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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM______TO_______
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, SUITE 3400, NEW YORK, NEW YORK 10155
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 308-5800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE $.01 PER SHARE
SECURITIES REGISTERED TO PURSUANT SECTION 12(g) OF THE ACT: 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 be the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 14, 1997, (a) 58,014,368 shares of the registrant's Common
Stock, par value $.01 per share, were outstanding, (b) 21,840,318 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 $29,331,547 based on the
closing bid price of $1.343 per share on March 14, 1997.
----------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
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COMMODORE ENVIRONMENTAL SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
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Page
<S> <C> <C> <C>
Item 1. Business..........................................................................1
Item 2. Properties........................................................................20
Item 3. Legal Proceedings.................................................................21
Item 4. Submission of Matters to a Vote of Security Holders...............................21
PART II
Item 5. Market and Registrant's Common Equity and Related Stockholder Matters.............22
Item 6. Selected Financial Data...........................................................23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation.........................................................................24
Item 8. Financial Statements and Supplementary Data.......................................28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................28
PART III
Item 10. Directors and Executive Officers of the Registrant................................29
Item 11. Executive Compensation............................................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management....................36
Item 13. Certain Relationships and Related Transactions....................................37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................40
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Commodore Environmental Services, Inc. (the "Company"), through its
69.3% owned subsidiary, Commodore Applied Technologies, Inc. ("Applied"), is
primarily engaged in the development of a variety of environmental technologies
for the destruction of hazardous materials and the separation and recovery of
metals, organics and other chemical compounds. Such activities are primarily
conducted through the following entities:
- - COMMODORE ADVANCED SCIENCES, INC. ("CAS"), a wholly owned
subsidiary of Applied, uses a patented non-thermal, portable
and scalable process known as SET(TM) for treating and
decontaminating soils and other materials and surfaces
containing PCBs, pesticides, dioxins and other toxic
contaminants to an extent sufficient to satisfy current
federal environmental guidelines. Based on the results of
laboratory testing, SET(TM) also appears capable of
neutralizing substantially all known chemical weapons
materials and warfare agents.
- ADVANCED SCIENCES, INC. ("ADVANCED SCIENCES"), a wholly owned
subsidiary of CAS, provides a full range of environmental,
technical and remediation services, including identification,
investigation, remediation and management of hazardous and
mixed waste sites, to government agencies, including the U.S.
Department of Defense and Energy, and to private companies
located in the United States and abroad.
- - COMMODORE SEPARATION TECHNOLOGIES, INC. ("SEPARATION"), an 87%
owned subsidiary of Applied, has developed a separation
technology and recovery system known as SLM(TM) for the
purpose of separating a variety of metals, chemical compounds,
nuclear by-products and other contaminants from liquid and
gaseous feedstreams.
- COMMODORE CFC TECHNOLOGIES, INC. ("REFRIGERANT"), a wholly
owned subsidiary of Applied, is applying certain environmental
technologies to the destruction, separation and recycling of
CFCs and other ozone-depleting substances.
The Company believes that its chemical processes and technologies offer
a safe, efficient and cost-effective alternative to traditional methods for the
separation, destruction and disposal of toxic substances and other compounds,
which can be utilized in a wide variety of industrial, military and other
applications. The Company is currently in the process of introducing these
processes and technologies on a commercial scale. In July 1996, Applied
successfully completed an initial public offering of its equity securities from
which it received net proceeds of approximately $30.5 million. In April 1997,
Separation successfully completed an initial public offering of its equity
securities, from which it received net proceeds of approximately $11.7 million.
The Company was reincorporated in the State of Delaware in August 1988.
The principal executive offices of the Company are located at 150 East 58th
Street, Suite 3400, New York, New York 10155, and its telephone number is (212)
308-5800.
RECENT DEVELOPMENTS
ACQUISITION OF ADVANCED SCIENCES, INC.
Effective October 1, 1996, Applied completed the acquisition of all of
the outstanding shares of capital stock of Advanced Sciences. Advanced Sciences,
together with its subsidiaries, provides a full range of
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environmental and technical services, including identification, investigation,
remediation and management of hazardous and mixed waste sites, to government
agencies, including the U.S.Department of Defense and Energy, and to private
companies located in the United States and abroad. In consideration for all of
the outstanding shares of capital stock of Advanced Sciences, the former
shareholders of Advanced Sciences received an aggregate of 450,000 shares of
common stock, par value $.001 per share, of Applied.
