<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
FORM 10-K/A
---------------------------------------------
AMENDMENT NO. 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission File Number 0-10054
COMMODORE ENVIRONMENTAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 87-0275043
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
150 EAST 58TH STREET, NEW YORK, NEW YORK 10155
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (212) 308-5800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock $.01 Par Value None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements contained incorporated by reference in part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
As of March 15, 1996, (a) 57,348,953 shares of the Company's Common
Stock were outstanding; (b) 23,090,647 shares of Common Stock were held by
non-affiliates; and (c) the aggregate market value of shares of Common Stock
held by non-affiliates was $20,204,316 based upon the closing bid price of $.875
share on March 15, 1996.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
THE COMPANY
Commodore Environmental Services, Inc. (the "Company" or "Commodore")
was reincorporated in the State of Delaware in August 1988. The Company's
predecessor was Commodore Resources Corporation. The current principal business
of the Company is holding interests in commercial real estate properties and the
development of technologies for the destruction or neutralization of hazardous
materials.
For the year ended December 31, 1995, real estate related activities
accounted for approximately 99% of the Company's revenues from operations, 1%
related to environmental services, and oil and gas and mining activities
accounted for less than one percent of the Company's revenues from continuing
operations, although the Company did acquire certain working interests in oil
and gas properties in 1991 and 1994. In addition, in 1993, the Company acquired
two companies which are engaged in the research, development and marketing of
innovative technologies for the destruction of hazardous materials. The Company
is concentrating its efforts on commercial opportunities, partnering and
acquisitions necessary to bringing to market the new technologies. See
"Acquisition of Remediation Businesses" for a description of the acquisitions.
See "Item 2 - Properties" for a description of the Company's real estate
properties and its remaining oil and gas properties.
The Company's principal executive offices are located at 150 East 58th
Street, Suite 3400, New York, New York 10155. Its telephone number is (212)
308-5800.
ACQUISITION OF REMEDIATION BUSINESSES
On December 22, 1993, the Company acquired 90.05% of the issued and
outstanding shares of voting common stock of each of Commodore Laboratories,
Inc. f/k/a A.L. Sandpiper Corporation ("Commodore Labs") and subsidiary and CFC
Technology, Inc. ("CFCT"). Commodore Labs and CFCT are the owners of certain
technologies relating to the destruction of polychlorinated biphenyls ("PCBs"),
dioxins and chlorofluorocarbons ("CFCs").
Commodore Labs was formed on July 1, 1981 to engage in the research,
development, and marketing of innovative technologies for the destruction of
hazardous materials. In 1990, Commodore Labs formed CFCT. Commodore Labs
developed, and in most cases acquired patents for, a wide range of technologies
for the destruction or remediation of hazardous wastes (the "Technology"). At
the present time, virtually all activities of Commodore Labs and CFCT are
concentrated on completing the laboratory development and design, construction
and demonstration of pilot scale equipment for application of the Technology. In
the future, Commodore Labs and CFCT are expected to continue to perform research
and development activities.
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Commodore Labs and CFC have had no commercial operations since they
were formed. Although prototype equipment and processes have been developed and
are continually being tested, management of the Company cannot project when, if
ever, commercialization of the Technology may commence. As of December 31, 1995,
Commodore Labs had spent approximately $7,000,000 in research and development
costs relating to the Technology, and is projected to spend approximately
$2,500,000 on research and development in 1996.
In connection with the closing of the Commodore Labs acquisition, in
exchange for 90.05% of the outstanding common stock of Commodore Labs, the
preacquisition holders of Commodore Labs common stock received shares of
Commodore Labs non-voting series "B" preferred stock and 5-year warrants to
purchase an aggregate of 3,000,000 shares of common stock, $.01 par value, of
the Company (the "Common Stock"), at an exercise price of $.05 per share. Albert
Abel ("Abel"), the President of Commodore Labs, retained ownership of 9.95% of
Commodore Labs voting common stock and received 1,000,000 shares of Common
Stock. In addition, Commodore issued to Abel and Allison L. Augur, Jr.,
("Augur"), the President of CFC, non-qualified stock options to purchase an
aggregate of 1,500,000 shares of Common Stock at an exercise price of $.10 per
share, which options vest at the rate of 20% of the shares subject to such
options per year. At the date of acquisition, Commodore Labs had 977 shares of
its series "A" preferred stock, par value $1,000, which was not exchanged as
part of the acquisition. In December, 1994, the Company issued 1,534,709 shares
of its Series B Preferred Stock in exchange for the 977 shares of series "A" of
Commodore Labs preferred and 557,709 of 577,081 of the shares of Commodore Labs
Series "B" Preferred Stock described above.
Upon the closing of the CFCT acquisition, Commodore (i) obtained
ownership of 90.05% of the outstanding shares of CFCT common stock, with the
remaining 9.95% of such common stock being held by Abel, (ii) issued 750,000
shares of its common stock to Augur, and (iii) paid the aggregate sum of $70,000
to Abel and Augur.
Commodore's purchase price at the time of the acquisitions of Commodore
Labs and CFCT exceeded the historical cost of the net assets purchased by
$2,457,201. This excess purchase price was previously recorded by Commodore and
reported in Commodore's 1993 and 1994 Annual Reports on Form 10-K as goodwill
and was being amortized over 15 years. At the request of a regulatory agency,
Commodore has reclassified the goodwill as in-process technology, in as much as
the technology feasibility acquired had not yet been established and at the time
of the acquisition there was no further alternative use. Accordingly, in this
Annual Report, Commodore is reflecting the in-process technology of $2,457,201
charged as an expense to operations effective January 1, 1994, rather than
reporting it as capitalized goodwill to be amortized over 15 years.
In connection with the closing, Commodore entered into a license
agreement with Commodore Labs and a sublicense agreement with CFCT pursuant to
which the right to utilize and commercialize all patents, confidential
information and know-how owned by Commodore Labs and/or licensed by Commodore
Labs to CFCT was acquired by Commodore. These agreements provide that royalties
of 5% of the revenues generated by Commodore from the Technology will be payable
to Commodore Labs and CFCT, allocated pro rata to the particular technology used
to generate the revenue.
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POLYCHLORINATED BIPHYNALS (PCBs) AND DIOXINS
Prior to environmental restrictions, PCBs were used in a number of
applications, including flame-retardant additives in resins and plastics, in
formulas for paints and inks, as additives for thermally sensitive lubricants,
and as dielectric fluids in transformers and resistors. Dioxins generally
consist of herbicides, and as by-products from the use of chlorine in
manufacturing and from the incineration of polyvinyl chloride (PVC) materials in
trash incinerators. The United States Environmental Protection Agent ("EPA") has
determined that PCBs and dioxins are toxic and present a general hazard to the
environment and to human life. As a result, there appears to be a growing market
for the destruction and/or neutralization of these contaminants.
Commodore Labs has developed and intends to commercialize its patented
process known as AGENT 313(tm). AGENT 313 is based upon solvated electron
chemistry, which mixes solvents such as anhydrous liquid ammonia with various
base metals to produce a solvated electron solution. Based on the results of
extensive testing by Commodore Labs, AGENT 313 appears capable of effectively
treating and decontaminating soils and other materials, including sludges,
sediments, oils and other hydrocarbon liquids, metals and porous and non-porous
structures and surfaces, by destroying PCBs, pesticides, dioxins, chlorinated
substances, chemical and biological phosphates and other toxic contaminants to
levels greater than 99.9%. Based upon test results, the Company believes that
AGENT 313 is also capable of neutralizing chemical weapons materials and warfare
agents and of concentrating certain radioactive wastes for more effective
disposal.
On March 15, 1996, the EPA issued to the Company a National Permit for
Alternate Destruction, which will allow the Company to use AGENT 313 on-site to
treat PCB-contaminated soil and other contaminated elements, such as sludges and
sediments. Based on currently published EPA national operating permits, the
Company believes that it possesses the only non-thermal PCB treatment technology
permitted under the EPA's Alternate Destruction Technology Program.
Most of the current treatment and disposal methods involve air
pollution emission, transportation, treatment and safety risks, and may not be
permanent solutions. In addition, certain of these treatment and disposal
methods result in large volumes of residual waste which may require further
treatment prior to disposal. As a result, many of these methods are being met
with increasing public resistance and more stringent regulations.
The Company believes that AGENT 313 is more effective than incineration
and other destruction methods for toxic substances, in that:
* it does not emit toxic fumes into the atmosphere, as is
sometimes the case with thermal or incineration methods;
* the Company's equipment is portable and can be moved directly
to the contaminated site, substantially reducing the risk of
off-site contamination;
* the Company's equipment utilizing AGENT 313 can be operated in
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various numbers of units and configurations to treat
contaminated materials in widely varying amounts;
* In tests conducted by Geomet, Inc. (one of only eight surety
laboratories licensed by the United States government to
conduct tests on live chemical warfare agents), AGENT 313
neutralized or destroyed all chemical weapons material and
warfare agents on which it was tested, consisting of all known
chemical weapons material and warfare agents in the United
States stockpile, and Lewisite (the primary chemical weapons
material and warfare agent of the former Soviet Union);
* the reaction time of AGENT 313 is under three minutes per load
of soils and other materials, as compared to between four and
six hours reaction time required for alternative processes,
such as thermal desorption and chemical treatment;
* the Company's equipment can be installed and operated inside
industrial plant facilities, thereby immediately treating
hazardous wastes as part of the manufacturing process;
* approximately 95% of the solvent used by AGENT 313 can be
recovered and reused for additional applications; and
* as a by-product when treating soils, AGENT 313 yields
nitrogen-enriched soils that can be reused on-site, avoiding
replacement and post-treatment costs of off-site disposal.
