8.1 Consultation. Commodore covenants to make its representatives
available for consultation and support of the Intellectual Property. Except with
respect to warranty services provided under Article V hereof, all
representatives will be billed to MES according to Commodore's standard
schedule of rates for its employees and representatives, a copy of which is
attached hereto as Schedule 8.1 and incorporated herein by reference. MES shall
have no obligation to pay any consultation fees provided pursuant to this
section unless specifically authorized in advance by MES.
8.2 Commodore's Costs of Chromium Disposal. Notwithstanding anything to
the contrary in this Agreement, if, despite due diligence and best efforts, the
parties are unable to sell or MES is otherwise unable to dispose of at no cost
to it, the residual chromium separated by the Equipment and/or any related
immobilized ligand process, then and in that event, during the Initial Term of
this Agreement, and during any renewal term thereof, Commodore agrees to pay
one-half of the costs to dispose of the chromium (but no other hazardous
substances) and/or strip solution containing the chromium (whether from the
Equipment or related immobilized ligand process) (but no other hazardous
substances) in accordance with all applicable laws, rules, regulations, orders
or other requirements.
8.3 Training. Commodore will provide, at its sole cost and expense, the
equivalent of five (5) business days of training to MES' personnel for purposes
of instructing them in the operation of the Equipment and Proprietary
Information. Any additional training necessary to
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instruct MES' personnel shall be provided by Commodore at MES' cost and expense
according to the Schedule of Rates set forth on Schedule 8.1 hereof.
ARTICLE IX
Miscellaneous
9.1 Survival. Upon the expiration or termination of this Agreement for
any reason, the parties hereto agree that all of the representations,
warranties, terms, conditions, undertakings, covenants and promises (whether or
not so captioned) contained herein by either one of them with respect to
limitations on use of the Proprietary Information, remedies, the covenants
against non-disclosure, confidentiality, indemnification, set-off, of
Intellectual Property, repurchase of the Equipment and other similar terms and
conditions which would survive termination or expiration of an agreement of this
nature in order to fully effectuate the intention of the parties shall survive
and shall not be affected by said expiration or termination.
9.2 Notices. All notices, requests, consents and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to be duly given if delivered personally or sent by telefax or by
registered or certified mail (notices sent by telefax or mailed shall be deemed
to have been given on the date received), as follows (or to such other address
as any party shall designate by notice in writing to the others in accordance
herewith:
(i) To: Commodore Separation Technologies, Inc.
c/o James M. DeAngelis
3240 Town Point Drive
Suite 200
Kennesaw, GA 30144
(ii) To: Maryland Envrionmental Service
Attention: Director
2011 Commerce Park Drive
Annapolis, Maryland 21401-2911
9.3 Entire Agreement. This Agreement (including the Schedules) contains
the entire agreement among the parties. This Agreement shall be construed and
interpreted in pari materia with the License Agreement of even date herewith
between the parties hereto and supersedes all prior arrangements or
understandings, written or oral, with respect thereto.
9.4 Amendments. Any term or condition of this Agreement may be amended
or modified in whole or in part at any time, to the extent authorized by
applicable law, by an agreement in writing, authorized and executed in the same
manner as this Agreement by the parties hereto. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any right,
power of privilege hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder. The
rights and remedies herein provided are cumulative and are not exclusive of any
rights or remedies which any party may otherwise have at law or in equity. The
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rights and remedies of any party arising out of or otherwise in respect of any
inaccuracy in or breach of any representation, warranty, covenant or agreement
contained in this Agreement shall in no way be limited by the fact that the act,
omission, occurrence or breach is based may also be the subject matter of any
other representation, warranty, covenant or agreement contained in this
Agreement (or in any other agreement between the parties) as to which there is
no inaccuracy or breach.
9.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.6 Exhibits. The Exhibits and other documents attached to or delivered
herewith are hereby incorporated and made a part of this Agreement as if set
forth in full herein.
9.7 Drafting. No presumption shall operate in favor of or against any
party in the construction or interpretation of this Agreement as a consequence
of a party's responsibility for drafting this Agreement.
9.8 Attorney and Professional Fees, Each party will pay his/her own
attorney or professional fees in connection with this Agreement or settlement
discussions leading to this Agreement.
9.9 Recitals. The foregoing recitals are incorporated herein as if set
forth at length.
9.10 Captions. The captions of Sections hereof are for convenience only
and shall not control or affect the meaning or construction of any of the
provisions of this Agreement.
9.11 Binding Agreement. This Agreement shall be binding upon, and inure
to the benefit of, the parties hereto and their respective designees,
successors, heirs and assigns.