ACQUISITION OF A.S. ENVIRONMENTAL, INC.
Effective October 1, 1996, Applied also completed the acquisition of
all of the outstanding shares of capital stock of A.S. Environmental, Inc., a
Delaware corporation ("ASE"). ASE, a newly formed entity with no history of
operations, had an option to purchase all of the outstanding capital stock of
Advanced Sciences and was acquired by Applied for the purpose of enabling
Applied to effect its acquisition of Advanced Sciences. The former shareholders
of ASE received, in consideration for all of the outstanding shares of capital
stock of ASE, an aggregate of 450,000 shares of common stock, par value $.001
per share, of Applied.
SALE OF COMMODORE SEPARATION TECHNOLOGIES, INC. AND COMMODORE CFC
TECHNOLOGIES, INC.
Effective as of December 2, 1996, the Company sold (i) all of the
outstanding capital stock of Separation and (ii) all of the outstanding capital
stock of Refrigerant to Applied, as part of a corporate restructuring of the
Company to consolidate all of its current environmental technology businesses
with Applied. In addition, the Company assigned to Applied outstanding
Separation notes aggregating $976,200 at December 2, 1996, representing advances
previously made by the Company to Separation, which Applied has contributed to
the equity of Separation. In consideration for the transfer of all of the
outstanding capital stock of Separation and Refrigerant to Applied, Applied paid
the Company $3.0 million in cash and, subject to compliance with any applicable
stockholder approval or notice requirements, will issue to the Company a warrant
expiring December 2, 2003 to purchase 7,500,000 shares of common stock, par
value $.001 per share, of Applied, at an exercise price of $15.00 per share,
valued at $2.4 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Certain Relationships and Related Transactions."
BUSINESS OPERATIONS
COMMODORE ADVANCED SCIENCES, INC.
The Company, through CAS, has developed and intends to commercialize
its patented process known as SET(TM). Based on the results of its extensive
testing, the Company believes that SET(TM) is capable of effectively treating
and decontaminating soils and other materials, including sludges, sediments,
oils and other hydrocarbon liquids, metals, clothing and porous and non-porous
structures and surfaces, by destroying PCBs, pesticides, dioxins, chlorinated
substances and other toxic contaminants to an extent sufficient to satisfy
current federal environmental guidelines. The Company also believes that, based
on the results of additional tests, SET(TM) appears to be capable of
neutralizing substantially all known chemical weapons materials and warfare
agents and of concentrating certain radioactive wastes for more effective
disposal. Tests of SET(TM) have been conducted since 1989 and have been financed
to date principally from borrowings and investments from the Company. SET(TM)
is based upon solvated electron chemistry, in which solvents such as anhydrous
liquid ammonia are mixed with various base metals to produce a solvated electron
solution.
SET(TM)
The SET(TM) technology mixes anhydrous liquid ammonia and/or other
similar solvents with reactive metals and contaminated elements to effect the
selective destruction or neutralization of organic compounds (such as PCBs,
pesticides and dioxins). Applied has demonstrated that SET(TM) can achieve
consistently high levels of contaminant destruction when working with PCBs,
dioxins and pesticides. SET(TM) has treated soils containing up to 10,000 parts-
per-million (ppm) of contaminants, and oils containing up to 250,000 ppm,
leaving residual soils and oils with
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contamination levels of less than one ppm. In addition, SET(TM) has been
successfully applied to other PCB-contaminated surfaces such as concrete. The
SET(TM) process can be used in conjunction with selected post-treatment
processes suc hthat no hazardous or toxic residues will result from the use of
SET(TM), nor will there be any toxic emissions into the air, water, soils or
other surfaces. By example, most contaminated soils treated with SET(TM) can
(subject, in some instances, to reblending the soil with organic matter) be
used subsequently for planting or for any other use for which non-contaminated
soils are appropriate.
Equipment utilized in the SET(TM) process consists of tanks, pumps and
piping to handle anhydrous ammonia and other solvents in liquid and vapor forms,
and reactor vessels for holding contaminated materials and for the introduction
of solvating solutions. The system can be transported to field sites and
configured in numerous sizes.
