<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer
incorporation or organization) Identification No.)
150 EAST 58TH STREET 10155
NEW YORK, NEW YORK (Zip Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 308-5800
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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
The number of shares of common stock outstanding at August 12, 1996 was
57,488,953.
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COMMODORE ENVIRONMENTAL SERVICES,INC
FORM 10-Q
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION ..................................... 3
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 ..................... 3
Condensed Consolidated Statement of Operations -
Three months ended June 30, 1996 and 1995
Six months ended June 30, 1996 and 1995.................. 5
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 1996 and June 30, 1995......... 6
Notes to Condensed Consolidated Financial Statements....... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 9
PART II. OTHER INFORMATION ......................................... 12
SIGNATURES ............................................................. 13
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(000'S OMITTED)
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
ASSETS (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash $ 156 $ 36
Subscription receivable 30,617 0
Certificate of deposit 50 50
Other receivables 61 40
Due from related parties 8 8
Inventories 0 45
Prepaid assets 237 25
Restricted cash 1,963 1,793
------- -------
TOTAL CURRENT ASSETS 33,092 1,997
Mortgage notes and related receivables 302 303
Due from related party 125 125
Equipment (net of accumulated depreciation) 1,369 1,054
Other assets 101 34
Other investments 357 357
Deferred loan fees 240 288
Intangible assets 274 250
Non performing real estate loan 912 912
------- -------
TOTAL ASSETS $36,772 $ 5,320
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONT'D)
<TABLE>
<CAPTION>
(000'S OMITTED)
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,885 $ 670
Due to related parties 1,064 1,085
Insurance loss reserve 994 994
-------- --------
TOTAL CURRENT LIABILITIES 3,943 2,749
Bonds payable 4,000 4,000
Line of credit 2,000
Minority interest of subsidiary 6,390
Minority interest in preferred 19
Stockholders' Equity:
Common stock, par value $.01 per share
authorized 100,000,000 and shares
issued and outstanding 57,348,953
and 56,768,953 573 568
Preferred stock, par value $.01 per share
authorized 10,000,000, issued and
outstanding 4,534,709 45 45
Additional paid in capital 43,476 19,209
Retained earnings (deficit) (23,649) (21,226)
-------- --------
20,445 (1,404)
Less cost of 506,329 shares of common stock
held in treasury (25) (25)
-------- --------
TOTAL STOCKHOLDERS' EQUITY
(DEFICIT) 20,420 (1,429)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 36,772 $ 5,320
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(000'S OMITTED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995* 1996 1995*
------- -------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Interest and other income from
commercial real estate $ $ 150 $ $ 300
Income from refrigerant services 10 121
Income from soil remediation 14 14
Other income 14 10 31 28
------- ------- ------- -------
38 160 166 328
EXPENSES
Research and development 714 466 1,162 885
General and administrative 551 501 1,093 947
Cost of refrigerant services 9 85
------- ------- ------- -------
OPERATING (LOSS) (1,236) (807) (2,174) (1,504)
Interest 138 146 249 293
------- ------- ------- -------
NET (LOSS) $(1,374) $ (953) $(2,423) $(1,797)
======= ======= ======= =======
NET (LOSS) PER SHARE
(Based on weighted average
shares of 56,840,000 and
56,840,000 in 1996 and
56,260,000 and 56,160,000
in 1995) ** $ (.02) $ (.02) $ (.04) $ (.03)
</TABLE>
* Reclassified to conform to current year presentation.
** Common stock equivalents are not included in the net loss per share
calculation since they are antidilutive.
See notes to condensed consolidated financial statements.
5
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COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(000'S OMITTED)
SIX MONTHS ENDED
JUNE 30,
-----------------------
1996 1995
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(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) $(2,423) $(1,797)
Adjustments to reconcile net (loss) to
net cash used in operating activities:
Depreciation and amortization 183 96
Interest (non cash) 48 48
Increase in receivables (21)
Increase in prepaid registration costs (237)
Decrease in inventories 45
(Increase) decrease in other assets (62) 1
Increase in restricted cash (170) (233)
Increase (decrease) in accounts payable and
accrued liabilities 1,215 (561)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (1,422) (2,446)
------- -------
INVESTING ACTIVITIES
Payments received on receivables 1 226
Purchase of equipment (483) (168)
Increase in receivables (327)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (482) (269)
------- -------
FINANCING ACTIVITIES
Issuance of preferred stock 100
Increase in line of credit 2,000
Issuance of Common Stock 120 22
Payment of long term debt (73)
Payment of dividends on preferred stock (75) (147)
Payments to related parties (21) (58)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,024 (156)
------- -------
INCREASE (DECREASE) IN CASH 120 (2,871)
Cash at beginning of period 36 3,011
------- -------
CASH AT END OF PERIOD $ 156 $ 140
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
6
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COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. The financial statement information was derived from
unaudited financial statements unless indicated otherwise. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
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. Beginning in
January 1989, in response to greater availability of "occurrence type"
insurance, the Company obtained third party asbestos abatement related general
liability insurance from unrelated insurance companies. Harvest no longer issues
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 ("Agreement")
with respect to an order served by the Department against Harvest in November
1991. The Agreement requires the Company to fund Harvest $1,000,000. Those funds
have been deposited into a Harvest interest-bearing account. As of July 15,
1996, Harvest had $1,063,000 in an interest-bearing account and an amended
$4,264,683 intercompany demand note (the "Company Note") made to the order of
Harvest by the Company. The Department and/or Harvest have the right to use the
proceeds from the reserve account to purchase reinsurance in order to eliminate
all or part of the insurance risk.