9.12 Choice of Law and Forum: Severability. This Agreement shall be
governed by and construed in accordance with the laws of State of Maryland
without regard to conflict of law rules.
9.13 Access to Dundalk Marine Terminal. To the extent permitted by law,
MES agrees to allow Commodore access to Dundalk Marine Terminal for the sole
purpose of showing third parties the Equipment in operation. In order to enter
Dundalk Marine Terminal, Commodore must first provide to MES the name of each
individual for whom permission to enter is sought, along with the individuals'
address, business afffliation, and such other information as MES may reasonably
request. Commodore and its party may not enter Dundalk Marine Terminal until MES
first provides permission, which permission shall not be unreasonably denied.
MES may require that all persons entering Dundalk Marine Terminal first agree to
release, hold harmless and indemnify MES, MPA, the State of Maryland, and all
their officers and employees from liability for any injury or damage incurred as
a result of the persons entering Dundalk Marine Terminal.
9.14 Publication. Except as hereinafter provided, Commodore reserves
the prior right to approve all publications or press releases by MES relating to
the Intellectual Property or its performance which approval should not be
unreasonably withheld. Provided, that this reservation
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shall not apply to any information which MES is obligated to report to the
Maryland General Assembly or Executive Branch agency or which it must provide
pursuant to a judicial or administrative order or subpoena.
9.15 Data Sharing MES. MES covenants and agrees to share with
Commodore on a timely and periodic basis all performance related data from the
Equipment. Commodore covenants and agrees to pay for or reimburse MES for the
reasonable cost of providing photocopies of such data, postage and other similar
out-of-pocket expenses for same.
9.16 Testing. Commodore hereby reserves the right, and MES hereby
agrees that Commodore may, upon reasonable advance notice to MES, initiate any
tests of the Equipment or install any items of hardware as part of the Equipment
and/or remove or replace same, provided that all of the foregoing is carried out
at Commodore's sole cost and expense and that it does not in any way interfere
with the operation of the Equipment or separating and removing the chromium from
the Dundalk Marine Terminal leachate, or does not, in any way, interfere with or
prevent the Equipment from meeting any of the warranties set forth in Article V
hereof.
IN WITNESS WHEREOF and intending to be legally bound, the said parties
have hereunto set their hands and seals this 5th day of February, 1998.
Attest: Commodore Separation Technologies, Inc.
/s/ Sandra M. Hodge By: /s/ Kenneth J. Houle
- ---------------------------- -----------------------------------
Sandra M. Hodge Kenneth J. Houle
Title: Executive Assistant Title: President and C.O.O.
Witness: Maryland Environmental Service
/s/ Denise M. Russell By: /s/ James W. Peck
- ----------------------------- --------------------------------
James W. Peck
Title: Director
Approved for legal form and
sufficiency this 4th day of
January, 1998
/s/ XXXXXXXXXXXX
- ----------------------------
Assistant Attorney General
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EXHIBIT 10.22
LICENSE AGREEMENT
This Agreement is made as of the 5th day of February 1998, by and between
COMMODORE SEPARATION TECHNOLOGIES, INC., a corporation organized and existing
under the laws of the State of Delaware ("Commodore"), and Maryland
Environmental Service, an agency and instrumentality of the State of Maryland
("MES").