The Environmental Business Journal estimates that the annual global
market for all environmental products and services was approximately $420
billion in 1995 and is expected to reach $500 billion by 2000. The Company
estimates that the United States market for the destruction of PCBs, dioxins,
chlorinated substances and other toxic contaminants, including soils and water,
industrial and chemical facilities, gas pipelines and other contaminated areas,
is approximately $100 billion. Additionally, the Chemical Weapons Convention,
consisting of most of the world's nations, has adopted a treaty which mandates
the worldwide destruction of all chemical weapons and warfare agents by 2006.
Based upon reports furnished by the United States Department of Defense, the
United States military and other government agencies have estimated the
expenditure of approximately $12 billion over the next ten years for the
destruction of domestic stockpile and non-stockpile chemical weapons and
chemical warfare agents. The projected international market for such services
over the same period is estimated at approximately $50 billion.
The Company's business strategy to commercialize AGENT 313 is to
establish collaborative joint working and marketing arrangements with
established engineering and environmental service organizations. The Company
intends to enter into these relationships as a principal (i) in individual
projects, in projects involving specific applications throughout the
marketplace, or in projects involving specific industries, or (ii) as licensing
arrangements with third parties for their use of AGENT 313 in specific
industries or applications. The Company is currently involved in several
demonstration projects and is negotiating potential working arrangements with
several companies, including Teledyne Brown Engineering, Inc. and Sverdrup
Corporation.
Although the Company believes that it will be able to enter into one or
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more definitive agreements with collaborative partners and be awarded contracts
to use AGENT 313 in significant projects, there can be no assurance that any of
these discussions will result in collaborative agreements or contract awards.
Even if such contracts are awarded, there is no assurance that AGENT 313 will
perform successfully on a large-scale commercial basis or that it will be
profitable to the Company. There can also be no assurance that AGENT 313 will
not be superseded by other competing technologies.
CHLOROFLUOROCARBONS (CFCs)
CFCs are a class of chemicals that have properties that have made them
attractive as refrigerants, aerosol propellants, fire retardants, foam-blowing
agents and cleaning compounds. On the other hand, they present serious
environmental problems, as CFCs have been confirmed as a cause of the depletion
of the Earth's ozone layer.
These circumstances have prompted worldwide efforts to eliminate CFC
manufacture and use, in favor of ozone-safe alternatives. However, this
transition will take a decade or more to be completed worldwide. In 1987,
delegates from all of the industrialized countries in the world met in Montreal
to draft the first global environmental law concerning the cutback and eventual
halt to production of all the ozone-depleting chemicals that the world was
using. It provides that CFCs will be banned from production worldwide by the end
of 1995. After 1995, when CFC production ceases, the only CFC refrigerants which
will be available will be those recovered from an operating system, i.e.,
recycled.
It is estimated that for the developed world, about 350 million pounds
of CFCs are needed to service existing equipment each year. Even more
significant, somewhere between one billion and two billion pounds will be needed
by the time that equipment is retired or converted to use other refrigerants
about a third of the way into the 21st century.
Presently, there is only one means of preserving the existing CFC
stocks to service ongoing needs. That is to remove the material from the
refrigeration or air conditioning unit, remove contaminants (such as moisture,
acid, oil or chloride particulates) to established industry purity standards,
and then return the reclaimed material to use, either in the same system or in
another one. CFC reclaimers provide this service.
While providing a valuable service, the reclaiming industry cannot fill
one urgent need. That need is for a means of returning to productive use
mixtures of refrigerants that have become cross-contaminated during use. One
approach is to blend pure refrigerant into the mixture until the contaminant
component refrigerant is driven below the 0.5% level as mandated by industry
standards. This is only economical, however, if the mixed refrigerant has small
percentages of the offending contaminate refrigerant. If the contaminant
percentage is too high, the cost of adding virgin refrigerant is extremely
uneconomical. To further exacerbate the situation, there will be no more virgin
CFCs available to blend after 1996. Presently, most mixed and contaminated
refrigerants are being stockpiled pending an economic solution.
Commodore has developed and patented a process which, in test
applications of limited quantities of CFCs, has been able to separate mixtures
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of refrigerants so that they can be returned to productive use at purity
levels meeting industry standards.
An example of the benefit of this process involves automobile air
conditioners. EPA econometrics models predict that by 1996, there will be over
120,000,000 cars in the U.S. alone that will still rely on R12 as the
refrigerant in their systems. Based on limited test results to date, it appears
that Commodore's process can provide the required stocks economically through
the patented separation process.
A dilemma also arises when parties have to decide what to do with their
CFC stockpiles (banks) and daily usage waste streams that can not be recycled
and must be destroyed. The current capacity of approved destruction technologies
cannot destroy the anticipated stockpiles of ozone-depleting substances within a
reasonable time frame. There exists a need to expand the options available for
destruction/transformation technologies to ensure that the disposal of
stockpiles is performed in an environmentally acceptable manner. Commodore has
demonstrated, on a limited trial basis, the ability to destroy a number of the
high ozone-depleting refrigerants to the required levels of destructive
efficiency. This technology has not, however, been utilized on a commercial
scale.
Commodore's CFC separation and destruction technologies may be a
solution to a rapidly growing worldwide problem for which an economic and
effective alternative is not otherwise known to be available. The Commodore
process employs fundamental chemical principles in novel combinations to deal
with two aspects of the CFC problem:
1. On a limited trial basis, the technology has separated
mixtures of CFCs that have become cross-contaminated during
use, thereby returning acceptable purity, high-valued CFCs to
economic and productive use, and
2. The technology has also destroyed low-value CFCs, and mixtures
thereof, that do not merit recycling. This is done in a
non-thermal process, which is believed to have considerable
cost advantage over alternative destruction processes.
To date, the separation and destruction technologies have proven
effective in test applications of limited quantities of CFCs. Commodore hopes to
place the technologies into commercial-scale use and application beginning in
1996, although there can be no assurance that this will occur.
LIABILITY INSURANCE
In July 1987, the Company established Harvest American Insurance
Company ("Harvest"), a wholly-owned subsidiary of the Company, licensed by the
State of Vermont as a "captive" insurance company. Harvest issued "occurrence"
based insurance policies to each of the Company's former asbestos abatement
subsidiaries, but not to any other persons or entities. An occurrence-based
policy insures against claims arising at any time in the future based upon
events which occurred while the policy was in effect. The policies were in
effect from July 1987 through January 1989. The operating subsidiaries of the
Company paid premiums to Harvest based upon a percentage of sales and had
coverage through January 1989. Beginning in January 1989, in response to greater
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availability of "occurrence type" insurance, the subsidiaries obtained asbestos
abatement-related general liability insurance from unrelated insurance
companies. Harvest no longer issues new policies. The maximum exposure under the
outstanding policies is $5,000,000 in the aggregate.
In December 1994, the Vermont Department of Banking and Insurance (the
"Department") and the Company entered into a Settlement Agreement (the
"Agreement") with respect to an order served by the Department against Harvest
in November 1991. The Agreement required the Company to fund Harvest an
additional $750,000 over an 18-month period. Those funds have been and will be
deposited into a Harvest interest-bearing account. As of December 31, 1995,
Harvest had $792,900 in an interest-bearing account and an amended $4,514,683
intercompany demand note (the "Company Note") made to the order of Harvest by
the Company. The Company funded an additional $150,000 on January 15, 1996 and
will fund another $100,000 on July 15, 1996 as per the Agreement. The Department
and/or Harvest have the right use proceeds from the reserve account to purchase
reinsurance in order to eliminate all or part of the insurance risk.
In addition, the Company will indemnify and defend Harvest against any
claims made against Harvest. There is currently one claim relating to a fire
which occurred at a job site which Harvest insured. This claim is currently
being investigated and defended by Harvest. See Item 3 - Legal Proceedings.
In 1994, the Company had an independent actuary evaluate the loss
reserve required as of December 31, 1994. The actuary determined that a loss
reserve of $994,000 is adequate in connection with the policies issued by
Harvest. The Company thereby maintains its loss reserve at $994,000.
Finally, under the terms of the 1990 agreements pursuant to which the
Company disposed of its former asbestos abatement subsidiaries, Hesco
Environmental Safety Co., Inc. and AWI Environmental Services, Inc.
(respectively, the "Hesco Agreement" and the "Allwash Agreement"), the Company
has agreed to indemnify Hesco and Allwash for failures of Harvest to pay amounts
payable under Harvest insurance policies, except that each of such indemnified
parties (i) shall bear the first $25,000 of liability for each claim against
such party, respectively, for which Harvest fails to make payment (as identified
above), up to a maximum of $250,000 for all such claims against such party,
respectively, and (ii) shall bear 20% of any such claim against such party,
respectively, payable by Harvest, above the $25,000 deductible referred to in
subprovision (i), for which it is entitled to indemnification under the Hesco
Agreement or Allwash Agreement, up to a maximum of $250,000 for any single claim
and up to a maximum of $500,000 for such claims against such party,
respectively, in the aggregate.