7
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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 the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
Note B - Commitments and Contingencies
In August 1990, the Company sold its two remaining environmental services
subsidiaries, Hesco Environmental Safety Co., Inc ("Hesco") and AWI
Environmental Services, Inc. ("AWI"). Following consummation of the Hesco and
AWI transactions, Hesco and AWI retained certain contingent liabilities relating
to pending litigation against Hesco and AWI. However, under the terms of the
sales agreements, the Company had agreed to indemnify Hesco and AWI for certain
possible future failures of Harvest to pay Hesco or AWI under Harvest insurance
policies. Hesco, a named insured under the insurance policies issued by Harvest,
is presently a named party in certain pending litigation, most of which involve
workman's compensation claims, and Harvest has denied coverage. All of such
litigation is incidental to the business conducted by Hesco. In the event that
Harvest has insufficient assets to meet its obligations under these insurance
policies, Harvest can attempt to seek payment therefor by demanding funds from
the Company under an intercompany note receivable from the Company. A successful
claim for which there is inadequate coverage would have a material adverse
effect on the Company. There is no assurance that Harvest will not ultimately be
found liable for coverage of Hesco's losses in connection with any or all of
such actions and counsel to Harvest has not expressed an opinion on the
likelihood of Harvest's liability therefor.
In or about September 1991, Hesco was served a summons and complaint by
Insurance Company of North America, American Home Assurance Co., Home Insurance
Co., Subscription Participants, as collective subrogees of the Long Island
Lighting Company in connection with a fire which occurred at the Long Island
Lighting Company power station and which plaintiffs claim was caused by the
negligence of Hesco. Plaintiffs are seeking $1,250,000 in damages. Harvest has
informed Hesco that it has denied coverage and that the above claim is not
covered by Harvest under the Harvest insurance policy held by Hesco.
8
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Note C - Subscription receivable
On June 28, 1996, the Company's formerly wholly-owned subsidiary, Commodore
Applied Technologies, Inc. ("CAT"), successfully completed an initial public
offering of 5,750,000 shares of common stock (including the underwriter's
over-allotment) and 5,750,000 redeemable common stock purchase warrants from
which CAT received net proceeds, after giving effect to the underwriting
discount and non-accountable expenses, of approximately $31,217,000. The
offering proceeds were received by CAT in July 1996. In addition, the Company
incurred approximately $600,000 in transaction costs in connection with the
offering, which reduced the gross proceeds. The Company retains a 72.3%
ownership interest in CAT.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
General
The Company and its subsidiaries are engaged in the development of a
variety of environmental technologies for the destruction and separation of
hazardous materials. CAT has developed a patented non- thermal, portable and
scalable process known as AGENT 313 (TM) for treating and decontaminating soils
and other materials and surfaces containing polychlorinated biphenyls,
pesticides, dioxins and other toxic contaminants to an extent sufficient to
satisfy current federal environmental guidelines. It has been proven that AGENT
313 can also neutralize chemical weapons materials and warfare agents. Through
other subsidiaries, the Company is applying these and related technologies to
the destruction, separation and recycling of chlorofluorocarbons and other
ozone-depleting substances and is developing a related liquid membrane
technology for the purpose of separating other hazardous wastes from other
types of contaminated media.
Results from Operations
THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1995
Gross revenues for the second quarter of 1996 were $38,000 as compared to
$160,000 for the second quarter of 1995, a decrease of $122,000. Gross revenues
for the six month period ended June 30, 1996 were $166,000 as compared to
$328,000 for the six month period ended June 30, 1995, a decrease of $162,000.
The decrease is due to the collection of a mortgage receivable at the end of
1995, which no longer exists in 1996. In addition, in 1996, the Company
commenced operations of its refrigeration separation business. In the second
quarter of 1996, the equipment for refrigeration separation was used in another
technology within the Company's business and therefore second quarter 1996
revenues were negligible.
