<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
ON
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): October 1, 1996
-------------------
Commodore Environmental Services, Inc.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-10054 87-0275043
- ---------------------------- ------------- ------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
150 East 58th Street, Suite 3400
New York, New York 10155
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 308-5800
----------------
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
ADVANCED SCIENCES, INC.
In accordance with Item 7(a)(4), the financial statements of
Advanced Sciences, Inc. are provided.
A.S. ENVIRONMENTAL, INC.
This Company had no operations through June 30, 1996.
(b) Pro Forma Financial Information.
In accordance with Item 7(b)(2), the pro forma financial
information is provided.
1
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMMODORE ENVIRONMENTAL SERVICES, INC.
Date: November 26, 1996. By: /s/ ANDREW P. ODDI
-------------------------------
Andrew P. Oddi
Chief Financial Officer
2
<PAGE> 4
COMMODORE ENVIRONMENTAL SERVICES, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited condensed pro forma combined balance sheet at
the year ended December 31, 1995 and September 30, 1995 and the nine months
period ended September 30, 1996 and June 30, 1996 of Commodore Environmental
Services, Inc. (Commodore) and Advanced Sciences, Inc. (ASI), respectively,
assumes the acquisition of ASI by Commodore. It combines the historical balance
sheets of Commodore and ASI. The business combination has been accounted for as
a purchase of ASI giving effect to the acquisition of 100% of the outstanding
common shares of ASI. The unaudited condensed pro forma financial statements
also reflect the completion of the public offering of Commodore Applied
Technologies, Inc. (Applied) as if it took place at the beginning of the period.
The unaudited condensed pro forma combined balance sheet should be read in
conjunction with the historical financial statements and related notes.
The following unaudited condensed pro forma combined statements of
operations for the years ended December 31, 1995 and September 30, 1995 and nine
months ended September 30, 1996 and June 30, 1996 for Commodore and ASI,
respectively, assumes the acquisition of ASI by Commodore as of the beginning of
the individual fiscal years of the companies (January 1, 1995 for Commodore and
October 1, 1994 for ASI) and nine months periods (January 1, 1996 for Commodore
and October 1, 1995 for ASI) and completion of the public offering at the
beginning of the fiscal year.
The pro forma results of operations are not necessarily indicative of
the results of operations that would actually have been obtained if the
transactions had occurred as of the beginning of the year and nine month period.
These statements should be read in conjunction with the historical financial
statements and related notes.
<PAGE> 5
COMMODORE ENVIRONMENTAL SERVICES, INC.
PROFORMA BALANCE SHEET
SEPTEMBER 30, 1995 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Commodore
Environmental
Advanced Services,
Sciences, I Inc.
------------- ------------ Adjustments
September 30, December 31, and Proforma
1995 1995 Eliminations Combined
------------- ------------ ------------ --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 116 86 (1) (150)
(2) 30,568 30,620
Receivables:
Current portion related party note receivable 7 7
Accounts receivable 9,407 40 9,447
Less allowance for loan loss (224) (224)
Inventory 46 46
Prepaid expenses and other, net 247 25 272
Income taxes receivable 1,363 1,363
Restricted cash 1,793 1,793
-------- ----- ------ ------
Total current assets 10,909 1,997 30,418 43,324
-------- ----- ------ ------
Property and equipment 2,068 1,222 (1) 1,284 4,574
Less accumulated amortization and depreciation 1,714 168 1,882
-------- ----- ------ ------
Net property and equipment 354 1,054 1,284 2,692
-------- ----- ------ ------
Other assets:
Investments in equity securities 86 86
Receivables 303 303
Intangible assets 465 539 (1) 11,685 12,689
Non-performing assets 912 912
Related party receivables 125 125
Other 390 390
-------- ----- ------ ------
Total other assets 551 2,269 11,685 14,505
-------- ----- ------ ------
Total assets $ 11,814 5,320 43,387 60,521
======== ===== ====== ======
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Commodore
Environmental
Advanced Services,
Sciences, Inc. Inc.
-------------- ------------- Adjustments
September 30, December 31, and Proforma
1995 1995 Elimination Combined
-------------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 4,258 670 4,928
Short-term debt 236 236
Accrued compensation 1,466 1,466
Other accrued expenses 483 994 1,477
Current portion of long-term debt and capital lease
obligation 12 12
Note payable to related party 1,085 (3) 3,000 4,085
-------- ------ ------ ------
Total current liabilities 6,455 2,749 3,000 12,204
-------- ------ ------ ------
Long-term debt and capital lease obligations, net of current
portion 6,295 6,295
Bonds payable 4,000 4,000
-------- ------ ------ ------
Total liabilities 12,750 6,749 3,000 22,499
-------- ------ ------ ------
Minority interest (1) 3936
(2) 9,384
(3) (1,976) 11,344
-------- ------ ------ ------
Stockholders' (deficit):
Preferred stock (Commodore) 45 45
Common stock (Commodore) 568 568
Additional paid-in capital 19,209 (2) 21,184
(3) (2,582)
(1) 7,947 45,758
Retained earnings (21,226) (3) 1,558 (19,668)
-------- ------ ------ ------
Common stock (Advanced Sciences, Inc.) 35 (1) (35) 0
(Accumulated deficit) (280) (1) 280 0
Unrealized losses on marketable equity securities (116) (1) 116 0
Notes receivable from related parties (575) (1) 575 0
Treasury stock (25) (25)
-------- ------ ------ ------
Total stockholders' (deficit) (936) (1,429) 29,043 26,678
-------- ------- ------ ------
Total liabilities and stockholders' deficit $ 11,814 5,320 43,387 60,521
======== ====== ====== ======
</TABLE>
<PAGE> 7
COMMODORE ENVIRONMENTAL SERVICES, INC.
PROFORMA STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Commodore
Environmental
Advanced Services,
Sciences, Inc. Inc.