EMPLOYEES
The Company had twenty-one employees as of March 15, 1996. None of such
employees are covered by collective bargaining agreements, and the Company's
relations with its employees are believed to be satisfactory.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED Year Ended Year Ended Year Ended Year Ended
DECEMBER December December December December
31, 1995 31, 1994 31, 1993 31, 1992 31, 1991
<S> <C> <C> <C> <C> <C>
Revenue $ 1,089,000 $ 1,848,000 $ 803,000 $ 1,075,000 $ 871,000
Costs and Expenses 4,058,000 5,615,000 3,266,000 954,000 1,084,000
Net Income (Loss) (2,969,000) (3,767,000) (2,463,000) 121,000 (213,000)
Net Income (Loss) Per
Share (.05) (.07) (.05) .003 (.005)
Dividends Per Share -- -- -- -- --
Total Assets 5,321,000 10,776,000 15,129,000 11,418,000 11,094,000
Long-Term Obligations
(including current
portions) 4,000,000 5,735,000 8,243,000 4,292,000 4,408,000
Redeemable Preferred
Stock (including
accrued interest) 0 0 567,000 517,000 468,000
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1994
Commodore's purchase price at the time of the acquisitions of Commodore
Labs and CFCT exceeded the historical cost of the net assets purchased by
$2,457,201. This excess purchase price was previously recorded by Commodore and
reported in Commodore's 1993 and 1994 Annual Reports on Form 10-K as goodwill
and was being amortized over 15 years. At the request of a regulatory agency,
Commodore has reclassified the goodwill as in-process technology, in as much as
the technology feasibility acquired had not yet been established and at the time
of the acquisition there was no further alternative use. Accordingly, in this
Annual Report, Commodore is reflecting the in-process technology of $2,457,201
charged as an expense to operations effective January 1, 1994, rather than
reporting it as capitalized goodwill to be amortized over 15 years.
Total revenues for the year ended December 31, 1995 were $1,089,000 as
compared with $1,848,000 for the year ended December 31, 1994. The decrease in
total revenues is the result of the following:
- - Revenues in 1994 included an $836,000 adjustment to the insurance loss
reserve which was not adjusted in 1995, and the Company recovered a bad
debt in 1994 of $148,000 relating to an estimate of a mortgage
receivable collected in 1994. In 1995, the Company realized a gain on
the collection of a mortgage receivable of $573,000. Revenues from 1995
also included interest income from mortgage receivables of $468,000 as
compared to $818,000 in 1994, a decrease of $350,000. The decrease was
due to the collection of two mortgage receivables, one in December 1994
and one in October 1995. The Company expects a minimal amount of
revenue to be generated by interest from mortgages in the future.
Costs and expenses for the year ended December 31, 1995 were $4,058,000
as compared with $5,615,000 for the year ended December 31, 1994. The analysis
of costs and expenses is as follows:
- - In 1994 the Company charged to expense $2,457,201 of in-process
technology which had been acquired in the acquisitions of Commodore
Labs and CFCT.
- - In 1995, the Company incurred approximately $2,136,000 in research and
development costs, of which $159,000 was capitalized as equipment costs
and the balance of $1,990,000 was expensed. In 1994, the Company
incurred approximately $1,747,000 in research and development costs, of
which $710,000 was capitalized as equipment costs and the balance of
$1,037,000 was expensed.
- - In 1995, consultants were hired as full-time employees and assigned to
the research and development subsidiaries. The costs related to such
personnel are now being included in research and development expense.
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- - In 1995, general and administrative expenses increased from $1,358,000
to $1,517,000, an increase of $159,000. The Company incurred an
additional $135,000 in travel-related expenses which were attributable
to support ongoing marketing of the Technology and the seeking of new
business opportunities. The Company also incurred additional insurance
expense of $64,000, relating to equipment and other operating issues.
- - In 1995, interest expense decreased from $763,000 for the year ended
December 31, 1994 to $550,000 for the year ended December 31, 1995. The
decrease is the result of the satisfaction of a mortgage payable in the
fourth quarter of 1995. The decrease in interest expense partially
offset the other cost increases noted above.
The net loss for the year ended December 31, 1995 was $2,969,000, as
compared to a net loss for the year ended December 31, 1994 of $3,767,000. The
difference is due to the write-off of in-process technology, the decrease in
total revenues and the increase in expenses as noted above.
Fiscal Year Ended December 31, 1994 Compared to Fiscal Year Ended December 31,
1993
Total revenues for the year ended December 31, 1994 were $1,848,000 as
compared with $803,000 for the year ended December 31, 1993. The increase in
total revenues is the result of the following:
- - In 1994, the Company had an actuarial valuation performed on its
captive insurance company in order to determine an adequate reserve. As
a result of the valuation, it was determined that the reserve was
overaccrued by $836,000. Because no asbestos abatement claims have been
made to date and management believes the probability of a claim being
reported is remote, management has reduced the reserve to agree with
the actuary's findings and recognized $836,000 in revenue in 1994.
- - Interest income from commercial real estate activities increased in
1994 from that in 1993 by approximately $326,000. At December 1993, the
aggregate value of a certain mortgage receivable approximated market
value of the underlying real estate security. In 1994, the Company
received cash and recognized interest income to the extent of the
contractual amount of the mortgage. In 1993, the interest income was
offset by a realization allowance since the receivable was in excess of
the market value of the underlying real estate property.
- - In 1993, the Company realized $125,000 of revenue on a note receivable
that was theretofore deemed unrecoverable.
Costs and expenses for the year ended December 31, 1994 were $5,615,042
as compared with $3,265,000 for the year ended December 31, 1993. The analysis
of costs and expenses is as follows:
- - In 1994, the Company charged to expense $2,457,201 of in-process
technology which had been acquired in the acquisitions of Commodore
Labs and CFCT.
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- - In 1994, the Company incurred approximately $1,747,000 in research and
development costs, of which $710,000 was capitalized as equipment costs
and the balance of $1,037,000 was expensed. Research and development
costs were insignificant in 1993, as the acquisitions of Commodore Labs
and CFT were not completed until December 22, 1993.
- - During 1993, the Company increased its receivable and non-performing
asset allowance by $1,970,665. This non-cash expense was made to adjust
the carrying value of its mortgage and other related receivables to be
approximately that of the underlying security. The Company evaluates
periodically the underlying security of the mortgage notes and other
receivables. An independent appraisal was obtained on some of the
underlying security in 1993, as all underlying security has appraisals
performed on a rotating basis. Although the Company is not looking to
the underlying security to recover the value of the recorded assets,
the Company believes that it is prudent to maintain the value of the
receivables at the estimated fair market value of the underlying
assets. The writedown of $1,970,665 was due to the poor economic
conditions in the real estate industry and resulting depressed real
estate values. The non-recurrence of this item in 1994 was
substantially offset by the increase in research and development
expenses noted above, and by the increases in travel and interest
expenses noted below.
- - The Company incurred $214,000 of consulting expense in 1993, of which
$165,000 was paid to a related party. In 1994, the consultants were
hired as full-time employees and assigned to the research and
development subsidiaries. The costs related to such personnel are now
being included in research and development expense. Additional
consultants were hired in 1994 at a cost of approximately $50,000.
- - In 1994, the Company incurred travel and related expenses of
approximately $220,000 in connection with the obtaining of overseas
financing and research and development activities. In addition, the
Company incurred $170,000 in salaries and wages and $164,000 in
professional fees relating to research and development activities which
did not occur in 1993.
- - During 1993, the Company was audited by the State of New York for tax
returns filed in previous years. The Company paid interest and
additional taxes of approximately $80,000, which was expensed in 1993.
- - Interest expense increased from $443,000 for the year ended December
31, 1993 to $763,000 for the year ended December 31, 1994. The increase
is the result of an increase in long-term debt.
The net loss for the year ended December 31, 1994 was $3,767,000, as
compared to a net loss for the year ended December 31, 1993 of $2,463,000. The
difference was due primarily to the write-off of in-process technology and the
increase in total revenues noted above.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $793,000 on December 31,
1995 as compared to a working capital deficit of $78,000 on December 31, 1994.
The Company incurred approximately $2,136,000 in research and
development costs associated with the Technology in 1995. The Company
anticipates that it will incur research and development costs of approximately
$2,500,000 in 1996, given its present level of activities. The Company is
currently in the process of negotiating a line of credit with a commercial bank,
to enable the Company to continue its research and development efforts and
paying ongoing expenses; however, the Company does not have a commitment for any
financing, and there can be no assurance as to whether or when any financing can
be obtained. The Company's continued viability is dependent upon meeting its
cash requirements during 1996. Currently, a corporation owned by the majority
shareholder has been advancing the Company funds to continue to meet its
obligations. In the event that the Company is not successful in obtaining third
party financing, its continued existence will be totally dependent on the
majority shareholder's ability to fund the Company. As of March 26, 1996, the
Company is indebted to the majority shareholder's corporation for $1,875,000.
Harvest American Insurance Company
In July 1987, the Company established Harvest, a wholly-owned
subsidiary of the Company, licensed by the State of Vermont as a "captive"
insurance company. Harvest issued "occurrence" based insurance policies to each
of the Company's former asbestos abatement subsidiaries, but not to any other
persons or entities. An occurrence-based policy insures against claims arising
at any time in the future based upon events which occurred while the policy was
in effect. The policies were in effect from July 1987 through January 1989. The
operating subsidiaries of the Company paid premiums to Harvest based upon a
percentage of sales and had coverage through January 1989. Beginning in January
1989, in response to greater availability of "occurrence type" insurance, the
subsidiaries obtained asbestos abatement-related general liability insurance
from unrelated insurance companies. Harvest no longer issues new policies. The
maximum exposure under the outstanding policies is $5,000,000 in the aggregate.
In December 1994, the Department and the Company entered into a
Settlement Agreement (the "Agreement") with respect to an order served by the
Department against Harvest in November 1991. The Agreement requires the Company
to fund Harvest an additional $750,000. Those funds have been and will be
deposited into a Harvest interest-bearing account. As of December 31, 1995,
Harvest had $792,900 in an interest-bearing account and an amended $4,514,683
intercompany demand note (the "Company Note") made to the order of Harvest by
the Company. The Company funded an additional $150,000 on January 15, 1996 and
will fund another $100,000 on July 15, 1996 as per the Agreement. The Department
and/or Harvest have the right use proceeds from the reserve account to purchase
reinsurance in order to eliminate all or part of the insurance risk.