RECITALS:
WHEREAS, Commodore owns certain Proprietary technology related to a
supported liquid membrane device and process which uses a liquid membrane
support, diluent mixtures, membrane temperature gradients, carrier solutions,
and other proprietary processes for which Commodore has filed one or more
patent applications with the United States Patent and Trademark Office, which
are described on Schedule A hereto which is incorporated by reference herein;
Commodore also owns proprietary know-how and other proprietary information
related to its supported liquid membrane device and process; (all of the
foregoing proprietary technology, know-how and information is hereinafter
referred to as Commodore's "Supported Liquid Membrane Technology");
Commodore's Supported Liquid Membrane Technology has the ability to process
wastewater and separate and/or remove from the wastewater metals such as
chromium; and
WHEREAS, Commodore has developed proprietary equipment ("Proprietary
Equipment") which incorporates and actuates the Supported Liquid Membrane
Technology for processing wastewater and for separating and removing chromium;
Commodore has also developed certain computer software, including source code
and object code (the "Software") which operates and controls the Supported
Liquid Membrane Technology and the Proprietary Equipment in combination with
other non-proprietary equipment. The Proprietary Equipment and the Software
are also described on Schedule A hereto and, together with the Supported
Liquid Membrane Technology, are hereinafter collectively referred to as
"Intellectual Property");
WHEREAS, MES operates leachate treatment facilities ("Leachate Treatment
Facilities") at the Dundalk Marine Terminal at the Port of Baltimore, Maryland
("Dundalk Marine Terminal") at which it must, inter alia, remove chromium from
leachate before discharging the leachate;
WHEREAS, pursuant to an Equipment Lease of even date herewith between the
parties hereto (the "Equipment Lease") MES has agreed to lease certain
equipment (the "Equipment") and by this Agreement, MES has agreed to license
the Intellectual Property described on Schedule A hereto from Commodore under
the terms and conditions of this Agreement for the purpose of separating and
removing chromium from the leachate generated by MES at the Dundalk Marine
Terminal Leachate Treatment Facilities; Commodore is willing to (i) lease the
Equipment to MES pursuant to the Equipment Lease (subject to certain
non-disclosure and other provisions) and (ii) license its Intellectual
Property with a right to use it with the Equipment to MES, all in accord with
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing recitals and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and for and in consideration of the terms and conditions
hereinafter set forth, and intending to be legally bound, the parties hereto
agree as follows:
<PAGE>
ARTICLE I
1.1 Recitals. The foregoing recitals are incorporated herein as if set
forth at length.
ARTICLE II
License of Intellectual Property
2.1 License. Subject to the terms and conditions of this Agreement,
Commodore hereby licenses to MES (sometimes hereinafter referred to as the
"Licensee"), and MES hereby licenses from Commodore, for "Use" exclusively at
the Dundalk Marine, Terminal Leachate Treatment Facilities, the right and
license to Use the Intellectual Property. For purposes of this Agreement, "Use"
shall mean and include the right to use, but not to sublicense, the Intellectual
Property hereby licensed together with the Equipment leased by Commodore to MES
by an Equipment Lease of even date herewith, solely for the purpose of
separating and removing chromium from the leachate generated by the Dundalk
Marine Terminal Leachate Treatment Facilities; MES shall not use or commercially
exploit the Intellectual Property for any other purpose without the express
written consent of Commodore which consent Commodore may withhold for any reason
or for no reason.
2.2 Improvements and Modifications. Commodore also hereby licenses to
MES, solely for the purposes stated in Section 2.1 hereof, all improvements or
modifications to the Intellectual Property described on Schedule A hereto
developed by Commodore (if any) and, for purposes of this Agreement,
"Intellectual Property" shall include all improvements and modifications thereto
developed by Commodore. Provided, that if any such improvements or modifications
include Proprietary or non-proprietary equipment or hardware, MES shall
exclusively bear the cost of same. Commodore shall sell such equipment or
hardware to MES on terms no less favorable that it sells it to other third
parties. Provided, that nothing in this Agreement shall be construed to obligate
MES to license such improvements or modifications, to pay for the cost of same,
if it does not desire to license such improvements or modifications.
2.3 (a) Infringement. MES shall promptly notify Commodore of any
alleged infringement of the Intellectual Property described in Article II hereof
of which MES becomes aware.
(b) Commodore, as the owner of such Intellectual Property,
shall have the exclusive right, but shall not be obligated, to commence suit
for any such infringement of such intellectual property, and MES agrees that
Commodore, with the prior approval of the Attorney General of the State of
Maryland, may cause MES to join it as a plaintiff to any such suit. The cost of
any such infringement action commenced by Commodore, including all out-of-pocket
expenses incurred by MES as a result of its participation in such action, shall
be borne by Commodore and Commodore shall promptly reimburse MES its
out-of-pocket costs upon demand by MES, but in no event later than thirty (30)
days following such demand by MES. Any recovery or damages awarded in such
action shall be applied, first to reimbursement of MES out-of-pocket litigation
costs and fees, and second, to the reimbursement of Commodore litigation
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costs and fees, and the balance of such recovery or damages, if any, shall be
retained by Commodore.
(c) If within two (2) months after notice by MES to Commodore,
Commodore has been unsuccessful in persuading the alleged infringer to desist
and has not brought an infringement action, or if Commodore notifies MES at any
time of its intention not to bring suit against the alleged infringer, or to
discontinue any suit commenced against an infringer, MES shall have the right,
but shall not be obligated, to commence suit for such infringement, or to
continue to prosecute the existing suite as the case may be, and MES may, in
such suit, use the name of Commodore as a party plaintiff and/or may cause
Commodore to join it as a party to such suit and/or MES may substitute itself as
the party plaintiff/successor to Commodore, as the case may be. The cost
of any such infringement action commenced and/or continued by MES shall be borne
by MES. Any recovery or damages awarded in such action shall be applied, first,
to the reimbursement of MES litigation costs and fees, and the balance of such
recovery or damages, if any, shall be retained by MES.