-------------- ------------- Adjustments
September 30, December 31, and Proforma
1995 1995 Eliminations Combined
------------- ------------ ------------ --------
<S> <C> <C> <C> <C>
REVENUES:
Gross contract revenues $ 33,337 33,337
Other 1,044 1,044
Direct reimbursed costs (9,157) (9,157)
-------- ------ ------ -------
Net revenues 24,180 1,044 0 25,224
-------- ------ ------ -------
CONTRACT COSTS:
Direct labor, fringe and overhead 16,553 16,553
Other direct costs 4,866 4,866
General and administrative 2,566 1,518 4,084
-------- ------ ------ -------
Total contract costs 23,985 1,518 0 25,503
-------- ------ ------ -------
Gross margin 195 (474) 0 (279)
-------- ------ ------ -------
INTEREST AND OTHER EXPENSES:
Research and development (1,990) (1,990)
Loss on disposal of assets (701) (701)
Interest income 45 45
Interest expense (841) (550) (1,391)
Provision for uncollectible receivables and
potential disallowances (417) (417)
Other (265) (265)
-------- ------ ------ -------
Total interest and other expenses (2,224) (2,495) 0 (4,719)
-------- ------ ------ -------
Loss before income taxes and
minority interest (2,029) (2,969) (4,998)
-------- ------ ------ -------
INCOME TAX BENEFIT (EXPENSE) 107 107
-------- ------ ------ -------
Net loss before minority interest (1,922) (2,969) 0 (4,891)
Minority interest (3) 1,558 1,558
-------- ------ ------ -------
Net loss (1,922) (2,969) 1,558 (3,333)
======== ====== ====== =======
LOSS PER COMMON SHARE $ (0.06)
=======
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 56,212 56,212
====== =======
</TABLE>
<PAGE> 8
COMMODORE ENVIRONMENTAL SERVICES, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
YEAR ENDED SEPTEMBER 30, 1995 (ASI)
AND DECEMBER 31, 1995 (COMMODORE)
The pro forma combined financial statements have been prepared assuming
the acquisition of Advanced Sciences, Inc., (ASI) by Commodore Environmental
Services, Inc., (Commodore) as of the beginning of the individual fiscal years
of the companies (January 1, 1995 for Commodore and October 1, 1994 for ASI) and
the completion of the public offering of Applied's common stock at the beginning
of the fiscal year.
The pro forma combined statements include the financial statement
balances for Commodore at December 31, 1995 and the year then ended and the
financial statement balances for ASI at September 30, 1995 and for the year then
ended.
PRO FORMA ADJUSTMENTS
(IN THOUSANDS EXCEPT PER SHARE OF AMOUNTS)
(1) Exchange 900,000 shares at a price of $8.96 of Commodore
Environmental Services, Inc., (Commodore) for all of the
issued and outstanding common stock of Advanced Sciences, Inc.
(ASI). The purchase price of ASI included costs paid of $150
and was in excess of the historical book value of by $12,969,
of which $11,685 has been reflected at intangible assets and
$1,284 as plant and equipment.
(2) Gives effect of the completion of the public stock offering
where Commodore Applied Technologies, Inc. (Applied) a
subsidiary issued 5,750,000 shares of common stock for $6.00
per share. Applied received net cash proceeds of approximately
$30,568.
(3) Gives effect of converting $3,000 of intercompany note
receivable to investment of Applied and to adjust minority
interest to actual.
<PAGE> 9
COMMODORE ENVIRONMENTAL SERVICES, INC.
PROFORMA BALANCE SHEET
JUNE 30, 1996 AND SEPTEMBER 30,1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Commodore
Advanced Environmental
Sciences, Inc. Services, Inc.
----------------------------------- Eliminations
June 30, September 30, and Proforma
1996 1996 Adjustments Combined
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 182 2,276 (1) (150) 2,308
Receivables:
Accounts receivable 9,462 95 9,557
Less allowance for loan loss (2,946) (2,946)
Prepaid expenses and other, net 538 158 696
Temporary investments 20,766 20,766
-------------------------- ------------------------
Total current assets 7,236 23,295 (150) 30,381
-------------------------- ------------------------
Property and equipment 2,052 2,005 (1) 1,284 5,341
Less accumulated amortization and depreciation (1,791) (258) (2,049)
-------------------------- ------------------------
Net property and equipment 261 1,747 1,284 3,292
-------------------------- ------------------------
Other assets:
Other investments 358 358
Receivables 1,296 1,296
Intangible assets 539 (1) 11,685 12,224
Non-performing assets 912 912
Restricted cash 2,063 2,063
Other 100 100
-------------------------- ------------------------
Total other assets 0 5,268 11,685 16,953
-------------------------- ------------------------
Total assets $ 7,497 30,310 12,819 50,626
========================== ========================
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
Commodore
Advanced Environmental
Sciences, Inc. Services, Inc.
----------------------------------- Eliminations
June 30, September 30, and Proforma
1996 1996 Adjustments Combined
------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable $ 2,941 1,385 4,326
Short-term debt 308 219 527
Accrued compensation 1,021 1,021
Other accrued expenses 384 994 1,378
Current portion of long-term debt and capital
lease obligation 7 7
------------------------- ----------------------------
Total current liabilities 4,661 2,598 0 7,259
------------------------- ----------------------------
Long-term debt and capital lease obligations,
net of current portion 7,591 7,591
Bonds payable 4,000 4,000
Line of credit 2,250 2,250
------------------------- ----------------------------
Total liabilities 12,252 8,848 0 21,100
------------------------- ----------------------------
Minority interest 6,107 (2) 3,104 9,211
------------------------- ----------------------------
Stockholders' equity (deficit):
Preferred stock (Commodore) 579 579
Common stock (Commodore) 45 45
Additional paid-in capital 40,287 (2) (3,092)
(1) 6,208 43,403
Retained earnings (25,531) (1) 1,844 (23,687)
Common stock (Advanced Sciences, Inc.) 35 (1) (35) 0
(Accumulated deficit) (4,613) (1) 4,613 0
Treasury stock (177) (25) (1) 177 (25)
------------------------- ----------------------------
Total stockholders' equity (deficit) (4,755) 15,355 9,715 20,315
------------------------- ----------------------------
Total liabilities and stockholders' equity (deficit) $ 7,497 30,310 12,819 50,626
========================= ===========================
</TABLE>
<PAGE> 11
COMMODORE ENVIRONMENTAL SERVICES, INC.
PROFORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1996 AND SEPTEMBER 30, 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Commodore
Advanced Environmental
Sciences, Inc. Services, Inc.