In addition, the Company will indemnify and defend Harvest against any
claims made against Harvest. There is currently one claim relating to a fire
13
<PAGE> 14
which occurred at a job site which Harvest insured. This claim is currently
being investigated and defended by Harvest. See Item 3 - Legal Proceedings).
In 1994, the Company had an independent actuary evaluate the loss
reserve required as of December 31, 1994. The actuary determined that a loss
reserve of $994,000 is adequate in connection with the policies issued by
Harvest. The Company thereby maintains its loss reserve to $994,000.
Finally, under the terms of the Hesco Agreement and the Allwash
Agreement, the Company has agreed to indemnify Hesco and Allwash for failures of
Harvest to pay amounts payable under Harvest insurance policies, except that
each of such indemnified parties (i) shall bear the first $25,000 of liability
for each claim against such party, respectively, for which Harvest fails to make
payment (as identified above), up to a maximum of $250,000 for all such claims
against such party, respectively, and (ii) shall bear 20% of any such claim
against such party, respectively, payable by Harvest, above the $25,000
deductible referred to in subprovision (i), for which it is entitled to
indemnification under the Hesco Agreement or Allwash Agreement, up to a maximum
of $250,000 for any single claim and up to a maximum of $500,000 for such claims
against such party, respectively, in the aggregate.
IMPACT OF INFLATION
Management does not believe that inflation is likely to have a
significant impact on the results of the Company's current operations.
14
<PAGE> 15
ITEM 8. LIST OF FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The following consolidated financial statements of Commodore
Environmental Services, Inc. and subsidiaries are included as Item 8 and can be
found on pages F-1 through F-28, inclusive:
Consolidated Balance Sheets - December 31, 1995 and 1994.
Consolidated Statements of Operations - Years ended December 31, 1995,
1994 and 1993.
Consolidated Statements of Stockholders' Equity - Years ended December
31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flow - Years ended December 31, 1995,
1994 and 1993.
Notes to Consolidated Financial Statements.
The following consolidated financial statement schedule of Commodore
Environmental Services, Inc. and subsidiaries is included in this Item 8:
Schedule II - Valuation and Qualifying Accounts
All other 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.
15
<PAGE> 16
COMMODORE ENVIRONMENTAL
SERVICES, INC.
DECEMBER 31, 1995, 1994 AND 1993
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
COMMODORE ENVIRONMENTAL SERVICES, INC.
We have audited the consolidated balance sheet of Commodore
Environmental Services, Inc., and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the three years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 statements 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 Commodore
Environmental Services, Inc., and subsidiaries at December 31, 1995 and 1994,
and the results of their operations and their cash flows for the three years
then ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
P, the Company's significant operating losses, and deficits in working capital
and retained earnings raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in note P. The accompanying consolidated financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
F-1
<PAGE> 18
Our audit, referred to above, also included the financial schedule
listed in answer to item 14(a)(2). In our opinion, such financial schedule
present fairly the information required to be set forth therein.
The Company established a captive insurance subsidiary in July, 1987,
for the purpose of providing liability insurance coverage to the environmental
services subsidiaries of the Company for asbestos abatement site work performed
during the period July, 1987 to January, 1989. The accompanying financial
statements at December 31, 1995 and 1994 reflect a reserve of $994,000 to offset
possible future claims. As discussed in note O, the subsidiary does not have
sufficient experience to accurately determine the estimate of possible claims
which may be filed. Accordingly, the financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
TANNER & CO.
Salt Lake City, Utah
February 6, 1996, except for notes Q and R
which are dated August 7, 1996
F-2
<PAGE> 19
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash (note B) $ 36,189 3,011,423
Certificates of deposit restricted (note B) 50,000 50,000
Other receivable 39,561 39,561
Notes and advances to related parties (note N) 7,500 8,544
Inventories (note B) 45,572 --
Prepaid assets 25,000 --
Restricted cash (note B) 1,792,900 291,622
------------ ----------
Total current assets 1,996,722 3,401,150
------------ ----------
Receivables, net (notes B, D, and H) 303,517 4,683,290
Furniture and equipment less accumulated
depreciation of $140,460 and $92,586
(note B) 1,053,983 715,233
Other investments (note F) 356,892 356,892
Note receivable from related party (note N) 125,000 125,000
Nonperforming assets (note E) 911,862 911,862
Other assets (notes B and G):
Deferred financing costs, net 288,000 384,000
Deferred acquisition costs, net 45,144 90,292
Patent costs, net 205,898 82,466
Other 33,600 25,556
------------ ----------
572,642 582,314
------------ ----------
$ 5,320,618 10,775,741
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 669,887 1,039,179
Payables to related parties (note N) 1,085,490 1,294,829
Current portion - long-term debt (note H) -- 151,462
Insurance loss reserve (note O) 994,000 994,000
------------ -----------
Total current liabilities 2,749,377 3,479,470
------------ -----------
Bonds payable (note I) 4,000,000 4,000,000
Long-term debt (note H) 1,583,175
Commitments and contingencies (notes M and O) -- --
Stockholders' equity (note L):
Preferred stock, par value $.01 per share,
authorized 10,000,000 shares, issued
and outstanding 4,534,709 shares and
4,434,709 shares 45,347 44,347
Common stock, par value $.01 per share,
authorized 100,000,000 shares, issued
56,768,953 shares and 56,406,687
shares 567,689 564,067
Additional paid-in capital 19,209,445 19,386,555
Retained deficit (21,225,927) (18,256,560)
------------ -----------
(1,403,446) 1,738,409
Less 506,329 shares of treasury stock,
at cost (25,313) (25,313)
------------ -----------
Total stockholders' equity (1,428,759) 1,713,096
------------ -----------
$ 5,320,618 10,775,741
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 20
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Income from commercial
real estate activities (notes B and D) $ 1,041,366 818,336 649,141
Income from refrigerant technology services 2,901 -- --
Interest income 44,445 46,464 28,360
Bad debt recovery (notes D and E) -- 147,545 125,000
Other income (note O) -- 835,922 --
----------- ---------- ----------
Total revenues 1,088,712 1,848,267 802,501
----------- ---------- ----------
Costs and expenses:
Research and development 1,990,395 1,036,892 --
In-process technology acquired -- 2,457,201 --
General and administrative:
Salaries and wages 393,138 362,918 193,200
Travel 356,901 221,979 --
Amortization 78,436 50,907 --
Rent (notes K and N) 126,992 97,829 65,789
Professional fees 122,497 240,721 76,867
Insurance 121,386 57,488 19,128
Consulting -- 50,443 214,000
Other 318,434 275,675 281,983
Increase in receivable realization
allowance -- -- 1,970,665
Interest 549,900 762,989 443,402
----------- ---------- ----------
Total expense 4,058,079 5,615,042 3,265,034
----------- ---------- ----------
Net loss before income taxes (2,969,367) (3,766,775) (2,462,533)
Income tax expense (note J) -- -- --
----------- ---------- ----------
Net loss $(2,969,367) (3,766,775) (2,462,533)
=========== ========== ==========
Net loss per share (note B) $ (.05) (.07) (.05)
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 21
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
PREFERRED COMMON COMMON
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
STOCK PAR STOCK PAR PAID-IN RETAINED HELD IN
SHARES VALUE SHARES VALUE CAPITAL DEFICIT TREASURY
--------- --------- ------- ----- ---------- -------- ---------
<S> <C> <C> <S> <C> <C> <C> <C>
Balance, January 1, 1993 -- -- 46,536,687 465,367 15,535,698 (12,027,252) (25,313)
Issuance of common stock
for services -- -- 7,300,000 73,000 2,000 -- --
Issuance of common stock for
investment in subsidiary -- -- 1,750,000 17,500 -- -- --
Issuance of preferred stock
for cash 925,000 $ 9,250 -- -- 915,750 -- --
Dividends on preferred stock -- -- -- -- (6,514) -- --
Dividends on redeemable
preferred stock -- -- -- -- (49,500) -- --
Net (loss) -- -- -- -- -- (2,462,533) --
--------- ------- ---------- ------- ---------- ----------- -------
Balance, December 31, 1993 925,000 9,250 55,586,687 555,867 16,397,434 (14,489,785) (25,313)
Issuance of preferred stock
less offering costs for cash 1,975,000 19,750 -- -- 1,595,250 -- --
Exchange of preferred stock for
preferred stock of subsidiary 1,534,709 15,347 -- -- 1,519,362 -- --
Issuance of common stock -
exercise of options -- -- 820,000 8,200 4,000 -- --
Issuance of common stock options -- -- -- -- 25,000 -- --
Dividends on preferred stock -- -- -- -- (143,623) -- --
Dividends on redeemable
preferred stock -- -- -- -- (10,868) -- --
Net (loss) -- -- -- -- -- (3,766,775) --
--------- ------- ---------- ------- ---------- ----------- -------
Balance, December 31, 1994 4,434,709 44,347 56,406,687 564,067 19,386,555 (18,256,560) (25,313)
Issuance of preferred stock
less offering costs for cash 100,000 1,000 -- -- 99,000 -- --
Issuance of common stock -
exercise of options -- -- 362,266 3,622 20,091 -- --
Dividends on preferred stock -- -- -- -- (296,201) -- --
Net loss -- -- -- -- -- (2,969,367) --
--------- ------- ---------- ------- ---------- ----------- -------
Balance, December 31, 1995 4,534,709 $45,347 56,768,953 567,689 19,209,445 (21,225,927) (25,313)
========= ======= ========== ======= ========== =========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 22
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,969,367) (3,766,775) (2,462,533)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 202,721 158,400 10,942
Gain on collection of note receivable (573,025) -- --
Bad debt recovery -- (147,545) (125,000)
Decrease in insurance loss reserve -- (835,922) --
Increase in receivable allowances -- -- 1,970,665
write off of in-process technology -- 2,457,201 --
Issuance of stock for services -- 25,000 75,000
Increase in other receivables -- (39,561) --
Increase in inventories (45,572) -- --
Increase in prepaid assets (25,000) -- --
(Increase) decrease in other assets (8,044) 3,016 1,956
Increase (decrease) in accounts
payable and accrued liabilities (369,292) 440,634 319,329
Increase in patents (137,131) (66,890) --