The SET(TM) process requires placing the contaminated materials into a
reactor where they are mixed with a solvent and charged with a base metal. The
chemical reaction produces metal salts such as calcium chloride, calcium
hydroxide, and non-halogenated inert organics. The ammonia within the reactor is
then removed to a discharge tank for later reuse. The materials are removed,
sampled for residual traces of PCB or other halogenated organic compounds, and
placed in storage for disposal. In many cases, the decontaminated soil and
metals can be replaced in their original location, recycled or reused. The
solvents do not enter the chemical reaction, but merely serve as the solute for
the solvated electron solution.
EPA Nationwide Permit and Testing Results
In order to treat PCBs within the United States on all non-Superfund
sites, the treating entity must obtain a permit from the United States
Environmental Protection Agency ("EPA"). Most EPA permits granted to date for
PCB destruction are solely for single-site incineration treatment centers. In
August 1995, SET(TM) was demonstrated to the EPA in order to obtain a Nationwide
Permit for PCB Disposal (the "Nationwide Permit"). In March 1996, the EPA issued
the Nationwide Permit to Applied, which Applied then transferred to CAS
effective December 1, 1996. The Nationwide Permit allows CAS to use SET(TM)
on-site to treat PCB-contaminated soil at any location in the United States. In
addition to soil treatment the Nationwide Permit allows CAS to treat
PCB-contaminated metallic surfaces. The Nationwide Permit only covers the
destruction of PCBs in soils and on metallic surfaces.
Based on currently published lists of EPA national operating permits,
the Company believes that CAS possesses the only non-thermal PCB treatment
technology for multiple applications permitted under the EPA's Alternate
Destruction Technology Program. EPA regulations governing permitting have been
in effect for more than 15 years, and according to the latest EPA published list
of non-thermal destructive processes, only seven companies have met EPA's
stringent requirements for commercial operation. Of these, only CAS is permitted
to remediate PCB-contaminated soils and metallic surfaces. The EPA's Alternative
Destruction Technology Program is designed to encourage remediation technologies
as an alternative to incineration.
The Nationwide Permit became effective on March 15, 1996, expires on
March 15, 2001, and may be renewed subject to providing any requested additional
information to the EPA at the time of renewal. The Nationwide Permit imposes
certain continuing obligations on CAS, including notification of all job sites,
periodic reporting to the EPA as to activities at the job sites, prior
notification to and approval by the EPA with respect to any single-site
centralized remediation facility that CAS may seek to establish, and certain
restrictions on the disposal of by-products from the use of SET(TM). The
Nationwide Permit further specifies that CAS must continue to comply with all
otherwise applicable federal, state and local laws regarding the handling and
disposition of hazardous substances.
In more than 1,000 tests using SET(TM), various high levels of PCB
contamination were reduced to levels approaching non-detectable, with the
destruction process occurring in a matter of minutes. The following table is a
summary of the results of those tests.
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<TABLE>
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PCB LEVEL
----------------------------------------------------------
SOIL TYPE/MATERIAL BEFORE TREATMENT AFTER TREATMENT
------------------ ------------------ -----------------
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High PCBs
---------
Clay 290 ppm less than one ppm
Organic 660 ppm less than one ppm
Sandy 6,200 ppm less than one ppm
Oil 250,000 ppm less than one ppm
Low PCBs
--------
Clay 29 ppm less than one ppm
Organic 83 ppm less than one ppm
Sandy 130 ppm less than one ppm
</TABLE>
These tests were conducted on limited quantities of contaminated
material, and there can be no assurance that SET(TM) will be able to replicate
any of these test results on a large-scale commercial basis or on any specific
project.
In September 1995 and December 1995, Geomet, an independent surety
laboratory licensed by the U.S. government, conducted two series of laboratory
tests on SET's ability to neutralize chemical weapons materials and warfare
agents. Such tests, conducted on a small scale, demonstrated destruction
efficiencies of more than 99.99999% on nerve agents and chemical mustards. Such
tests are not necessarily indicative of results that would be obtained from
testing on a larger scale. CAS is continuing to test SET(TM) on chemical weapons
by-products, as well as on larger quantities of these chemical weapons
materials.