--------------------------------- Eliminations
June 30, September 30, and Proforma
1996 1996 Adjustments Combined
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Gross contract revenues $ 20,411 163 20,574
Direct reimbursed costs (6,645) (6,645)
--------------------------- -----------------------------
Net revenues 13,766 163 0 13,929
--------------------------- -----------------------------
CONTRACT COSTS:
Direct labor, fringe and overhead 8,397 8,397
Other direct costs 2,561 149 2,710
General and administrative 2,355 2,384 4,739
--------------------------- -----------------------------
Total contract costs 13,313 2,533 0 15,846
--------------------------- -----------------------------
Gross margin 453 (2,370) 0 (1,917)
--------------------------- -----------------------------
INTEREST AND OTHER EXPENSES:
Research and development (2,139) (2,139)
Interest income 296 296
Interest expense (447) (394) (841)
Provision for uncollectible receivables and
potential disallowances (3,428) (3,428)
Other (436) (436)
--------------------------- -----------------------------
Total interest and other expenses (4,311) (2,237) 0 (6,548)
--------------------------- -----------------------------
Loss before tax and minority interest (3,858) (4,607) 0 (8,465)
--------------------------- -----------------------------
Minority interest 302 (1) 1,844 2,146
--------------------------- -----------------------------
Net loss $ (3,858) (4,305) 1,844 (6,319)
=========================== =============================
LOSS PER COMMON SHARE $ (0.11)
==================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 56,262
==================
</TABLE>
<PAGE> 12
COMMODORE ENVIRONMENTAL SERVICES, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1996 (ASI)
AND SEPTEMBER 30, 1996 (COMMODORE)
The pro forma combined financial statements have been prepared assuming
the acquisition of Advanced Sciences, Inc., (ASI) by Commodore Environmental
Services, Inc., (Commodore) as of the beginning of the individual fiscal periods
of the companies (January 1, 1995 for Commodore and October 1, 1994 for ASI),
and the completion of the public offering of Commodore Applied Technologies,
Inc. as of January 1, 1995.
The pro forma combined statements include the financial statement
balances for Commodore at September 30, 1996 and the nine months then ended and
the financial statement balances for ASI at June 30, 1996 and for the nine
months then ended.
PRO FORMA ADJUSTMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1) Exchange 900,000 shares at a price of $8.96 of Commodore
Environmental Services, Inc. (Commodore) for all of the issued
and outstanding common stock of Advanced Sciences, Inc. (ASI).
The purchase price of ASI included costs paid of $150 and was
in excess of the historical book value of by $12,969, of which
$11,685 has been reflected as intangible assets and $1,284 as
plant and equipment.
(2) Gives effect of minority interest share of applied at
September 30, 1996.
<PAGE> 13
ADVANCED SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
AND
FOR THE UNAUDITED NINE MONTHS ENDED
JUNE 30, 1996 AND 1995
<PAGE> 14
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Advanced Sciences, Inc.:
We have audited the accompanying consolidated balance sheets of ADVANCED
SCIENCES, INC. (the Company) (a New Mexico corporation), and Subsidiaries as of
September 30, 1995 and 1994, and the related consolidated statements of
operations, stockholders' (deficit) equity and cash flows for each of the three
years in the period ended September 30, 1995. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Sciences,
Inc. and Subsidiaries as of September 30, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
October 1, 1996
<PAGE> 15
ADVANCED SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
--------------------------------
June 30, 1996 1995 1994
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 181,528 $ 115,753 $ 264,376
Receivables, net 6,516,039 9,183,227 11,642,970
Prepaid expenses and other 538,384 246,592 588,374
Income taxes receivable - 1,362,727 -
Deferred income taxes - - 1,153,778
------------ ------------ ------------
Total current assets 7,235,951 10,908,299 13,649,498
PROPERTY AND EQUIPMENT, net 261,216 354,155 1,428,850
INVESTMENTS IN EQUITY SECURITIES, at market value - 85,800 67,800
GOODWILL AND OTHER INTANGIBLES, net - 465,070 1,800,742
------------ ------------ ------------
Total assets $ 7,497,167 $ 11,813,324 $ 16,946,890
============ ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,940,560 $ 4,256,747 $ 3,163,590
Short-term debt 307,742 236,264 86,138
Accrued expenses:
Compensation related 1,021,559 1,466,215 1,958,698
Other 384,187 482,958 724,784
Income taxes payable - - 19,890
Current portion of long-term debt and
capital lease obligations 7,240 11,347 912,333
------------ ------------ ------------
Total current liabilities 4,661,288 6,453,531 6,865,433
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
net of current portion 7,591,028 6,295,410 9,107,077
------------ ------------ ------------
Total liabilities 12,252,316 12,748,941 15,972,510
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, no par value; 250,000 shares
authorized and issued 35,350 35,350 35,350
(Accumulated deficit) retained earnings (4,613,399) (279,637) 1,642,240
Unrealized losses on marketable equity securities - (116,330) (128,210)
Notes receivable from officers - (575,000) (575,000)
Treasury stock, 13,700 shares at cost (177,100) - -
------------ ------------ ------------
Total stockholders' (deficit) equity (4,755,149) (935,617) 974,380
------------ ------------ ------------
Total liabilities and stockholders' (deficit) equity $ 7,497,167 $ 11,813,324 $ 16,946,890
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE> 16
ADVANCED SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended June 30, Year Ended September 30,
----------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Gross contract revenues $ 20,410,924 $ 25,833,717 $ 33,337,774 $ 40,018,783 $ 53,767,508
Direct reimbursed costs 6,645,476 7,846,834 9,157,212 7,467,893 13,838,919
------------ ------------ ------------ ------------ ------------
Net revenues 13,765,448 17,986,883 24,180,562 32,550,890 39,928,589
------------ ------------ ------------ ------------ ------------
CONTRACT COSTS:
Direct labor, fringe and overhead 8,396,670 12,691,572 16,553,427 22,282,309 25,555,819
Other direct costs 2,560,933 2,667,827 4,866,536 5,457,991 6,571,225
General and administrative 2,355,818 2,507,662 2,565,272 3,354,061 5,341,266
------------ ------------ ------------ ------------ ------------
Total contract costs 13,313,421 17,867,061 23,985,235 31,094,361 37,468,310
------------ ------------ ------------ ------------ ------------
Gross margin 452,027 119,822 195,327 1,456,529 2,460,279
------------ ------------ ------------ ------------ ------------
INTEREST AND OTHER EXPENSES:
Interest expense, net 447,125 583,431 841,003 696,059 662,872
Loss from disposal of net assets of subsidiary
and write off of goodwill 439,393 - 700,848 - -
Provision for uncollectible receivables and
potential disallowances 2,722,068 417,865 417,865 4,280,581 -
Reserve for interest receivable from officer 74,070 - - - -
Loss on disposal of equity securities 191,983 - - - -
Litigation settlement - - - 400,000 -