----------- ---------- ----------
Net cash used in
operating activities (3,924,710) (1,772,442) (209,641)
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on receivables 3,242,382 4,047,819 615,043
Increase in receivables, net -- (920,172) (644,280)
Purchase of furniture and equipment (386,624) (707,766) --
Increase in other investments -- (110,017) (9,375)
Payments recovered on nonperforming assets -- 37,645 44,190
(Increase) decrease in notes and
advances to related parties 1,044 16,456 (150,000)
Increase in restricted cash (1,501,278) (11,461) (6,860)
Advances to subsidiary -- -- (403,715)
Payments received on notes receivable -- -- 325,000
Acquisition of Commodore Laboratories, formerly
A.L. Sandpiper, and CFC Technologies -- -- (18,216)
Increase in deferred acquisition costs -- -- (135,440)
----------- ---------- ----------
Net cash provided by (used in)
investing activities $ 1,355,524 2,352,504 (383,653)
----------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 23
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock 100,000 1,975,000 925,000
Issuance of bonds -- 1,500,000 2,500,000
Payments of long-term debt (24,221) (2,454,337) (102,558)
Payment of preferred stock and dividend (296,201) (721,123) --
Offering costs of preferred stock -- (360,000) --
Payables to related parties, net (209,339) (142,474) 350,050
Increase in deferred financing costs -- (77,500) (392,500)
Increase of stock for cash 23,713 12,200 --
----------- ----------- -----------
Net cash provided by (used in)
financing activities (406,048) (268,234) 3,279,992
----------- ----------- -----------
Increase (decrease) in cash (2,975,234) 311,828 2,686,698
Cash, beginning of year 3,011,423 2,699,595 12,897
----------- ----------- -----------
Cash, end of year $ 36,189 3,011,423 2,699,595
=========== =========== ===========
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1993, the Company acquired 90.05
percent of the outstanding common stock of Commodore Laboratories, formerly
A.L. Sandpiper, and subsidiary for 1,000,000 shares of the Company's common
stock. The Company also acquired 90.05 percent of the outstanding common
stock of CFC Technologies for $70,000 cash and the issuance of 750,000
shares of the Company's common stock. Assets and liabilities acquired are as
follows:
<TABLE>
<S> <C>
Cash $ 51,784
Furniture and equipment less accumulated depreciation 11,423
Patent costs 20,080
Other assets 4,476
Accounts payable and accrued expenses (115,734)
Payables related parties (409,170)
Preferred stock (1,554,081)
Advances from Commodore (403,715)
-----------
Net liabilities in excess of assets purchased (2,394,937)
Cash paid (70,000)
Issuance of common stock (17,500)
-----------
In-process technology acquired (2,482,437)
1994 adjustment for revaluation of accrued
liabilities 25,236
-----------
Total in-process technology acquired $(2,457,201)
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 24
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
NONCASH INVESTING AND FINANCING ACTIVITIES - CONTINUED:
In December 1994, the Company exchanged 977 shares of series "A" (par
value $1,000) and 557,709 of the 577,081 shares of series "B" (par value $1)
outstanding preferred stock in Commodore Laboratories, formerly A.L.
Sandpiper, for 1,534,709 shares of Commodore series "B" preferred stock (par
value $.01) totaling $1,534,709. In addition, the Company accrued $19,372 of
accrued liabilities for the 19,372 shares of series "B" (par value $1)
preferred stock that was not exchanged.
During 1995, the Company released a property in Illinois, in which it
held a security interest, to be sold in exchange for pay off of the mortgage
note payable of $1,710,416, which the Company owed. The balance outstanding
on the note receivable at the date of payoff was $1,137,391 and the Company
recognized a gain on the collection of the receivable of $573,025.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Operations reflect actual amounts paid for interest and income taxes as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest $454,000 662,000 427,000
======== ======= =======
Income taxes $ 81,000 90,000 40,000
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 25
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BACKGROUND
Commodore Environmental Services, Inc., and subsidiaries (the
"Company"), from January 1, 1991 to December 31, 1995, has been engaged
in real estate operations. Effective December 22, 1993, the Company
acquired 90.05 percent of the common stock in two entities (technology
entities) which own technology relating to the destruction of
polychlorinated biphenyls and chlorofluorocarbons. Since acquisition,
the Company has also been engaged in activities relating to these
technologies.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Commodore Environmental Services, Inc., and its wholly-owned
subsidiaries, which are over 50% owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
Effective December 22, 1993, the Company acquired 90.05
percent of the issued and outstanding common stock of Commodore
Laboratories, Inc., formerly A.L. Sandpiper, and subsidiary (Commodore
Labs) and 90.05 percent of the outstanding common stock of CFC
Technologies, Inc., (CFCT). The acquisitions are accounted for as a
purchase. The consolidated financial statements include the operations
of the Company and its subsidiaries for all years presented and
Commodore Labs and CFCT from December 22, 1993 to December 31, 1995.
Separate operations of Commodore Labs and CFCT for the period December
22, 1993 through December 31, 1993 are not presented separately as the
amounts are immaterial. Segment reporting is not presented as the
amounts are not materially different than those presented in the
financial statements.
CASH AND CASH EQUIVALENTS
The Company considers cash and highly liquid debt instruments
with maturities of three months or less to be cash equivalents.
CERTIFICATES OF DEPOSIT
At December 31, 1995 and 1994, the Company maintained $50,000
in certificates of deposit which is security for a letter of credit.
RESTRICTED CASH
Effective October 1995, the Company is required to maintain,
in an interest-bearing escrow account, $1,000,000 designated as
collateral security for the repayment of principal and interest of the
Convertible Bonds. In addition, the Company maintains $792,900 and
$291,622 as of December 31, 1995 and 1994, respectively, in an
interest-bearing deposit account pursuant to the Harvest American
Insurance Company settlement agreement.
F-9
<PAGE> 26
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION
REAL ESTATE
Revenues are recognized from sales of real estate on the
installment method. Cash receipts are apportioned between cost recovery
and profit recognition in the same ratio that cost and profit bore to
the original sales price.
INTEREST INCOME
The Company recognizes interest income on notes receivable
when earned. The recognition of interest income on notes receivable is
discontinued when management determines that the continual accrual of
interest may exceed the underlying security of the receivables.
REALIZATION ALLOWANCE
Receivable losses are accounted for under the allowance
method. Losses and recoveries are charged or credited directly to the
allowance. The allowance is adjusted so that the net mortgage
receivable is valued at its estimated recovery amount. The difference
between the original mortgage notes receivable with the accrued
interest and the estimated fair market value of the underlying security
is the value of the allowance. While management uses the best
information available on which to base estimates, future adjustments to
the reserve may be necessary if economic conditions differ
substantially from the assumptions used by management.
INVENTORIES
Inventories consist of materials and supplies, including
contaminated agents, stated at cost, on a first-in, first-out basis,
and labor costs to purify the contaminated agents preparing them for
resale. Inventories are stated at the lower of cost or market.
FURNITURE AND EQUIPMENT
Furniture and equipment is carried at cost. Improvements which
substantially increase the useful lives of the assets are capitalized.
Maintenance and repairs are expensed as incurred. Upon retirement or
disposal, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss is credited or
charged to income.
Provisions for depreciation are computed on the straight-line
method based on the estimated useful lives of the assets.
F-10
<PAGE> 27
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
AMORTIZATION OF OTHER ASSETS
The Company has included in other assets patent costs,
deferred acquisition costs, goodwill, and deferred financing costs.
These assets are being amortized over the following estimated useful
lives:
<TABLE>
<S> <C>
Patents 17 years
Deferred financing costs 5 years
Deferred acquisition costs 3 years
</TABLE>
INSURANCE LOSS RESERVE
Insurance loss reserves are estimates of the ultimate cost of
both reported and unreported claims incurred and unpaid at year-end
(see note O).
LOSS PER SHARE
Loss per share is computed based on the weighted average
number of shares outstanding. Shares used to determine loss per share
exclude common stock equivalents as they are antidilutive. Accordingly,
loss per share is based on weighted average shares outstanding of
56,212,000 for the year ended December 31, 1995, 55,535,000 for the
year ended December 31, 1994 and 52,450,000 for the year ended December
31, 1993.
CONCENTRATION OF CREDIT RISK
The Company's principal operations and substantially all
revenues are from collections on mortgage notes receivable. These
mortgage notes receivables are from real estate transactions in
Illinois and North Carolina. As discussed in note D and E, the Company
has a second position security interest in the Illinois property and
the receivable on the North Carolina property is unsecured.
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 account. The Company believes it is not
exposed to any significant credit risk on cash and cash equivalents.
INCOME TAXES
The Company provides for deferred income taxes on temporary
differences which represent the tax effects on transactions reported
for tax purposes in periods different than for book purposes.
F-11
<PAGE> 28
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INCOME TAXES - CONTINUED
Temporary differences relate primarily to recognizing income
on mortgage notes receivable and nonperforming assets, the realization
allowance, and the income loss reserve.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standard No. 121 "Accounting for Long Lived
Assets" and No. 123 "Accounting for Stock Based compensation."
Statement Nos. 121 and 123 are effective for years beginning after
December 15, 1995. The effect of adoption of Statement Nos. 121 and 123
are not anticipated to have a material impact on the Company's
financial statements.