Competitive and Operational Aspects of SET(TM)
Substantially all existing systems in use for the destruction of PCBs
and other halogenated compounds involve incineration or other thermal
approaches, and either the permanent installation of highly complex and
expensive incinerators and waste disposal equipment at the affected site, or the
removal of contaminated materials to off-site facilities. The Company believes
that SET(TM) represents an approach to resolving serious environmental
remediation issues that does not create or entail the safety risks of air
pollution and transportation of hazardous materials. The Company believes that
SET(TM) is more effective than incineration and other destruction methods for
toxic substances in that:
- SET(TM) does not emit toxic fumes into the atmosphere, as is
sometimes the case with thermal or incineration methods;
- SET(TM) is portable and can be moved directly to the
contaminated site, thereby reducing the risk of off-site
contamination;
- SET(TM) equipment can be customized and configured to address
various treatment applications;
- SET(TM) has been shown to neutralize or destroy all chemical
weapons material and warfare agents in the United States
stockpile, and Lewisite (the primary chemical weapons material
and warfare agent of the former Soviet Union), in tests
conducted by an independent, federally certified surety
laboratory;
- SET's reaction time is substantially less than that of
alternative processes, such as thermal destruction and other
forms of chemical treatment;
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- SET(TM) equipment can be installed and operated inside
industrial plant facilities to treat hazardous wastes on line
as a continuation of the manufacturing process; and
- SET(TM), when used to treat soils, yields nitrogen-enriched
soils that can be reused on-site, avoiding replacement and the
post-treatment costs of off-site disposal.
The Company believes that SET(TM) is the only technology currently
available which possesses all of these features and is capable of treating a
wide variety of contaminants.
Joint Ventures
Teledyne Environmental Joint Venture. On August 6, 1996, Commodore
Government Environmental Technologies, Inc. ("Commodore Government"), a wholly
owned subsidiary of Applied at the time (now a wholly owned subsidiary of CAS),
entered into a joint venture agreement with Teledyne Environmental, Inc.
("Teledyne Environmental") as the exclusive means by which each party (and their
affiliates) will pursue the chemical weapons destruction and demilitarization
market on a worldwide basis. Commodore Government and Teledyne Environmental
each own one-half of the venture. Teledyne Environmental is a major provider of
contract services to the Department of Defense and to the Department of
Energy. The purpose of the joint venture, known as "Teledyne-Commodore, LLC," a
Delaware limited liability company, encompasses all phases of chemical weapons
demilitarization including design, engineering, field work, chemical weapon,
ordinance and residue (heel) neutralization and demilitarization, disposal and
reclamation through the use, application and commercialization of the SET(TM)
process.
Each of Commodore Government and Teledyne Environmental owns 50% of the
equity, profit and losses of the joint venture company, and have each budgeted
initial capital contributions of approximately $2.0 million. Under the terms of
the joint venture, Commodore Government's role concentrates on engineering and
site operations relating to the SET(TM) process and related equipment. Teledyne
Environmental is primarily responsible for site development, facilities
engineering, facilities construction and maintenance, utility connections,
materials recovery, transportation, waste management and transport and site
decommissioning. In addition, each of the parties will jointly coordinate the
engineering, construction, installation and decommissioning of the SET(TM)
process controls and monitoring instrumentation.
CAS has licensed SET(TM) and corresponding know-how to the joint
venture. In exchange, CAS received ownership of one-half of the joint venture
which will benefit from Teledyne's extensive experience in government
contracting, particularly with the United States Military and the Department
of Energy, its extensive experience in engineering and design, and its worldwide
contacts. CAS also licensed the SET(TM) process and corresponding know-how to
Teledyne Brown Engineering, Inc. ("TBE"), a subsidiary of Teledyne, Inc. for use
in TBE's existing United States Department of Army Small Burials Contract (the
"Small Burials Contract"). TBE's Small Burials Contract is an existing contract
covering demilitarization of non-stockpile caches of chemical munitions at up to
25 sites to be designated by the United States Army with a contract value of up
to $250 million. Under the terms of such license, CAS receives a royalty equal
to 8% of TBE's net sales revenues derived from the Small Burials Contract.
Proposed New Bedford Harbor Project. The New Bedford, Massachusetts
harbor and waterfront area contains some of the highest concentration of PCBs in
the nation and in 1982, this 18,000-acre site was placed on the EPA's Superfund
national priorities list. The contaminated sediments and sludges from this site
were to be disposed of by incineration. However, public and political opposition
related to the risks associated with incineration has caused the EPA to halt
these plans.