9
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General and administrative expenses totalled $551,000 for the second
quarter of 1996 as compared to $501,000 for the second quarter of 1995, an
increase of $50,000 or 10% and general and administrative expenses totalled
$1,093,000 for the six month period ended June 30, 1996 as compared to $947,000
for the six month period ended June 30, 1995, an increase of $146,000 or 15%.
This increase is attributable to the hiring of additional personnel, and
associated overhead expenses relating to the increased activity in the new
hazardous material destruction and separation of mixed refrigerant subsidiaries.
In the second quarter of 1996, the Company incurred $714,000 of research and
development expenses associated with research, development and marketing of
technologies for the destruction of hazardous materials as compared to $466,000
in the second quarter of 1995, an increase of $248,000 or 53%. For the six month
period ended June 30, 1996, the Company incurred $1,162,000 of research and
development expenses as compared to $885,000 for the six month period ended June
30, 1995, an increase of $277,000 or 31%. The increase in research and
development costs is due to additional projects and the furthering of existing
work in the development of technologies in the destruction of hazardous
materials.
Interest expense was $138,000 for the second quarter of 1996 as compared to
$146,000 for the second quarter of 1995, a decrease of $9,000 and interest
expense was $249,000 for the six month period ended June 30, 1996 as compared to
$293,000 for the six month period ended June 30, 1995, a decrease of $45,000.
The 15% decrease is due to the reduction of outstanding debt in 1996 from 1995.
The Company had a net loss of $1,374,000 for the three month period ended
June 30, 1996 as compared to a net loss of $953,000 for the three month period
ended June 30, 1995. The Company had a net loss of $2,423,000 for the six month
period ended June 30, 1996 as compared to a net loss of $1,797,000 for the six
month period ended June 30, 1995. The fluctuation in results have been described
above.
Liquidity and Capital Resources
The Company had working capital of $29,149,000 on June 30, 1996 as compared
to a working capital deficit of $752,000 at the beginning of the year. On June
28, 1996, the Company's formerly wholly-owned subsidiary, CAT, was successful in
completing an initial public offering, and the Company continues to hold 72.3%
common stock ownership. The completion of this offering resulted in net proceeds
of approximately $30,617,000. Gross proceeds from the offering were $35,075,000
offset by underwriting discounts and non-accountable expenses of $3,858,250 and
approximately $600,000 in transaction costs. The Company has invested the
remaining proceeds in short term cash equivalent investments and anticipates
using the proceeds to further the development of its various technologies and
commercialize the technologies through joint ventures with partners.
10
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In August 1996, CAT (through one of its wholly owned subsidiaries) signed a
joint venture agreement with a subsidiary of Teledyne Inc. to form a Limited
Liability Company ("LLC") a mutually owned joint venture formed to pursue
chemical demilitarization on a worldwide basis. Pursuant to this agreement, the
CAT is required to fund the LLC $2,000,000 over the next six months.
The Company established a captive insurance subsidiary, Harvest American
Insurance Company ("Harvest") in July 1987 for the purpose of providing
liability insurance coverage to the environmental services subsidiaries of the
Company for asbestos abatement site work for the period July 1987 to January
1989. As a result, less than seven years of its own information upon which to
base reserves for losses and loss adjustment expenses is available. Accordingly,
the actual incurred losses and loss adjustment expenses may vary significantly
from the estimated amounts included in the accompanying financial statements.
The Company's management believes its reserves for losses and loss adjustment
reserves are reasonable.
Although the balance of the insurance loss reserve is recorded as a current
liability, it is not possible to determine whether that balance or any
additional cash funds will be required to be paid during 1996.
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material legal proceedings to which
the Company is a party which have not been disclosed in previous filings with
the Securities and Exchange Commission. There are no material developments to be
reported in any previously reported legal proceeding.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER EVENTS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none
(b) Reports on Form 8-K - none
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1996 COMMODORE ENVIRONMENTAL SERVICES, INC.
(Registrant)
By /s/ Andrew P. Oddi
--------------------------------------
Andrew P. Oddi - Vice President
Finance and Administration
(as both a duly authorized officer of
the registrant and the principal
financial officer or chief accounting
officer of the registrant)
13
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 156
<SECURITIES> 0
<RECEIVABLES> 30,678
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,092
<PP&E> 1,570
<DEPRECIATION> (201)
<TOTAL-ASSETS> 36,772
<CURRENT-LIABILITIES> 3,943
<BONDS> 6,000
0
45
<COMMON> 573
<OTHER-SE> 19,802
<TOTAL-LIABILITY-AND-EQUITY> 36,772
<SALES> 0
<TOTAL-REVENUES> 166
<CGS> 0
<TOTAL-COSTS> 85
<OTHER-EXPENSES> 2,255
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<INTEREST-EXPENSE> 249
<INCOME-PRETAX> (2,423)
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