Other 436,150 227,667 264,377 315,665 395,156
------------ ------------ ------------ ------------ ------------
Total interest and other expenses 4,310,789 1,228,963 2,224,093 5,692,305 1,058,028
------------ ------------ ------------ ------------ ------------
Loss before income taxes (3,858,762) (1,109,141) (2,028,766) (4,235,776) 1,402,251
INCOME TAX BENEFIT (EXPENSE) - 56,867 106,889 762,608 (589,000)
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (3,858,762) $ (1,052,274) $ (1,921,877) $ (3,473,168) $ 813,251
============ ============ ============ ============ ============
LOSS PER COMMON SHARE $ (15.59) $ (4.21) $ (7.69) $ (13.89) $ 3.25
============ ============ ============ ============ ============
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 247,474 250,000 250,000 250,000 250,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 17
ADVANCED SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Retained Losses/Gains Notes
Earnings on Marketable Receivable
Common (Accumulated Equity from Treasury
Stock Deficit) Securities Officers Stock Total
------- ------------ ------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, Year Ended September 30, 1992 $35,350 $ 4,302,157 $ - $(575,000) $ - $ 3,762,507
Net income - 813,251 - - - 813,251
------- ----------- --------- --------- --------- -----------
BALANCES, Year Ended September 30, 1993 35,350 5,115,408 - (575,000) - 4,575,758
Effect of change in accounting
for investment in equity securities
at October 1, 1993, net of income tax effect - - (2,210) - - (2,210)
Net loss - (3,473,168) - - - (3,473,168)
Unrealized loss on investment in equity
securities, net of income tax effect - - (126,000) - - (126,000)
------- ----------- --------- --------- --------- -----------
BALANCES, Year Ended September 30, 1994 35,350 1,642,240 (128,210) (575,000) - 974,380
Net loss - (1,921,877) - - - (1,921,877)
Unrealized gain on investment in equity
securities, net of income tax effect - - 11,880 - - 11,880
------- ----------- --------- --------- --------- -----------
BALANCES, Year Ended September 30, 1995 35,350 (279,637) (116,330) (575,000) - (935,617)
Acquisition of 6,250 shares of treasury stock
in exchange for cash (Unaudited) - - - - (75,000) (75,000)
Acquisition of 7,450 shares of treasury stock
in exchange for officer note and interest
receivable (Unaudited) - - - 100,000 (102,100) (2,100)
Transfer of unrealized loss on investment in
equity security from available-for-sale-
category to trading category (Unaudited) - - 116,330 - - 116,330
Reserve for officer note (Unaudited) - (475,000) - 475,000 - -
Net loss (Unaudited) - (3,858,762) - - - (3,858,762)
------- ----------- --------- --------- --------- -----------
BALANCES, Nine months ended
June 30, 1996 (Unaudited) $35,350 $(4,613,399) $ - $ - $(177,100) $(4,755,149)
======= =========== ========= ========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 18
ADVANCED SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended June 30, Year Ended September 30,
-------------------------- ------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,858,762) $ (1,052,274) $ (1,921,877) $ (3,473,168) $ 813,251
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 124,825 205,252 425,950 248,704 200,770
Provision for uncollectible receivables
and potential disallowances 2,796,138 417,865 341,771 4,280,581 -
Contract adjustment to accounts payable (244,000) - - - -
Loss (gain) on sale of assets and
write off of goodwill 631,374 - 700,848 (1,235) -
Other (29,100) 9,923 - 196,373 (91,289)
Changes in assets and liabilities:
Receivables, net (107,652) 1,305,638 2,114,976 759,687 8,622,893
Income taxes, net 1,283,372 (266,074) (1,382,617) (115,028) (237,203)
Deferred income taxes - 84,399 1,147,658 (894,565) -
Prepaid expenses and other (187,127) 165,920 350,286 (197,586) (168,153)
Accounts payable and other (1,516,843) 510,471 1,093,157 458,058 (8,201,673)
------------ ------------ ------------ ------------ ------------
Other accrued expenses (98,771) (324,905) (460,451) (672,837) 394,687
------------ ------------ ------------ ------------ ------------
Total adjustments 2,652,216 2,108,489 4,331,578 4,062,152 520,032
------------ ------------ ------------ ------------ ------------
Net cash (used) provided by operating activities (1,206,546) 1,056,215 2,409,701 588,984 1,333,283
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment - - (148,126) (425,582) (60,317)
Cash surrendered in asset dispositions - - (7,295) - -
Cash used for acquisitions - - - (600,000) -
Proceeds from sale of assets 92,074 11,500 - 35,194 -
Other - - (3,783) (62,433) -
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by investing activities 92,074 11,500 (159,204) (1,052,821) (60,317)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on revolving line-of-credit (21,009,968) (26,933,190) (35,188,395) (41,769,999) (65,015,658)
Borrowings on revolving line-of-credit 22,433,464 25,696,050 33,395,262 42,290,473 63,973,662
Repayment of debt and capital lease obligations (8,888) (199,728) (605,987) (460,945) (154,265)
Proceeds from issuance of debt - - - 386,640 5,983
Acquisition of treasury stock (75,000) - - - -
Change in short-term debt (159,361) 155,953 - - -
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by financing activities 1,180,247 (1,280,915) (2,399,120) 446,169 (1,190,278)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 65,775 (213,200) (148,623) (17,668) 82,688
CASH, at beginning of period 115,753 264,376 264,376 282,044 199,356
------------ ------------ ------------ ------------ ------------
CASH, at end of period $ 181,528 $ 51,176 $ 115,753 $ 264,376 $ 282,044
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 19
ADVANCED SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 AND
FOR THE (UNAUDITED) NINE MONTHS ENDED
JUNE 30, 1996 AND 1995
(1) ORGANIZATION AND RISK FACTORS:
Advanced Sciences, Inc. (ASI), a New Mexico corporation, provides a full range
of environmental and technical services, including identification,
investigation, remediation and management of hazardous and mixed waste sites,
to government agencies and private companies in the United States and abroad.
ASI conducts a majority of its business with agencies of the U. S. Federal
government and with prime contractors that serve the Federal government.
During fiscal year 1995 and for the nine months ended June 30, 1996, ASI had
revenues from one government contract approximating 45% and 38% (unaudited) of
total revenues, respectively. Certain Federal government contracts are
typically funded in one year increments, and funding under these contracts is
dependent on Federal budget authorization levels. The potential for reductions
in the Federal budget heighten the possibility of funding cutbacks.
During fiscal years 1995 and 1994, ASI has experienced losses totaling
approximately $5.4 million. The majority of these losses resulted from write
offs of billed and unbilled receivables totaling approximately $4.7 million,
from loss on sale of net assets of a non-core subsidiary totaling
approximately $0.7 million (see Note 12) and from a one-time cost of $0.4
million in fiscal year 1994 to settle litigation (see Note 9). These losses
have resulted in a stockholders' deficit balance of $0.9 million at September
30, 1995.