In March 1996, Applied and TriRex Consulting Company, an environmental
project management company ("TriRex"), submitted a proposal for a competing
feasibility study under which SET(TM) would represent the enabling stand-alone
technology for the destruction of PCBs at the site, with TriRex providing
monitoring services. Applied
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and its possible working partner have not, as yet, been awarded a follow-up
contract with respect to the New Bedford Harbor Project.
Proposed Sverdrup Joint Venture. Applied and Sverdrup Corporation
("Sverdrup") have entered into a non-binding memorandum of understanding to
establish one or more joint ventures or related arrangements to utilize SET(TM)
as the enabling technology for the decontamination of PCBs and other toxic
substances on a variety of Superfund sites. Applied has conducted extensive
discussions with Sverdrup whereby SET(TM) would be marketed through Sverdrup
primarily to governmental agencies such as the EPA (for clean-up of Superfund
and other sites) and branches of the United States armed forces. Applied and
Sverdrup have also jointly responded to a request for proposal ("RFP") from the
Department of the Navy in respect of an alternative method of decontaminating
various naval installations in the United States.
Sharp & Associates. Applied has entered into a non-binding memorandum
of understanding with Sharp & Associates, Inc., a Columbus, Ohio-based
consulting and remediation company ("Sharp"), to explore the applicability of
SET(TM) to the remediation of dioxin-contaminated soils. The memorandum of
understanding contemplates that Applied and Sharp will jointly approach owners
of dioxin-contaminated sites with proposals to demonstrate the applicability of
SET(TM) to the remediation of soils at such sites. The Company believes that a
successful demonstration could result in additional opportunities for the use of
SET(TM).
ADVANCED SCIENCES, INC.
Advanced Sciences is a national environmental consulting firm that
provides specialized technical and project management products and services
primarily to government-sector clients, including the U.S.Department of
Energy ("DOE") and Department of Defense ("DOD"), and also to private-sector
domestic and foreign industrial clients. Advanced Sciences offers its clients
almost 20 years' experience in all aspects of environmental regulation and
compliance, as well as access to leading technologies and innovative skills
related to the identification, investigation, remediation and management of
hazardous, mixed and radiological waste sites. Advanced Sciences currently
operates a network of eight offices located in six states, with its principal
executive offices located in Albuquerque, New Mexico.
CAS plans to incorporate its process technology into the products and
services offered to Advanced Sciences's customers, with a view to increasing the
quality and scope of services offered and providing CAS with an existing
customer base for its technology.
Services
Advanced Sciences' analytic and scientific abilities enable it to
become involved in environmental issues and problems at their outset. Initially,
Advanced Sciences provides its clients with a broad outline of the types of
environmental problems, health risks and liabilities associated with a
particular activity. Advanced Sciences also conducts environmental audits and
assessments, underground storage tank site investigations, remedial
investigations/feasibility studies, environmental impact assessments, and
statements and studies to identify any potential environmental hazards.
Having already established a competitive market position in the
consulting and front-end analysis phase, Advanced Sciences has been able to
follow market demand into remediation services. After an environmental problem
is identified, Advanced Sciences offers alternative remediation approaches which
may involve providing on-site waste containment or management of
on-site/off-site remediation and waste removal. Advanced Sciences can also
redesign its clients' ongoing production processes and develop engineering plans
and technical specifications to minimize or eliminate the generation of
hazardous waste. The Company believes that Advanced Sciences' integration of
engineering and environmental skills, plus its access to innovative
technologies, provide Advanced Sciences with a competitive advantage in
redesigning production processes.
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New technologies play a critical role in both the remediation of
existing waste sites and in the reduction of waste generated by ongoing
production processes. Advanced Sciences has access to key technologies that can
help minimize waste, reduce costs and improve the quality of a finished product.
Advanced Sciences has also retained what it believes are among the most
qualified professionals in the environmental consulting business. Advanced
Sciences' scientists have participated on national boards for risk assessment
and quality assurance, were instrumental in the development of environmental
regulations for the DOE and DOD, and have served as expert witnesses before the
U.S. Congress and the Nuclear Regulatory Commission. To maintain its competitive
position, Advanced Sciences intends to continue to develop viable remediation
technologies and attract and retain qualified personnel.