ARTICLE III
Royalty Payments/Consideration
3.1 Royalty. For the Intellectual Property licensed pursuant to this
Agreement, MES shall pay to Commodore and Commodore agrees to accept a royalty
of Ten ($10.00) Dollars.
ARTICLE IV
Indemnification
4.1 Obligation of MES to Indemnify. Provided that Commodore is not in
default of its obligations under this Agreement, MES shall indemnify and hold
harmless Commodore and its predecessors, successors and assigns and their
respective agents, servants, employees, officers, directors, and members
(collectively, the "Indemnitees"), from and against any and all losses,
liabilities, damages or deficiencies (including interest, penalties and
reasonable attorneys' fees) arising out of or due to any breach of any of the
representations, warranties, covenants or undertakings (whether or not so
captioned) of MES contained in this Agreement or in any document, certificate or
schedule annexed hereto or delivered to Commodore pursuant to this Agreement or
contained in the Equipment Lease of even date herewith between the parties
hereto. (This indemnification undertaking does not extend to or cover actions or
claims arising in tort and which are not from a breach of this Agreement.)
4.2 Obligation of Commodore to Indemnify. Provided that MES is not in
default of its obligations under this Agreement, Commodore shall indemnify and
hold harmless MES and its successors and assigns and its respective agents,
servants, employees, officers, directors and shareholders (collectively, the
"Indemnitees"), from and against any and all losses, liabilities, damages or
deficiencies (including interest, penalties and reasonable attorneys' fees)
arising out of or due to any breach of any of the representations, warranties,
covenants or undertakings (whether or not so captioned) of Commodore contained
in this Agreement or in any document,
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certificate or schedule annexed hereto or delivered to MES pursuant to this
Agreement or contained in the Equipment Lease of even date herewith between the
parties hereto. (This indemnification undertaking does not extend to or cover
actions or claims arising in tort and which are not from a breach of this
Agreement.)
4.3 Notice to Indemnifying Party. Promptly after the receipt by the party
("Indemnitee") hereto of formal notice of any claim or the commencement of any
action or proceeding giving rise to a right to indemnity, such Indemnitee
shall, if a claim with respect thereto is to be made against any party or
parties, as the case may be, obligated to provide indemnification
("Indemnifying Party") pursuant to Article IV hereof, give such indemnifying
Party written notice of such claim or the commencement of such action or
proceeding. Such notice shall be a condition precedent to any liability of the
Indemnifying Party under the indemnification agreements contained herein. In
any event, the Indemnitee, the Indemnifying Party and their counsel shall
cooperate in the compromise of, or defense against, any such asserted
liability and both the Indemnitee and the Indemnifying Party shall have the
right to participate in the defense of such asserted liability and neither may
settle or compromise any claim over the objection of the other.
4.4 Setoff. With respect to any indemnity claim made by an Indemnitee,
in the event that such Indemnitee suffers any loss, liability, damages or
deficiencies (including interest, penalties and reasonable attorneys' fees)
arising out of or due to any breach of any of the representations, warranties or
covenants or undertakings (whether or not so captioned) of the other (i.e., the
Indemnitor) contained in this Agreement or in any document, certificate or
schedule annexed hereto, and provided said Indemnitee gives notice to the other
in accordance with Section 4.3 of this Agreement, then said Indemnitee shall be
entitled to withhold payment of and/or set-off any monies or in-kind payment to
the extent of such indemnifiable loss which it owes or may hereafter become
liable to pay to said other party under this Agreement.