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 expense during the reporting period. Actual results could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by
reference to various market data and other valuation techniques as
appropriate. Financial instruments subject to possible material market
variations from the recorded book value are the convertible bonds and
notes receivable. There are no material differences in these financial
instruments from the recorded book value as of December 31, 1995.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 presentation have been
reclassified to conform with the 1995 presentation.
NOTE C - ACQUISITION
The Company entered into an agreement which was completed
December 22, 1993, to acquire 90.05 percent of the issued and
outstanding shares of voting common stock of each Commodore Labs and
CFCT. Commodore Labs and CFCT are the owners or licensees of certain
technologies relating to the destruction of polychlorinated biphenyls
and chlorofluorocarbons (the Technologies).
F-12
<PAGE> 29
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - ACQUISITION - CONTINUED
In connection with the Commodore Labs acquisition, the holders
of Commodore Labs common stock received 577,081 shares of Commodore
Labs non-voting series "B" preferred stock par value $1.00 and 5 year
warrants to purchase an aggregate of 3,000,000 shares of Commodore
common stock at an exercise price of $.05 per share. Albert Abel
(Abel), the president of Commodore Labs, retained ownership of 9.95
percent of the Commodore Labs common stock and received 1,000,000
shares of Commodore common stock. In addition, Commodore issued to Abel
and Allison L. Augur, Jr. (Augur), the former president of CFCT,
non-qualified stock options to purchase an aggregate of 1,500,000
shares of Commodore common stock at the rate of 20 percent per year at
an exercise price of $.10 per share.
At the date of acquisition, Commodore Labs had 977 shares of
its series "A" preferred stock par value $1,000 which was not
exchanged.
As part of the acquisition, the Company acquired ownership and
licenses to certain technologies. Inasmuch as the entities acquired
would not, in the current period, generate significant revenues from
its technology the excess purchase price of $2,457,201 over the assets
acquired is considered in-process technology. The in-process technology
was charged to operations effective January 1, 1994.
In December, 1994, the Company extended an agreement to the
holders of Commodore Labs Series "A" and "B" preferred stock to
exchange their Commodore Labs preferred stock for Commodore Series "B"
preferred stock. See description of Series "B" Preferred Stock in Note
L. The Company received acceptance from shareholders holding 977 shares
of series "A" preferred stock and 557,709 of the 577,081 shares of
series "B" preferred stock and accrued a liability of $19,372 for those
shareholder that had not returned the agreement.
In connection with the closing of the CFCT acquisition,
Commodore acquired 90.05 percent of the outstanding shares of CFCT
common stock, with the remaining 9.95 percent of such common stock
being held by Abel, through the issuance of 750,000 shares of its
common stock to Augur and, in addition, paid the aggregate sum of
$70,000 to Abel and Augur.
The Company has not recorded minority interest inasmuch as
Commodore Labs and CFCT had a deficit in stockholders' equity at the
date of acquisition and has a deficit in stockholders' equity at
December 31, 1995.
In connection with the closing, Commodore entered into a
license agreement with Commodore Labs and a sublicense agreement with
CFCT pursuant to which all patents, confidential information and
know-how owned by Commodore Labs and licensed by Commodore Labs to CFCT
were acquired by Commodore. These agreements provide that royalties of
5 percent of the revenues generated by the Commodore Labs Technologies
will be payable to Commodore Labs.
F-13
<PAGE> 30
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - RECEIVABLES
The Company is the holder of certain mortgage notes receivable
and other related receivables at December 31, 1995 and 1994, which
arose through the sale of certain properties.
The purchasers of the properties have all been limited
partnerships for whom the majority stockholder of the Company was
initially the primary promoter. The majority shareholder is no longer
directly affiliated with the limited partnerships, except that certain
general partners are affiliated with companies owned by the majority
stockholder.
The Company has adopted a position whereby a portion of cash
received, under the terms of the mortgage receivables, are being
applied to interest receivable. Under this position, there are not
current principal maturities. During 1995, the Company received cash
payments of $3,242,382 and payments in the form of direct payoff of the
mortgage note due on the property of $1,710,416. During 1994, the
Company received $4,047,819 in cash payments on the mortgage
receivables. Upon collection of all unpaid interest and other
receivables the Company will apply payments to the principal and
amortization of the deferred gain.
The components of notes receivable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Mortgage note receivable at an interest rate of 13.25%. Annual
payments range from $891,434 in 1995 to $1,015,741 in 1997
with the remaining amount due in 1998,
secured by real estate $ -- 3,800,000
Accrued interest receivable 1,231,332 2,410,347
Other receivables related to the obligor
of the mortgage receivable 80,000 80,000
Deferred income on sale -- (1,884,357)
Realization allowance (1,311,332) --
----------- ----------
Net receivable -- 4,405,990
----------- ----------
</TABLE>
F-14
<PAGE> 31
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - RECEIVABLES - CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Mortgage note receivable with interest
at 6% to be paid in monthly installments
of $29,257 along with additional related
receivables including interest receivable
and management fees, unsecured 7,135,469 7,009,685
Note receivable, with interest at 10%,
in various installments through 2002,
unsecured 274,517 277,300
Realization allowance (7,135,469) (7,009,685)
----------- ----------
Net receivable 274,517 277,300
----------- ----------
Other receivables 29,000 --
----------- ----------
Total mortgage and notes receivable
net of realization allowance $ 303,517 4,683,290
=========== ==========
</TABLE>
The balance due from the debtors at December 31, 1995 of
$8,750,318 is now unsecured. Management has adjusted the realization
allowance to reflect management's estimate of the net realizable value
of the receivable. On December 30, 1994, the Company entered into an
agreement with one of the debtors whereby the debtor would pay to the
Company all future proceeds from a note in the amount of $277,300 which
the debtor received as proceeds from the sale of the property.
The realization allowance for these mortgage receivables
reduced the net receivable to management's estimate of the value of the
real estate securing the receivables. In December, 1993, based upon the
poor economic conditions of the real estate industry, the Company
reevaluated the net realizable value of these receivables and increased
the realization allowance by $1,970,665. Effective in 1995, the
receivables are unsecured. Payments have been made in accordance with
the agreement on the remaining receivables and the balance appears
collectable. No additional realization allowance has been established.
F-15
<PAGE> 32
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - NON-PERFORMING ASSETS
The Company has a mortgage note receivable and other related
receivables which have an aggregate net book value of $911,862 at
December 31, 1995 and 1994, respectively, which are not performing
according to the terms of the note and receivables. The Company is in a
second position on the real estate securing the mortgage note
receivable. At December 31, 1995 and 1994, the Company has a
realization allowance of $1,481,536 and $1,321,024, respectively, on
the mortgage note receivable and related receivables based upon the
estimated recoverability of the receivables and the underlying value of
the security. The Company is not recognizing interest income on the
receivables and is applying all payments received as a reduction of
accrued interest receivable. The Company received payments of $-0- and
$37,743 relating to the nonperforming assets for the years ended
December 31, 1995 and 1994, respectively.
NOTE F - OTHER INVESTMENTS
In March, 1991, the Company invested $200,000 for a joint
ownership interest in an oil and gas field located in Oklahoma. The
Company had a 14.0625 percent working interest in the joint venture.
The investment is accounted for on the cost basis. The Blum Family
Trust (BFT), an entity in which the Company's Chairman of the Board,
Chief Executive Officer and Majority Stockholder serves as trustee, had
a majority interest in the same oil and gas field. The Field is
currently producing oil, and revenues generated are being reinvested to
further the development of the Field. The Company invested an
additional $9,375 from its portion of operating income in the venture
in 1993.
In 1994, the Company exchanged its interest in the above
property for a joint ownership interest in an oil and gas field located
in Louisiana (the Louisiana Property). The Company has a 22.67 percent
working interest in the Louisiana Property. The Louisiana Property is
approximately 10,000 acres which contain a number of producing wells.
Some wells need remedial work and other wells need minor work to be
brought back on line. In addition, a geological and geophysical study
on the Louisiana Property will be performed to recommend new drilling
locations. The Company's portion of revenues and expenses relating to
the property were $4,300 and $13,600, respectively, in 1995. The
investment is accounted for on the equity method. Condensed financial
statements are not presented as the investment and its operations are
immaterial to the Company.
In 1994, BFT exchanged its interest in the Oklahoma Field for
additional ownership interest in the Louisiana Property. BFT originally
had a 45 percent interest in the Louisiana Property and has increased
its ownership to 56.33 percent as a result of this transaction.
F-16
<PAGE> 33
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - OTHER ASSETS - CONTINUED
The Company has other assets consisting of costs incurred in
obtaining patents, acquisition costs, financing costs, and goodwill
relating to the purchase of Commodore Labs and CFCT (see notes A and
C).
The amount and accumulated amortization is as follows at
December 31, 1995:
<TABLE>
<CAPTION>
ACCUMULATED NET
ITEM AMOUNT AMORTIZATION BALANCE
---- ------ ------------ -------
<S> <C> <C> <C>
Deferred financing costs $480,000 192,000 288,000
Deferred acquisition costs 135,440 90,296 45,144
Patent costs 224,906 19,008 205,898
Other assets not amortizable 33,600 -- 33,600
-------- ------- -------
$873,946 301,304 572,642
======== ======= =======
</TABLE>
The amount and accumulated amortization is as follows at
December 31, 1994:
<TABLE>
<CAPTION>
ACCUMULATED NET
ITEM AMOUNT AMORTIZATION BALANCE
---- ------ ------------ -------
<S> <C> <C> <C>
Deferred financing costs $480,000 96,000 384,000
Deferred acquisition costs 135,440 45,148 90,292
Patent costs 88,225 5,759 82,466
Other assets not amortizable 25,556 -- 25,556
-------- ------- -------
$729,221 146,907 582,314
======== ======= =======
</TABLE>
F-17
<PAGE> 34
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - LONG-TERM DEBT
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 1,
--------------------
1995 1994
----- ----------
<S> <C> <C>
Notes payable to financial and insurance companies:
First mortgage note payable in monthly
installments of $24,946 including
interest through February, 2003 with
interest at 8.9 percent, secured by mortgage
note receivable and the underlying
real estate $ -- 1,734,637
----- ----------
Total -- 1,734,637
Less current maturities -- (151,462)
----- ----------
Total long-term $ -- 1,583,175
===== ==========
</TABLE>
NOTE I - BONDS PAYABLE
In 1993 and 1994, the Company issued convertible bonds
aggregating in the principal amount of $4,000,000, pursuant to a
private offering. The bonds carry an interest rate of 8.5 percent with
the interest payable quarterly. Maturity of the bonds is in 1998.