Unaudited results through June 30, 1996, indicate that ASI had incurred a net
loss in excess of $3.8 million. ASI has now decided that it will no longer
market surface cleaning technologies or participate in remedial construction
contracts, areas which resulted in losses and write offs in excess of $3.1
million in the unaudited nine months ended June 30, 1996. The owners of ASI
have sold all shares of ASI to a third party (see Note 14) and renegotiated its
revolving bank line of credit (see Note 6). Management believes that these
actions, along with refocusing its core business, will allow ASI to begin to
return to profitable operations and reduce outstanding debt.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles for government contractors. All significant transactions and
accounts between ASI and its consolidated subsidiaries have been eliminated in
the accompanying consolidated financial statements.
-6-
<PAGE> 20
Cash
Only cash on hand or deposited in banks with original maturities of three
months or less is included as cash on the consolidated balance sheets and
consolidated statements of cash flows.
Goodwill
The excess of the purchase price over the fair value of the net assets acquired
by ASI (Goodwill) was amortized using the straight-line method over 15 years.
Periodically, ASI assesses the performance, growth, market and competitive
outlook of business to determine if there has been any permanent impairment.
As a result of this assessment, ASI recorded a write-down of goodwill of $1.2
million in fiscal 1995 in connection with the disposal of certain assets of a
subsidiary. ASI also recorded a $0.4 million write off of the remaining
goodwill during the unaudited nine months ended June 30, 1996 in connection
with a change in ASI's strategic business focus (see Note 12).
In March 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). The
provisions of SFAS No. 121, which was adopted by ASI on October 1, 1996, did
not have a significant effect on ASI's financial position or results of
operations when adopted.
Investments in Equity Securities
In 1994, ASI adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"(SFAS No.
115). ASI's 60,000 unregistered shares of Transamerican Waste Industries,
Inc., were accounted for as "available-for-sale" securities. The change in
their market value was recorded directly to consolidated stockholders'
(deficit) equity, net of tax. During the unaudited nine months ended June 30,
1996, these securities, which had an original cost of $282,000, were sold for
cash of $89,500.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
provided over the estimated useful lives of the respective assets (three to ten
years) utilizing the straight-line method. Repair and maintenance costs are
expensed as incurred. Major betterments and replacements are capitalized.
Contract Revenues
The major portion of ASI's revenues result from engineering and scientific
services performed for the U.S. Government and prime contractors that serve the
Federal Government under a variety of contracts, most of which provide for
reimbursement of costs plus fixed fees. Revenue under cost-reimbursement
contracts is recorded as costs are incurred and include estimated earned fees
in the proportion that costs incurred to date bear to total estimated costs.
Generally, revenues and fees on contracts are recognized and billed monthly as
services are performed.
-7-
<PAGE> 21
ASI provides for anticipated losses on contracts by a charge to income during
the period such losses are first identified. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. On September 30, 1995, ASI recorded a $300,000 reduction of
revenue and contract receivables to provide for anticipated losses on a
remedial construction contract. By the substantial completion of this contract
on June 30, 1996, this contract had incurred additional losses of $1.8 million
(unaudited) due to changes in job performance and job conditions in fiscal
1996.
Contract costs, both direct and indirect, are subject to audit by the Defense
Contract Audit Agency (DCAA). Management believes that appropriate allowances
have been established to cover potential audit disallowance. Contract revenues
have been recorded in amounts which are expected to be realized upon final
settlement.
DCAA has audited ASI's costs through the fiscal year ended September 30, 1989
and preliminary DCAA audit reports have been issued for fiscal 1990 through
1993. An allowance for doubtful accounts and potential disallowances for
fiscal years 1990 through 1995 has been established based upon the portion of
billed and unbilled receivables that management believes may be uncollectable.
ASI's management recorded an additional allowance for potential disallowances
and other credits of $1.2 million during the unaudited nine months ended June
30, 1996. Management believes this allowance will provide ASI the basis to
negotiate with Federal Government representatives to quickly settle both billed
and unbilled receivables for cash in order to maximize cash flow in the short
term.
Income Taxes
ASI has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Deferred income taxes are provided based on the
estimated future tax effects of differences between financial statement
carrying amounts and the tax bases of existing assets and liabilities.
(Loss) Income Per Common Share
(Loss) income per common share was computed by dividing net (loss) income by
the weighted average number of shares of common stock outstanding during the
period.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities 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.
-8-
<PAGE> 22
Unadopted Accounting Pronouncement
In December 1991, the Financial Accounting Standards Board issued Statement No.
107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107). SFAS
107 extends existing fair-value disclosure practices by requiring all entities
to disclose the fair value of financial instruments, both assets and
liabilities on and off the balance sheet, for which it is practicable to
estimate fair value. If estimating fair value is not practicable, SFAS 107
requires disclosure of descriptive information pertinent to estimating the
value of financial instrument. SFAS 107 is effective for financial statements
issued for fiscal years ending after December 15, 1995. ASI has not yet
adopted the provisions of SFAS 107, the adoption of which is not expected to
have a significant impact on future disclosures.
Reclassifications
Certain reclassifications have been made to the accompanying financial
statements to conform presentations from year to year.
(3) FOREIGN SUBSIDIARIES:
During fiscal years 1995 and 1994, ASI provided funding for the purpose of
establishing and operating Advanced Sciences Integradas S.A. in Buenos Aires,
Argentina (ASI Argentina), and Advanced Sciences Integrated Mexico, S.A. de
C.V. in Mexico City, Mexico (ASI Mexico). ASI owned 100% and 49% of ASI
Argentina and ASI Mexico, respectively. The investment in ASI Argentina
represents primarily start-up costs. Because there have been no material
operations in ASI Argentina, the full amount of the investment was reserved
during 1994. ASI controls the operations of ASI Mexico and, accordingly, ASI
Mexico is consolidated with ASI in the accompanying consolidated financial
statements. During the unaudited nine months ended June 30, 1996, ASI acquired
all shares of ASI Mexico which it had not previously owned from ASI's Chairman
for his original cost of $50,000; such amount was offset against the note
receivable from the Chairman.
(4) RECEIVABLES:
Receivables consist of the following:
<TABLE>
<CAPTION>
September 30,
June 30, -----------------------------
1996 1995 1994
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Contract Receivables:
Amounts billed $ 9,277,267 $ 8,155,091 $ 10,496,732
Retainages 162,321 107,953 726,815
Unrecovered costs and estimated profits subject to
future negotiation--not billed 19,944 981,056 4,824,735
Expenses advanced to employees and officers 3,076 15,292 67,135
Interest on notes receivable from related-parties
(Note 8) - 148,336 96,902
------------- ------------ ------------
9,462,608 9,407,728 16,212,319
Less: Allowance for doubtful accounts and potential
disallowances 2,946,569 224,501 4,569,349
------------- ------------ ------------
$ 6,516,039 $ 9,183,227 $ 11,642,970
============= ============ ============
</TABLE>
-9-
<PAGE> 23
The balances billed but not paid by customers pursuant to retainage provisions
are due upon completion and acceptance of the contracts.