ARTICLE V
MES Covenants
MES hereby covenants and agrees that:
5.1 Work Product. For a period beginning with MES's first exposure to
Commodore's Intellectual Property or beginning on the effective date hereof,
whichever first occurs, and expiring ten (10) years from the expiration of this
Agreement (i) Commodore shall have and, except as hereinafter provided,
exclusively own the sole proprietary interest in any Work Product of MES or its
employees (as hereinafter defined) or any Other Confidential Information as
hereinafter defined relating to Commodore's Intellectual Property or Proprietary
Information (as hereinafter defined), and (ii) except as hereinafter provided,
MES hereby expressly, irrevocably and perpetually transfers and assigns
exclusively to Commodore or its designee, all rights to, title and interest in,
any such MES Work Product. For purposes of this Agreement, the term "Work
Product" means and refers to any and all ideas, inventions, know-how,
copyrights, patents, trade secrets, improvements, modifications, sketches,
models and all documents thereto, any other work product and/or intellectual
property developed by MES either solely or jointly with others, where said MES's
Work Product relates to the intellectual Property hereby licensed or Commodore's
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Proprietary Information, or where said Work Product is developed wholly
or partly with the use of Commodore's time, material, personnel, facilities,
Intellectual Property or Proprietary Information and MES further agrees,
immediately upon discovery, to disclose any and all such Work Product to
Commodore without delay. MES shall, from time to time as requested by
Commodore; take all appropriate steps to establish or document Commodore's
ownership in and place Commodore in possession of such Work Product, including
but not limited to, the execution of appropriate copyright and/or patent
applications or assignments, and MES agrees not to disclose any knowledge of
the existence and contents of such Work Product herein unless and until
released in writing by Commodore from such obligations. All such MES's Work
Product shall automatically be and become Proprietary Information of
Commodore. For purposes of this Agreement, "Other Confidential Information"
means and refers to drawings, blueprints, other reproductions, models,
patterns, samples, devices or parts thereof, data, data sheets, data books,
reports, client lists, any information provided by Commodore, or any other
object or document developed for Commodore's Intellectual Property or
Proprietary Information. All such information, in addition to MES's Work
Product, shall be confidential. Provided, however, that with respect to MES'
Work Product which would be considered a "public record" within the meaning of
Section 10-617(d) of the State Government Article of the Annotated Code of
Maryland (the "Maryland Code") or which would be considered a record which
must be archived pursuant to subtitle V of the Maryland Code, then MES may own
the documentary material embodying such Work Product but (i) the intangible
Work Product referred to or contained within that documentary material shall
nonetheless be considered "Commercial Information" within the meaning of
Section 10-617(d) of the Maryland Code and (ii) Commodore shall nonetheless
own the intangible Work Product referred to or contained within that
documentary material.
5.2 Non-Disclosure.
(a) It shall hold in strict confidence all of Commodore's Intellectual
Property, Other Confidential Information, and other Proprietary Information,
including MES Work Product, and all Other Confidential Information, and any
information, either written or oral, originated by or peculiarly within the
knowledge of Commodore and MES agrees it will disclose any of the foregoing
within its own organization only to its employees or authorized contractors who
are (i) directly assigned to work within the scope of this Agreement, (ii) have
a bona fide need to know and use such Intellectual Property, Other Confidential
Information and (iii) have executed an agreement with MES prohibiting the
unauthorized use, duplication and disclosure of all such information in
accordance with this Agreement. Without limiting the generality of the
foregoing, MES will exercise no less care to safeguard such Information acquired
from Commodore than MES exercises in safeguarding its own competitive sensitive
or proprietary information.
(b) It will not disclose, duplicate or use any such information
acquired from Commodore, in whole or in part, for any purposes other than those
expressly permitted herein. MES agrees that it will not disclose any such
information to any third party, commercially exploit in any manner whatsoever,
or use same for its benefit or the benefit of any third party without the
express written consent of Commodore. MES shall not perform or permit others to
perform decompilation, disassembly or reverse engineering of any items of such
Information disclosed hereunder. Violation of the terms of this Paragraph shall
be cause for appropriate injunctive relief to stop such unauthorized disclosure,
in addition to any other available legal or equitable remedy.
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The foregoing restrictions on MES's disclosure and use of such information
acquired from Commodore shall not apply to information;
(i) known to MES prior to receipt from Commodore;
(ii) which is in public knowledge, or becomes so, without breach of
MES's obligations hereunder or the breach of MES's agents,
servants, employees of contractors;
(iii) rightfully acquired by MES prior to the time of disclosure
hereunder from a third party without restriction on disclosure or
use;
(iv) disclosed by Commodore to an unaffiliated third party without
restriction on disclosure or use,
(v) independently developed by MES without resort to Information
provided by Commodore, or;
(vi) as to which MES has received express written consent from an
authorized officer of Commodore to disclose or use.
(vii) except as otherwise provided, required to be disclosed by law,
subpoena or court order. Provided, that should MES receive a
demand for disclosure of any of Commodore's Intellectual
Property, Other Confidential Information or other Proprietary
Information, or should MES receive a subpoena or court order to
produce same, it shall immediately notify Commodore of said
demand, subpoena or court order to afford Commodore the earliest
opportunity to interpose any objection to such demand, subpoena
or court order.