During 1995, the collateral agreement associated with the convertible
bonds was amended. The bonds are secured by an amount of unissued
shares of the Company's common stock such that the market price equals
125 percent of the outstanding principal amount of the bonds (8,000,000
shares at December 31, 1995), whereby if the Company defaults on
payment, the borrower has the right to have the certificates endorsed
by the Company. In addition, the Company must maintain $1,000,000 in
cash in a bank account as additional security. As partial consideration
to terminate the original collateral agreement, the Company issued
warrants to purchase 2,000,000 shares of the Company's common stock at
a price of $.68 per share through December 2000.
The bonds, at the holders option, are convertible at any time
into common stock of the Company at the rate of $1.00 of bond principal
value for each share of common stock. The Company has paid an aggregate
commission of $480,000 in cash plus 5 year warrants to purchase
2,233,332 shares upon complete issuance of the $4,000,000 in bonds, pro
rated for the principal amount of such bonds actually sold. Subsequent
to when the bid price of the Company's common stock exceeds $1.25 per
share, the bonds are redeemable and repayable by the Company at the
face amount thereof plus accrued interest. The bonds also have
detachable 5 year warrants, with an exercise price of $.10 per share,
which allow the holders to purchase one share of the Company's common
stock for every $8.00 of bond principal. As a result, the Company has
issued to bond holders warrants to purchase 500,000 of the Company's
common stock at $.10 per share. The common shares acquired upon
conversion of the bonds and exercise of the detachable warrants are
subject to "piggy back" registration rights.
F-18
<PAGE> 35
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - INCOME TAXES
The Company provides for deferred income taxes on temporary
differences which represent tax effects of transactions reported for
tax purposes in periods different than for book purposes.
The difference between the income tax (benefit) at statutory
rates for 1995, 1994 and 1993 and the amount presented in the financial
statements is the change in the tax valuation allowance which offsets
the income tax benefit of the operating loss.
Deferred tax assets at December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Realization allowance $ 2,870,000 2,380,000
Insurance loss reserve 350,000 350,000
Operating loss carryforwards 4,650,000 3,580,000
----------- ----------
7,870,000 6,310,000
Valuation allowance (7,870,000) (6,310,000)
=========== ==========
-- --
=========== ==========
</TABLE>
The Company has net operating loss carryforwards of
approximately $13,672,000 which expire in the years 1996 through 2010.
The amount of net operating loss carryforward that can be used in any
one year will be limited by the applicable tax laws which are in effect
at the time such carryforward can be utilized. If certain substantial
changes in the Company's ownership should occur, there would be an
annual limitation of the amount of NOL carryforwards which could be
utilized.
F-19
<PAGE> 36
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - OPERATING LEASES
The Company is committed under noncancellable operating leases
for office space and other office equipment. Future maturities under
the leases for the next five years are as follows:
<TABLE>
<S> <C>
1996 $ 62,927
1997 64,941
1998 50,868
1999 4,140
2000 1,380
--------
$184,256
========
</TABLE>
NOTE L - STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK
During 1995, 362,266 options for the purchase of common stock
were exercised. Of the options exercised, 60,000 were at $.01 per
share, 100,000 were at $.03 per share, 2,266 were at $.05 per share and
200,000 were at $.10 per share.
During 1994, 820,000 options for the purchase of common stock
were exercised. Of the options exercised, 620,000 shares were at $.01
per share and 200,000 shares were at $.03 per share.
On February 16, 1993, Paul E. Hannesson, a former principal
shareholder, officer and director of the Company, at the time the
services were rendered, received for $75,000 in services rendered to
the Company in connection with acquisitions, including those described
below, an aggregate of 7,300,000 shares of the Company's common stock.
On December 22, 1993, in connection with the acquisition of
Commodore Labs and CFCT, the Company issued 1,000,000 shares of the
Company's common stock to the president of Commodore Labs and 750,000
shares of the Company's common stock to one of the CFCT shareholders.
F-20
<PAGE> 37
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - STOCKHOLDERS' EQUITY - CONTINUED
ISSUANCE OF PREFERRED STOCK
In December 1994, the board of directors approved the issuance
and sale of the Company's series "B" preferred stock.
The Series "B" preferred stock pays dividends quarterly at a
rate of $.08 per annum per share accruing from January 1, 1998 and is
callable at any time the bid price of the Company's common stock equals
or exceeds $3.00 per share at the call price of 110 percent of the bid
price on date of call.
In December, 1994, the Company extended an agreement with
Commodore Labs series "A" and "B" preferred stock holders to exchange
said stock for the Company's series B preferred stock. In connection
therewith, the Company desired to issue 977,000 shares of series "B" to
the holder of Commodore Labs series "A" preferred stock and 577,081
shares of series "B" to the holder of Commodore Labs series "B"
preferred stock. All but 19,372 shares of the Commodore Labs series "B"
preferred stock was exchanged.
On November 10, 1993, the board of directors approved the
issuance and sale of 3,000,000 shares of the Company's series "AA"
preferred stock with five year warrants to acquire 6,000,000 shares of
the Company's common stock at an exercise price of $.10 per share. The
series "AA" preferred stock pays dividends at a rate of $.10 per annum
per share and is callable at any time the bid price of the Company's
common stock equals or exceeds $1.25 per share, at the call price of
$1.00 per share.
In 1993, 1994, and 1995 the Company sold 3,000,000 shares of
series "AA" preferred stock for $3,000,000. In connection with the
issuance of 3,000,000 shares of the preferred stock, the Company paid
commissions of $360,000, and issued 5 year warrants to purchase 550,000
shares of its common stock of an exercise price of $.10 per share.
REDEEMABLE PREFERRED STOCK
The Company's majority stockholder owned redeemable series "A"
preferred stock of the Company at December 31, 1993. The balance of
redeemable series "A" preferred stock including dividends was $566,633
at December 31, 1993. The dividends accrue at $.15 per annum per share.
Accrued dividends were $49,500 for 1993 and $10,868 in 1994 prior to
the redeemable preferred stock being redeemed in May, 1994.
F-21
<PAGE> 38
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - STOCK OPTIONS AND STOCK WARRANTS
STOCK OPTIONS
On January 28, 1987, the Company adopted the 1987 Stock Option
Plan (the Plan), reserving 10,000,000 shares of common stock for
issuance in connection with the Plan. Adoption of the Plan was approved
at the annual meeting of shareholders on June 26, 1987. Under the Plan,
the Company can grant both incentive stock options (ISO's) and
nonqualified stock options.
The 1987 Stock Option Plan authorized the granting, to key
employees, of incentive stock options and nonqualified stock options to
purchase shares of the Company's common stock at fair market values at
dates of grant. Options generally are exercisable on a pro rata basis
over a five year period. On December 30, 1992, 300,000 options were
granted at an exercise price of $.01 per share under the Plan. During
1993 and 1994, options to purchase a total of 120,000 shares were
exercised.
On November 22, 1993, options to purchase an aggregate of
500,000 shares of common stock were granted to an employee at an
exercise price of $.03 per share, of which 200,000 were exercised in
1994. The Company also granted an option to purchase an aggregate of
100,000 shares of common stock to a non-employee at an exercise price
of $.10 per share.
In connection with the acquisition by the Company of Commodore
Labs and CFCT in 1993, the Company issued nonqualified stock options to
purchase an aggregate of 1,500,000 shares of the Company's common stock
at the rate of 20 percent per year at an exercise price of $.10 per
share.
No compensation expense was recognized by the Company relating
to the aforementioned options as the market value equalled the exercise
price at the date of grant in all situations.
In August 1994, options to purchase an aggregate of 500,000
shares of common stock were granted to a nonrelated party at an
exercise price of $.01 per share, for future services. An expense of
$10,000 was recognized by the Company as a result of this transactions
as the market value exceeded the exercise price at the date of grant by
$.02 per share. These options were exercised in 1994.
In 1995, options to purchase an aggregate if 480,000 shares of
common stock were granted to employees at an exercise price of $.50 per
share, exercisable vesting in one-third increments.
F-22
<PAGE> 39
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - STOCK OPTIONS AND STOCK WARRANTS - CONTINUED
STOCK OPTIONS - CONTINUED
No compensation expense was recognized by the Company relating
to the aforementioned options as the market value equalled the exercise
price at the date of grant in all situations.