Unbilled receivables include current and prior year costs and fees billable
upon certain specified events (including settlement of prior years' government
audits.) All such amounts have been classified as current assets although
certain amounts may not be collected within one year depending on when the
conditions for collection are satisfied.
Substantially all of ASI's billed receivables are pledged to secure the
line-of-credit described in Note 6.
(5) PROPERTY AND EQUIPMENT:
Property and equipment, including assets acquired under capital lease
obligations, consist of the following:
<TABLE>
<CAPTION>
September 30,
June 30, ------------------------------
1996 1995 1994
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Equipment $ 1,034,141 $ 1,037,435 $ 1,961,255
Furniture and fixtures 551,541 564,147 579,471
Vehicles 24,158 24,158 39,158
Software and other 442,165 442,165 434,615
------------- ------------- -------------
2,052,005 2,067,905 3,014,499
Less: accumulated depreciation and amortization 1,790,789 1,713,750 1,585,649
------------- ------------- -------------
$ 261,216 $ 354,155 $ 1,428,850
============= ============= =============
</TABLE>
-10-
<PAGE> 24
(6) DEBT AND CAPITAL LEASE OBLIGATIONS:
Debt and capital lease obligations consists of the following:
<TABLE>
<CAPTION>
September 30,
June 30, ------------------------------
1996 1995 1994
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Revolving bank line-of-credit of $9,250,000 and
$11,250,000 in 1996/1995 and 1994, respectively;
interest payable monthly at prime rate plus 1%
(9.25% at June 30, 1996 (unaudited) and 9.75% at
September 30, 1995); due December 31, 1997; secured
by certain accounts receivable and other assets not
otherwise pledged (see Note 14). $ 7,579,309 $ 6,278,910 $ 8,072,043
Note payable to individual (former president of
Environmental Alternatives, Inc.); interest at 8%
per annum; due April, 1999 - - 1,250,137
Subordinated note payable to related party;
interest at local bank index rate plus 2% (10.25% at
June 30, 1996 (unaudited) and 9.75% at September 30,
1995); due September 1996; unsecured 200,000 200,000 200,000
Equipment and insurance contracts and other notes,
primarily due within one year 107,742 36,264 522,521
Capital lease obligations; net of imputed interest
at rates ranging from 8% to 17% 18,959 27,847 60,847
------------- ------------- -------------
7,906,010 6,543,021 10,105,548
Less short-term debt 307,742 236,264 86,138
Less current portion of long-term debt and capital
lease obligations 7,240 11,347 912,333
------------- ------------- -------------
Long-term debt and capital lease obligations, net
of current portion $ 7,591,028 $ 6,295,410 $ 9,107,077
============= ============= =============
</TABLE>
The borrowing base for the line of credit (LOC), as amended April, 1995, is
limited to 85% of eligible (generally less than 90 days aged) billed Federal
Government and commercial contract accounts receivable. The LOC requires ASI
to meet certain financial covenants, the most restrictive of which are the
maintenance of a tangible net worth of $3,500,000, a
liabilities-to-tangible-net-worth ratio of no more than 3.75:1, a
minimum-interest-coverage ratio of 1.5:1 and a ratio of consolidated operating
cash flow to current maturities of 0.75:1 as of September 30, 1995. The LOC
also contains certain covenants and restrictions including, without limitation,
the following: (a) restricts the payment of dividends by ASI, (b) prohibits
transactions with affiliates not at arm's length, (c) allows ASI to make only
permitted investments, (d) restricts certain indebtedness, liens, and
dispositions of property and (e) prohibits a change in control or a fundamental
change in the business of ASI except
-11-
<PAGE> 25
under certain limited circumstances. This LOC further provides that certain
limited events or occurrences that would or could reasonably be expected to
have a material adverse effect on ASI's ability to repay the LOC or to perform
its obligations under the LOC will constitute an event of default.
ASI was not in compliance with the terms and covenants of the LOC at September
30, 1995. During April 1996, ASI entered into an agreement with its banker
whereby ASI was provided a $2.8 million uncollateralized facility through
September 15, 1996, and all events of noncompliance were waived. The
collateral for the credit line loan balance will continue to be accounts
receivable and has been further collateralized by certain personal assets and
personal guarantees of ASI's principal stockholder.
On September 23, 1996, ASI reached an agreement with its bank whereby the bank
agreed, subject to certain conditions, (1) to release ASI's primary
stockholders from their personal guarantees and terminate the bank's interest
in various security interests in their property, (2) to the merger between ASI
and CXI-ASI Acquisition Corp. (CXI-ASI) (see Note 14), and (3) to extend the
term of the loan until September 30, 1997. The bank has also agreed to waive
and forbear declaring a default by reason of ASI's successor (CXI-ASI) not
complying with the financial ratios provided in the LOC through September 30,
1996. However, the bank reserves the right to declare a default pursuant to
the LOC if mutually satisfactory ratios are not agreed to by December 15, 1996.
The bank will expect said covenants to ensure that the financial condition of
ASI's successor (CXI-ASI) will be no worse than that as of September 30, 1996.
Commodore Applied Technologies, Inc., in return, will, among other items,
guarantee $2,000,000 of ASI's LOC, which will be secured by a $500,000 cash
deposit.
Maximum borrowings outstanding under the LOC were approximately $9,039,000 in
1995, $11,148,000 in 1994 and $10,682,900 in 1993. Weighted average
outstanding borrowings on these lines were $7,014,300 in fiscal 1995,
$7,987,900 in fiscal 1994 and $8,349,100 in fiscal 1993. Weighted average
interest rates were 9.86% in fiscal 1995, 7.54% in fiscal 1994 and 7.00% in
fiscal 1993.
Under the LOC, the bank provides cash management services to ASI. As ASI's
checks are presented for payment, they are covered by draws from the LOC.
ASI's cash receipts are applied directly to reduce the balance outstanding on
the LOC through the use of a lockbox arrangement.