In the case of any of events (i), (ii), (iii), (iv), (v), (vi) or (vii)
above, the removal of restrictions shall be effective only from and after the
date of occurrence of the applicable event and shall only apply to the portion
of Information which falls within the scope of such events.
(c) It waives its right to argue that Commodore's Intellectual Property
is not proprietary or confidential "Commercial Information" within the meaning
of Section 10-617(d) of the State Government Article of the Annotated Code of
Maryland or that it falls within any exception to non-disclosure allowed in
subparagraph (b) of this Paragraph 7.3.
5.3 Remedies. The parties agree to the reasonableness of the
restrictions in this Article and otherwise contained in this Agreement and
acknowledge that they have been negotiated at arms-lengths for fair and adequate
consideration, that they are of the essence of Commodore's willingness to enter
into this Agreement with MES and MES agrees that such restrictions shall be
legally enforceable and shall not be challenged by MES in any court proceeding.
MES agrees that Commodore's remedies at law for a breach of such restrictions
will be inadequate and that, in connection with any such breach, Commodore will
be entitled, in addition to any other available
6
<PAGE>
remedies, to temporary and permanent injunctive relief without the necessity of
proving actual damage or immediate or irreparable harm. Notwithstanding the
foregoing, if any court shall determine such restrictions to be unreasonable,
the parties agree to the reformation of such restrictions by the court to limits
which it finds to be reasonable and that MES will not assert that such
restrictions should be elimimted in their entirety by such court or that this
Agreement shall be nullified in its entirety.
5.4 Applicable Laws. MES agrees to operate the Equipment and to carry
on its business involving the Intellectual Property in accordance with all
applicable laws, rules, regulations, orders or other requirements. Without in
any way limiting the generality of the foregoing, and except as set forth in
Section 8.2 of the Equipment Lease, MES, at its sole cost and expense, hereby
covenants and agrees to properly dispose of (i) all chromium (including total
chromium) contained in the strip solution which cannot be resold or recycled
(ii) all chromium (including total chromium) contaminated sludge generated by
the CST System (iii) all other hazardous substances contained in or mixed with
the wastewater such as leachate or the strip solution and (iv) all components of
the Equipment contaminated with any hazardous or toxic substances which are
discarded during the term of this Agreement or, at Commodore's election, which
MES does not exercise its option to purchase pursuant to Section 2.14 of the
Equipment Lease.
ARTICLE VI
Commodore Covenants
6.1 Non-Disclosure.
(a) Commodore agrees to hold in strict confidence all of MES's
Intellectual Property, Other Confidential Information, and other Proprietary
Information, including Commodore Work Product, and any information, either
written or oral, originated by or peculiarly within the knowledge of MES and
Commodore agrees it will disclose any of the foregoing within its own
organization only to its employees or authorized contractors who are (i)
directly assigned to work within the scope of this Agreement, (ii) have a bona
fide need to know and use such Intellectual Property, Other Confidential
Information and (iii) have executed an agreement with Commodore prohibiting the
unauthorized use, duplication and disclosure of all such information in
accordance with this Agreement. Without limiting the generality of the
foregoing, Commodore will exercise no less care to safeguard such Information
acquired from MES than Commodore exercises in safeguarding its own competitive
sensitive or proprietary information.
(b) Commodore agrees that it will not disclose, duplicate or use any
such information CD acquired from MES, in whole or in part, for any purposes
other than those expressly permitted herein. Commodore agrees that it will not
disclose any such information to any third party, commercially exploit in any
manner whatsoever, or use same for its benefit or the benefit of any third party
without the express written consent of MES. Violation of the terms of this
Paragraph shall be cause for appropriate injunctive relief to stop such
unauthorized disclosure, in addition to any other available legal or equitable
remedy.
7
<PAGE>
The foregoing restrictions on Commodore's disclosure and use of such information
acquired from MES shall not apply to information;
(i) known to Commodore prior to receipt from MES;
(ii) which is in public knowledge, or become so, without breach of
Commodore's obligations hereunder or the breach of Commodore's
agents, servants, employees of contractors;
(iii) rightfully acquired by Commodore prior to the time of disclosure
hereunder from a third party without restriction on disclosure or
use;
(iv) disclosed by MES to an unaffiliated third party without
restriction on disclosure or use,
(v) independently developed by Commodore without resort to
Information provided by MES, or;
(vi) as to which Commodore has received express written consent from
an authorized officer of MES to disclose or use.
In the case of any of events (i), (ii), (iii), (iv), (v), or (vi)
above, the removal of restrictions shall be effective only from and after the
date of occurrence of the applicable event and shall only apply to the portion
of Information which falls within the scope of such events.