The following table presents the outstanding options at
December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
OPTIONS GRANTED EXERCISED OPTIONS EXERCISE EXPIRATION
1994 1995 1995 1995 PRICE DATE
--------- ------- ------- --------- ----- ----
<S> <C> <C> <C> <C> <C>
1,600,000 -- 200,000 1,400,000 $.10 December, 1998
180,000 -- 60,000 120,000 $.01 December, 1997
300,000 -- 100,000 200,000 $.03 December, 1997
-- 480,000 -- 480,000 $.50 December, 1998
--------- ------- ------- ---------
2,080,000 480,000 360,000 2,200,000
========= ======= ======= =========
</TABLE>
STOCK WARRANTS
During 1993 and 1994, as part of its issuance of its
$4,000,000 convertible bonds, the bond holders received one warrant to
purchase one share of common stock at an exercise price of $.10 per
share for each $8 of bond principal. Attached to the Series "AA"
preferred stock sold were warrants to acquire two shares of the
Company's common stock for each share of preferred stock at an exercise
price of $.10 per share.
In addition, in connection with the bond and preferred stock
offerings, warrants to purchase 2,783,332 shares of common stock were
issued to nonrelated third parties at an exercise price of $.10 per
share.
As part of the Company's issuance of 3,000,000 shares of
series "AA" preferred stock, the Company issued five year warrants to
purchase 6,000,000 shares of the Company's common stock at an exercise
price of $.10 per share.
As part of its acquisition in 1993 of Commodore Labs and CFCT,
the Company issued warrants to acquire shares of the Company's common
stock totaling 3,000,000 shares at $.05 per share. During 1995,
warrants to acquire 2,266 shares were exercised.
F-23
<PAGE> 40
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - STOCK OPTIONS AND STOCK WARRANTS - CONTINUED
STOCK WARRANTS - CONTINUED
In October, 1994, the Company entered into an employee
agreement and issued a warrant to purchase 500,000 shares of the
Company's common stock at an exercise price of $.14 per share
exercisable 20 percent per year over a five year period ending October,
1999.
An expense of $15,000 was recognized by the Company as a
result of this transaction as the market value exceeded the exercise
price at the date of grant by $.03 per share.
Outstanding warrants at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
WARRANTS GRANTED EXERCISED WARRANTS EXERCISE EXPIRATION
1994 1995 1995 1995 PRICE DATE
---------- --------- ----- --------- ------- -------
<S> <C> <C> <C> <C> <C>
3,000,000 -- 2,266 2,997,734 $.05 July 1, 1998
9,283,332 -- -- 9,283,332 $.10 1998 - 1999
500,000 -- -- 500,000 $.14 October, 1999
-- 2,000,000 -- 2,000,000 $.68 December, 2000
---------- --------- ----- ----------
12,783,332 2,000,000 2,266 14,781,066
========== ========= ===== ==========
</TABLE>
F-24
<PAGE> 41
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - TRANSACTIONS WITH RELATED PARTIES
The Company had demand payables to Kraft Capital Corporation
(Kraft) of $655,964 and $859,795 as of December 31, 1995 and 1994,
respectively. Commodore's majority stockholder is the sole stockholder
of Kraft. The Company was allocated rental charges of $58,015 in 1995,
$63,184 in 1994 and $65,789 in 1993 from an affiliate of the majority
stockholder.
A subsidiary of the Company has payables to shareholders of
the Company totaling $428,677 at December 31, 1995 and 1994.
The Company has a note receivable from a stockholder of the
Company for $125,000 at December 31, 1995 and 1994. The note is
interest bearing at 6 percent and due December, 1998. The note is
secured by certain subsidiary notes and advances payable to the
individuals. The Company also has advances receivable of $7,500 and
$8,544 at December 31, 1995 and 1994, respectively.
The Company has accrued interest from a 10 percent demand note
payable to a relative of the majority stockholder. The unpaid balance
of accrued interest was $-0- and $5,508 at December 31, 1995 and 1994,
respectively.
NOTE O - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has employment agreements with six corporate
officers. Aggregate minimum payments under the employment agreements
are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1996 $ 702,000
1997 419,000
1998 85,000
----------
Total $1,206,000
==========
</TABLE>
F-25
<PAGE> 42
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - COMMITMENTS AND CONTINGENCIES - CONTINUED
LITIGATION
Harvest American
In July 1987, the Company established Harvest American
Insurance Company, a wholly-owned subsidiary of the Company, licensed
by the state of Vermont as a "captive" insurance company. Harvest
issued "occurrence" based insurance policies to each of the Company's
former asbestos abatement subsidiaries and not to any other persons or
entities. An occurrence-based policy insures against claims arising at
any time in the future based upon events which occurred while the
policy was in effect. The policies were in effect from July 1987
through January 1989. The operating subsidiaries of the Company paid
premiums to Harvest based upon a percentage of sales and had coverage
through January 1989. Beginning in January 1989, in response to greater
availability of "occurrence type" insurance, the subsidiaries obtained
third party asbestos abatement related general liability insurance from
unrelated insurance companies. Harvest no longer issues new policies.
The maximum exposure under the policy is $5,000,000 in the aggregate.
In December, 1994, the Department of Banking and Insurance in
Vermont (the Department) and the Company entered into a Settlement
Agreement with respect to an order served by the Department against
Harvest in November 1991. The Agreement requires the Company to fund
Harvest an additional $250,000. Those funds will be deposited into a
Harvest interest bearing account. As of December 31, 1995, Harvest had
$792,900 in an interest bearing account and an amended $4,514,683
intercompany demand note made to the order of Harvest by the Company.
The Department and/or Harvest have the right use proceeds from the
reserve account to purchase reinsurance in order to eliminate all or
part of the insurance risk.
In addition, the Company will indemnify and defend Harvest
against any claims made against Harvest. There is currently one claim
relating to a fire which occurred at a job site which Harvest insured.
This claim is currently being investigated by the Company.
In 1994, the Company had an independent actuary evaluate the
loss reserve required as of December 31, 1994. The actuary has
determined that a loss reserve of $994,000, which includes the cash
already on deposit with the State of Vermont and the additional cash
required to be paid, is adequate in connection with the policies issued
by Harvest. The Company thereby reduced its loss reserve to $994,000.
OTHER
The Company has several other matters of litigation arising
from operations of the Company. Management is defending these claims
and believes the outcome of these will not have a material effect on
the financial condition of the Company.
F-26
<PAGE> 43
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - GOING CONCERN
The Company has sustained significant operating losses in
1995, 1994, and 1993. In addition, the Company has significant deficits
in working capital and retained earnings. These factors create an
uncertainty about the Company's ability to continue as a going concern.
The Company intends to obtain external financing through a
public offering of a subsidiary in 1996. The ability of the Company to
continue as a going concern is dependent on the Company obtaining
external financing and attaining future profitable operations. The
financial statements do not include any adjustment that might be
necessary if the Company is unable to continue as a going concern.
NOTE Q - RESTATEMENT OF FINANCIAL STATEMENTS
The Company, in December 1993 as further described in Note C
acquired 90.05% of two entities. The excess $2,457,201 purchase price
paid by the Company has previously been reflected in the consolidated
financial statements as capitalized goodwill and was being amortized
over 15 years. At the request of a regulatory agency, the Company has
reclassified the goodwill as in-process technology inasmuch as the
technology feasibility acquired had not yet been established and at the
time of acquisition there was no further alternative use. The
in-process technology of $2,457,201 is now charged against operations
effective January 1, 1994. The consolidated financial statements have
been restated for this change.
NOTE R - SUBSEQUENT EVENTS
In March 1996, the Company formed a new subsidiary, and in
June 1996, completed an offering on Form S-1 with the Securities and
Exchange Commission for the new subsidiary where in the new subsidiary
sold newly issued shares representing 27.7% of the subsidiary for net
proceeds of approximately $30,617,000. The Company intends to acquire
the remaining 9.95% of all subsidiaries owned by Al Abel for a purchase
price of $3 million, of which $750,000 represents cash paid at closing
and a $2,250,000 note payable with a portion of the interest payable
quarterly and the balance along with principal payable after 10 years.
F-27
<PAGE> 44
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND BAD DEBT END OF
DESCRIPTION YEAR EXPENSES(1) EXPENSE DEDUCTIONS(2) PERIOD
----------- ----------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Realization allowance on receivables $ 7,009,685 1,437,116 -- -- 8,446,801
=========== =========
Realization on nonperforming assets $ 1,321,024 160,512 -- -- 1,481,536
=========== =========
Year ended December 31, 1994:
Deducted from asset accounts:
Realization allowance on receivables $ 5,290,617 1,866,613 -- 147,545(2) 7,009,685
=========== =========
Realization of allowance on nonperforming assets $ 1,160,512 160,512 -- -- 1,321,024
=========== =========
Year ended December 31, 1993:
Deducted from asset accounts:
Realization allowance on receivables $ 4,026,152 293,800 970,665 -- 5,290,617
=========== =========
Realization allowance on nonperforming assets $ -- -- 1,160,512 -- 1,160,512
=========== =========
Allowance on note receivable $ 125,000 -- -- 125,000(2) --
=========== =========
</TABLE>
- --------------------
1. The allowance is reflected as a reduction of "mortgage note and related
receivables."
2. Management determined amount was collectable.
F-28
<PAGE> 45
SIGNATURES
Pursuant to the requirements of 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.
COMMODORE ENVIRONMENTAL SERVICES, INC.
Dated: November 14, 1996 By: /s/ Andrew P. Oddi
___________________________________________
Andrew P. Oddi
Vice President - Finance & Administration
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 47
<ALLOWANCES> 0
<INVENTORY> 46
<CURRENT-ASSETS> 1,997
<PP&E> 1,194
<DEPRECIATION> 140
<TOTAL-ASSETS> 5,321
<CURRENT-LIABILITIES> 2,749
<BONDS> 4,000
0
45
<COMMON> 568
<OTHER-SE> (2,042)
<TOTAL-LIABILITY-AND-EQUITY> 5,321
<SALES> 0
<TOTAL-REVENUES> 1,089
<CGS> 0
<TOTAL-COSTS> 3,508
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 550
<INCOME-PRETAX> (2,969)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,969)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,969)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