Future aggregate principal payments due on the short and long-term debt and
capital lease obligations are as follows at September 30, 1995:
<TABLE>
<S> <C>
1996 $ 247,611
1997 6,283,304
1998 4,969
1999 5,620
2000 1,517
------------
$ 6,543,021
============
</TABLE>
-12-
<PAGE> 26
(7) INCOME TAXES:
The income tax (benefit) expense applicable to ASI's operations is as follows:
<TABLE>
<CAPTION>
Federal State Total
------------ ------------ ------------
<S> <C> <C> <C>
Year ended September 30, 1995:
Current $ - $(1,419,763) $(1,419,763)
Deferred 207,139 1,105,735 1,312,874
------------ ----------- -----------
$ 207,139 $ (314,028) $ (106,889)
============ =========== ===========
Year ended September 30, 1994:
Current $ 230,810 $ 21,600 $ 252,410
Deferred (980,040) (34,978) (1,015,018)
------------ ----------- -----------
$ (749,230) $ (13,378) $ (762,608)
============ =========== ===========
Year ended September 30, 1993:
Current $ 490,000 $ 80,000 $ 570,000
Deferred 16,000 3,000 19,000
------------ ----------- ------------
$ 506,000 $ 83,000 $ 589,000
============ =========== ============
</TABLE>
Because the Company is in a net operating loss carry forward position, there is
no income tax benefit for the nine months ended June 30, 1996.
The components of the net deferred income tax asset as of September 30 are as
follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Components of the current deferred taxes, net:
Employee related accruals, primarily vacation $ 175,004 $ 199,359
Reserve for uncollectable receivables and potential disallowances 92,047 1,509,083
Litigation reserve 22,208 160,000
Foreign subsidiaries losses 194,963 194,335
Net operating loss carryforward 544,248 -
Loss on disposal of net assets of subsidiary 287,348 -
Employee related accruals, primarily health insurance (42,826) (43,530)
------------ ------------
1,272,992 2,019,247
Less: Valuation allowance (1,272,992) (865,469)
------------ ------------
- 1,153,778
------------ ------------
Components of the long-term deferred taxes, net:
Unrealized losses on investments in equity securities 80,231 85,474
Other (5,022) (60,712)
------------ ------------
75,209 24,762
Less: Valuation allowance (75,209) (24,762)
------------ ------------
- -
------------ ------------
Total $ - $ 1,153,778
============ ============
</TABLE>
-13-
<PAGE> 27
ASI conducts a periodic examination of its valuation allowance. Factors
considered in the evaluation include recent and expected future earnings, and
ASI's liquidity, and equity positions. Deferred tax assets can only be
realized to the extent ASI can carry tax losses back to recover taxes paid in
prior periods or generates taxable income in future periods. As of September
30, 1995 and June 30, 1996 (unaudited), ASI has established a valuation
allowance for the entire balance of net deferred tax assets.
As of September 30, 1995, a Federal net operating loss carryforward of $1
million is available to offset future taxable income for the next fifteen
years.
A reconciliation of the income tax (benefit) provision to the statutory Federal
income tax rate is as follows at September 30:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Tax benefit computed at statutory Federal tax rate of 34% $ (690,000) $(1,440,000) $ 476,800
State taxes, net of Federal tax effect - (184,975) 54,800
Alternative minimum tax 71,000 - -
Meal and entertainment exclusion 14,000 6,700 10,200
Nondeductible assessments 6,000 42,200 36,100
Nondeductible donations 2,000 89,000 -
Tax-rate change - (85,000) -
Change in tax valuation allowance 457,970 890,231 -
Other 32,141 (80,764) 11,100
----------- ----------- ------------
$ (106,889) $ (762,608) $ 589,000
=========== =========== ============
</TABLE>
The Company is currently undergoing an audit by the Internal Revenue Service
for fiscal years 1994 and 1995. The effect on taxable income or loss cannot be
quantified as the audit is still in process. However, management does not
believe that the results of this audit will have a material impact on these
financial statements.
(8) RELATED-PARTY TRANSACTIONS:
The notes receivable from officers include a $475,000 unsecured note receivable
from the primary stockholder of ASI. The note bears interest at 8% and is due
at various dates through June 1998. Interest receivable on the note, which was
$146,236 and $78,776 as of September 30, 1995 and 1994, respectively, is
included in Receivables (see Note 4). As part of the process of evaluating the
potential sale of all of the common stock of ASI and subsequent merger with
another company (see Note 14), ASI determined it would fully reserve the note
receivable and related interest receivable from the primary stockholder as part
of positioning for the sale during the unaudited nine months ended June 30,
1996.
A second note receivable for $100,000 included in notes receivable from
officers arose when ASI loaned a corporate vice president the funds to buy
7,450 shares of ASI common stock from a third party. The note bore interest at
8% and was secured by the 7,450 shares. Interest receivable on the note, which
was $2,106 and $18,126 as of September 30, 1995 and 1994, respectively, was
included in Receivables (see Note 4). On June 1, 1996, the vice president
returned the 7,450 shares of ASI common stock to ASI in full satisfaction of
all amounts due under this note, including interest (unaudited).
-14-
<PAGE> 28
During the unaudited nine months ended June 30, 1996, ASI repurchased 6,250
shares of its common stock from ASI's former President for $75,000.
On March 1, 1991, ASI entered into an agreement to lease its buildings and land
used for ASI's administration and operations under an operating lease which has
since been terminated, from a partnership in which ASI's Chairman was a limited
partner. ASI paid rent expense of approximately $344,300 under this lease for
the year ended September 30, 1993. On September 20, 1993, the Chairman sold
his interest in the partnership owning the building.
ASI has a lease agreement with its Chairman under which ASI is allowed to use
the Chairman's townhouse for business purposes. Rent paid for townhouse usage
approximated $23,000 for each of the years ended September 30, 1995 and 1994
and $22,000 for the year ended September 30, 1993.
(9) LITIGATION SETTLEMENT
During May 1995, ASI settled certain litigation commenced against ASI by a
former employee. The litigation was settled for $325,000 cash and a
non-interest bearing note for $75,000, which is due in eighteen monthly
installments.
(10) COMMITMENTS AND CONTINGENCIES:
ASI has various noncancellable operating lease agreements involving certain
property and equipment at various operating locations. The lease periods range
from one to ten years, with the majority being one-year premises leases with
automatic renewals. Rent expense on long-term lease commitments approximated
$1,707,000, $2,231,000 and $2,485,000 in 1995, 1994 and 1993, respectively.
During July 1996, ASI agreed to an early termination on its lease of its
administration and operations building in Albuquerque and paid $80,000 to exit
the lease December 1, 1996. The lease exit cost was expensed during the
unaudited nine months ended June 30, 1996. ASI is currently negotiating with
another party to lease space in Albuquerque.
Future minimum rental commitments on noncancellable operating leases (excluding
the Albuquerque administration and operations building) with remaining terms of
more than one year, including automatic renewals, are as follows at September
30, 1995:
<TABLE>
<S> <C>
1996 $ 870,000
1997 492,000
1998 541,000
1999 291,000
------------
$ 2,194,000
============
</TABLE>
-15-
<PAGE> 29
Noncancellable operating leases for certain premises include adjustments to
minimum rents for increases in the Consumer Price Index, for increases in
operating expenses and real estate taxes. The lease obligations for the
buildings in Albuquerque, Arlington and Richland are offset by subleases
totaling approximately $310,000 annually in fiscal 1995 and 1996 and $125,000
in fiscal 1997. The offsets are not reflected in the obligations above.