6.2 Commodore covenants to make its representatives available for
consultation and support of the Intellectual Property. All representatives will
be billed to MES according to Commodore's standards schedule of rates for its
employees and representatives at the rates shown on Schedule 8.2 attached hereto
and incorporated by reference herein. MES shall have no obligation to pay any
consultation fees provided pursuant to this section unless specifically
authorized in advance by MES.
ARTICLE VII
Commodore Warranties and Repsentations
Commodore hereby represents and warrants that:
7.1 No Infringement. To the best of its knowledge, information and
belief, the Intellectual Property does not infringe any proprietary rights or
interests of others.
7.2 No Liens. It owns the Intellectual Property free and clear of any
lien or encumbrance, or right or claim of any third party.
8
<PAGE>
ARTICLE VIII
Term
8.1 Initial Term. Except as hereinafter provided in Section 8.3 and 9.3
hereof, this Agreement shall become effective on the day and date above written
and continue in full force and effect for a minimum term of two years (the
"Initial Term") from the Commissioning Date of the Equipment at Dundalk Marine
Terminal as defined in the Equipment Lease between the parties hereto.
8.2 Renewal. Either party may unilaterally terminate this Agreement at
the expiration of the Initial Term by giving notice to the other party of its
intention to do so at least 90 days prior to the expiration of the Initial Term
In the absence of notice by either party to the other within 90 days of the
expiration of the initial Term of their intention to terminate this Agreement,
the Initial Term shall be deemed to be extended from year to year. Thereafter,
either party may unilaterally terminate this Agreement at the end of any one (1)
year renewal term by giving the other party at least 90 days prior written
notice to the other whereupon this Agreement shall terminate upon the expiration
of any such renewal term.
8.3 Termination. This Agreement shall automatically and immediately
terminate upon:
(a) the expiration of the Initial Term or if not then terminated,
upon expiration of any extension thereof in accordance with the
Section 10.2 hereof;
(b) at Commodore's option, a breach of this Agreement or the
Equipment Agreement of even date herewith and a failure by MES to
cure after 10 days written notice of said breach to MES.
(c) the valid termination of this Agreement or the Equipment Lease
for any other reason.
ARTICLE IX
Miscellaneous
9.1 Inspection and Audit. The parties agree that Commodore may, upon
reasonable advance notice, inspect MES's facilities at any time to verify the
adherence to the terms of this Agreement. MES agrees that Commodore may, at its
sole cost and expense, audit its books and records at any time, upon reasonable
notice, to ensure compliance with this Agreement.
9.2 Metering. The parties agree that Commodore may install a wastewater
volume or flow metering device to measure the volume of water processed by its
Intellectual Property hereby licensed and by the Intellectual Property sold to
MES pursuant to the Equipment Lease, of even date herewith.
9.3 Survival. Upon the expiration or termination of this Agreement for
any reason, the parties hereto agree that all of the representations,
warranties, terms, conditions, undertakings, covenants and promises (whether or
not so captioned) contained herein by either one of them with respect to
remedies, the covenants against competition, confidentiality, non-disclosure,
indemnification, set-off, return of Intellectual Property and other similar
terms and conditions
9
<PAGE>
which would survive termination or expiration of an agreement of this nature in
order to fully effectuate the intention of the parties shall survive and shall
not be affected by said expiration or termination.
9.4 Notices. All notices, requests, consents and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to be duly given if delivered personally or sent by telefax or by
registered or certified mail (notices sent by telefax or mailed shall be deemed
to have been given on the date received), as follows or to such other address
as any party shall designate by notice in writing to the others in accordance
herewith:
(i) To: Commodore
c/o James DeAngelis
Commodore Separation Technologies, Inc.
3240 Town Point Drive
Suite 200
Kennesaw, GA 30144
(ii) To: Maryland Environmental Service
Attention: Director
2011 Commerce Park Drive
Annapolis, Maryland 21401-2911
9.5 Entire Agreement. This Agreement (including the Schedules and
Exhibits) contains the entire agreement among the parties. This Agreement shall
be construed and interpreted in pari materia with the Property Equipment Lease
of even date herewith between the parties hereto and supersedes all prior
arrangements or understandings, written or oral, with respect thereto.
9.6 Amendments. Any term or condition of this Agreement may be amended
or modified in whole or in part at any time, to the extent authorized by
applicable law, by an agreement in writing, authorized and executed in the same
manner as this Agreement by the parties hereto. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any right,
power of privilege hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder. The
rights and remedies herein provided are cumulative and are not exclusive of any
rights or remedies which any party may otherwise have at law or in equity. The
rights and remedies of any party arising out of or otherwise in respect of any
inaccuracy in or breach of any representation, warranty, covenant or agreement
contained in this Agreement shall in no way be limited by the fact that the act,
omission, occurrence or breach is based may also be the subject matter of any
other representation, warranty, covenant or agreement contained in this
Agreement (or in any other agreement between the parties) as to which there is
no inaccuracy or breach.
10
<PAGE>
9.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.8 Exhibits. The Exhibits and other documents attached to or delivered
herewith are hereby incorporated and made a part of this Agreement as if set
forth in full herein.
9.9 Drafting. No presumption shall operate in favor of or against any
party in the construction or interpretation of this Agreement as a consequence
of a party's responsibility for drafting this Agreement.
9.10 Attorney and Professional Fees. Each party will pay his/her own
attorney or professional fees in connection with this Agreement or settlement
discussions leading to this Agreement.
9.11 Recitals. The foregoing recitals are incorporated herein as if set
forth at length.
9.12 Captions. The captions of Sections hereof are for convenience only
and shall not control or affect the meaning or construction of any of the
provisions of this Agreement.
9.13 Binding Agreement. This Agreement shall be binding upon, and inure
to the benefit of, the parties hereto and their respective designees,
successors, agents, servants or employees, heirs and assigns.
9.14 Choice of Law and Forum: Severability. This Agreement shall be
governed by and construed in accordance with the laws of State of Maryland
without regard to conflict of law rules.
9.15 Access to Dundalk Marine Terminal. To the extent permitted by law,
MES agrees to allow Commodore access to Dundalk Marine Terminal for the sole
purpose of showing third parties the Equipment in operation. In order to enter
Dundalk Marine Terminal, Commodore must first provide to MES the name of each
individual for whom permission to enter is sought, along with the individuals'
address, business affiliation, and such other information as MES may reasonably
request. Commodore and its party may not enter Dundalk Marine Terminal until
MES first provides permission, which permission shall not be unreasonably
denied. MES may require that all persons entering Dundalk Marine Terminal first
agree to release, hold harmless and indemnify MES, MPA, the State of Maryland,
and all their officers and employees from liability for any injury or damage
incurred as a result of the persons entering Dundalk Marine Terminal.
9.16 Publication. Except as hereinafter provided, Commodore reserves
the prior right to approve all publications or press releases by MES relating to
the Intellectual Property or its performance which approval should not be
unreasonably withheld. Provided, that this reservation shall not apply to any
information which MES is obligated to report to the Maryland General Assembly or
Executive Branch agency or which it must provide pursuant to a judicial or
administrative order or subpoena.
11
<PAGE>
9.17 Removal. Upon termination of this Agreement, Commodore shall have
a reasonable time within which to enter the site where the Intellectual Property
is located and to remove the Intellectual Property.
9.18 Data Sharing MES. MES covenants and agrees to share with
Commodore on a timely and periodic basis all performance related data from the
Equipment. Commodore covenants and agrees to pay for or reimburse MES for the
reasonable cost of providing photocopies of such data, postage and other similar
out-of-pocket expenses for same.
IN WITNESS WHEREOF and intending to be legally bound, the said parties
have hereunto set their hands and seals this 5th day of February, 1998.
Attest: Commodore Separation Technologies, Inc.
/s/ Sandra M. Hodge By: /s/ Kenneth J. Houle
- ---------------------------- -----------------------------------
Sandra M. Hodge Kenneth J. Houle
Title: Executive Assistant Title: President and C.O.O.
Witness: Maryland Environmental Service
/s/ Denise M. Russell By: /s/ James W. Peck
- ----------------------------- --------------------------------
James W. Peck
Title: Director
Approved for legal form and
sufficiency this 4th day of
January, 1998
/s/ XXXXXXXXXX
- ----------------------------
Assistant Attorney General
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,951
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 360
<CURRENT-ASSETS> 5,457
<PP&E> 1,283
<DEPRECIATION> 247
<TOTAL-ASSETS> 6,660
<CURRENT-LIABILITIES> 995
<BONDS> 0
0
1
<COMMON> 11
<OTHER-SE> 5,640
<TOTAL-LIABILITY-AND-EQUITY> 6,660
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,961
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> (195)<F1>
<INCOME-PRETAX> (2,766)
<INCOME-TAX> 0
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<EPS-PRIMARY> (.27)
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<FN>
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