During fiscal years 1996 and 1995, ASI operated a minimum premium health
benefit plan under which it partially self- insured individual employee health
care claims. ASI's maximum liability for employees within the State of New
Mexico under the insurance arrangement is limited to $65,000 per individual per
year, up to a cumulative amount (approximately $1,000,000 for employees for
fiscal year 1995) based on a fixed premium per covered individual. Claims in
excess of ASI's maximum liability are insured by a health insurance carrier.
In accordance with the agreement between ASI and its health insurance
administrator on the insurance coverage, ASI maintains a cash trust account to
fund the cost of claims based on ASI's current estimated claims liability. The
health insurance administrator manages this trust account for ASI and it is not
reflected in the accompanying consolidated financial statements.
Several claims have been asserted against ASI in the ordinary course of
business. Management believes, based on the advice of counsel, that such
claims will not have a material adverse effect on the financial position or
operating results of ASI.
(11) BENEFIT PLAN:
ASI adopted a defined contribution retirement plan, as defined in section
401(k) of the Internal Revenue Code (IRC). The plan covers substantially all
full-time employees. Covered employees are permitted to make tax-deferred
contributions to the plan. Contributions by ASI are voluntary. ASI's
contributions to the plan totaled $138,760, $205,305 and $217,556 in fiscal
years 1995, 1994 and 1993, respectively. No contributions were made by ASI
during the unaudited nine months ended June 30, 1996. ASI has no plans to
terminate or suspend the Plan within the next year but may be required to merge
this Plan with another pursuant to the sale of all of ASI's stock to a third
party (see Note 14).
(12) DISPOSAL OF NET ASSETS OF SUBSIDIARIES:
During fiscal year 1994, ASI acquired Environmental Alternatives, Inc. (EAI)
for $600,000 cash and a note payable for $1,251,506 under the purchase method
of accounting. EAI provided surface cleaning technologies to the nuclear,
industrial and aerospace industries. The excess of the purchase price of
$1,851,506 over the net assets acquired resulted in goodwill in the amount of
$1,768,419 and certain other intangibles.
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<PAGE> 30
ASI's Board of Directors adopted a formal plan to dispose of the majority of
the net assets of EAI effective September 30, 1995. The disposal of the net
assets, which has been reflected in the accompanying consolidated financial
statements for the fiscal year ended September 30, 1995 consists of the
following:
<TABLE>
<S> <C>
Assets Disposed of:
Current assets $ (38,052)
Property, plant and equipment (965,453)
Goodwill (1,216,873)
Liabilities Disposed of:
Accrued expenses 419,506
Note payable 1,029,971
Capital lease obligations 215,701
-------------
Net Assets Disposed of (555,200)
Accrual For Settlement Costs (145,648)
-------------
Loss From Disposal of Net Assets $ (700,848)
=============
At September 30, 1995 remaining EAI assets and liabilities are as follows:
Receivables retained by ASI, net $ 342,772
Goodwill retained by ASI, net 465,070
Accounts payable retained by ASI (166,661)
Line-of-credit debt retained by ASI (224,928)
Accrued settlement cost retained by ASI (144,843)
</TABLE>
Revenues from EAI in fiscal years 1995 and 1994 were less than 5% of
consolidated total revenue for such periods. Except for the assets and
liabilities retained by ASI in the settlement, all assets of EAI were removed
from the consolidated balance sheet as of September 30, 1995.
During the past two years, ASI has acquired various environmental remediation
contracts as a result of knowledge and expertise gained from operation of EAI.
ASI continued to carry goodwill, with a balance of $465,070 at September 30,
1995, from the original acquisition of EAI representing ASI's estimate of the
future value of contracts acquired as a result of the EAI acquisition. This
goodwill was amortized over the future period estimated to be benefited, of 15
years. As part of the process of evaluating the potential sale of all of the
common stock of ASI and subsequent merger with another company (see Note 14),
ASI determined it would no longer market EAI advanced surface technologies.
Accordingly the remaining goodwill of $0.4 million was written off as of June
30, 1996 (unaudited).
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<PAGE> 31
(13) SUPPLEMENTARY INFORMATION RELATING TO STATEMENTS OF CASH FLOWS:
Supplementary information for the consolidated statements of cash flows is set
forth below:
<TABLE>
<CAPTION>
June 30, September 30,
------------------------ ---------------------------------------
1996 1995 1995 1994 1993
------------ ---------- ------------ ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash paid (received) during the year
for:
Interest expense $ 447,682 $ 569,798 $ 694,513 $ 674,129 $ 622,384
============ ========== ============ ============ ===========
Income taxes $ (1,283,372) $ (121,950) $ (121,950) $ 421,118 $ 867,124
============ ========== ============ ============ ===========
Change in market value of available-
for-sale investment of $18,000 and
($213,685) recorded in equity, net
of income tax effect of ($6,120)
and $85,475 in 1995 and 1994,
respectively $ - $ - $ (11,880) $ 128,210 $ -
============ ========== ============ ============ ===========
Treasury stock acquired through
relief of debt and related interest $ 102,000 $ - $ - $ - $ -
============ ========== ============ ============ ===========
Equipment acquired under new capital
lease obligations $ - $ 46,000 $ 46,000 $ 41,843 $ -
============ ========== ============ ============ ===========
Short-term debt incurred for
insurance premiums $ 230,839 $ 47,113 $ 36,265 $ 26,385 $
============ ========== ============ ============ ===========
</TABLE>
As discussed in Note 12, ASI disposed of certain assets of EAI during fiscal
1995 through a non-cash transaction.
(14) SALE OF ASI:
On September 11, 1996, the stockholders of ASI agreed to exchange all
outstanding shares of ASI for 450,000 shares of Commodore Applied Technologies,
Inc. (Commodore). ASI would then be merged into CXI-ASI Acquisition Corp.
(CXI-ASI), a wholly-owned subsidiary of Commodore. This transaction is
intended to qualify as a tax-free reorganization pursuant to the Internal
Revenue Code. This transaction, which was effective October 1, 1996, was
subject to various conditions, including requiring the Chairman of ASI to enter
into an employment agreement, escrowing of certain of the Commodore shares
exchanged for the ASI shares for a period of eighteen months following closing
to cover warranties and representations made by the selling stockholders of
ASI, and ASI entering into a loan agreement acceptable to Commodore and
CXI-ASI.
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