Significant Contracts
Advanced Sciences has contracts in place that extend beyond the year
2000 with remaining funded and unfunded ceilings of over $130,000,000. Certain
of the contracts Advanced Sciences has been awarded within the last 18 months
include: (i) a $15,000,000, five-year environmental restoration/waste management
contract for Lockheed-Martin at its facilities in Oak Ridge, Tennessee; (ii) a
$52,000,000, five-year technical and management support contract for the DOE
facility located in Carlsbad, New Mexico; and (iii) a $10,000,000, five-year
environmental remediation contract for Westinghouse Savannah River Corp.
Advanced Sciences' contract base is national in scope (from Washington, D.C. to
Richland, Washington), and encompasses a wide variety of services, clients and
industries.
COMMODORE SEPARATION TECHNOLOGIES, INC.
The Company, through Separation, has developed and intends to
commercialize a separation technology and recovery system, known as SLM(TM).
Based on the results of more than 100 laboratory and other tests to date, the
Company believes that SLM(TM) can separate and recover chromium, cadmium,
silver, mercury, platinum, lead, zinc, nickel, trichlorethylene, polychlorinated
biphenyls, methylene chloride, amino acids, antibiotics, radionuclides, and
other organic and inorganic targeted substances from liquid or gaseous
feedstreams. SLM(TM) utilizes a process whereby a contaminated liquid or gaseous
feedstream is introduced into a fibrous membrane unit or module containing a
proprietary chemical solution, the composition of which is customized depending
on the types and concentrations of compounds in the feedstream. As the
feedstream enters the membrane, the targeted substance reacts with SLM's
proprietary chemical solution and is extracted through the membrane into a strip
solution where it is then stored. The remaining feedstream is either recycled or
discharged free of the extractant(s). In some instances, additional treatment
may be required prior to disposal.
SLM(TM) is distinguishable from other existing forms of membrane filtration
technology in that it:
- requires low initial capital costs and low operating costs;
- has the capability of treating a wide variety of elements and
compounds in a wide variety of industrial settings at great
speed and with a high degree of effectiveness, in a wide range
of contaminant concentrations, volume requirements and other
variables;
- is environmentally safe, in most instances producing no
sludges or other harmful by-products which would require
additional post-treatment prior to disposal;
- can selectively extract target substances, while extracting
substantially fewer unwanted substances;
- can typically operate on-site and in less space than competing
technologies;
- can extract metals, organic chemicals and other elements and
compounds in degrees of concentration and purity which permit
their reuse; and
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- has the capability, in a single process application, of
selectively extracting multiple elements or compounds from a
mixed process stream.
In August 1996, Separation completed an on-site demonstration
of SLM(TM) for the decontamination of chromium-contaminated groundwater at the
Port of Baltimore, Maryland. During this demonstration, a SLM(TM) unit, in a
single feedstream pass-through, reduced the contamination level of chromium from
over 630 parts per million (ppm) to less than one ppm. The results of this test
were verified by Artesian Laboratories, Inc., an independent testing laboratory.
Separation has since completed additional on-site demonstrations of SLM(TM) at
the Port of Baltimore with similar results. Due to the success of such
demonstrations, in February 1997 the State of Maryland informed Separation that
it will recommend including the SLM(TM) process as an eligible technology in the
bid specifications to remediate the groundwater at the Port of Baltimore. Based
on management studies and discussions with metals industry executives, the
Company believes that SLM(TM) represents a significant technological advancement
in the area of environmental remediation as the only technology capable of
on-site chromium removal and recovery that enables effluent discharge without
additional treatment.
In September 1996, Separation installed a commercial scale
prototype SLM(TM) unit at a Columbus, Ohio metal plating company. DLZ
Laboratories, Inc., an independent testing laboratory, verified that the SLM(TM)
unit processed the initial batch of process effluent stream and reduced nickel
and zinc contamination from 900 ppm to 2 ppm in one hour. Separation continued
to operate this SLM(TM) unit for three months to process nickel and zinc
effluent streams containing concentrations of 200 to 400 ppm, and the unit has
consistently reduced the contaminant levels to 1 to 5 ppm. The decontaminated
process effluent stream is being recycled into the plating line rinse tanks,
saving the plating company its normal consumption of make-up water at a rate of
five gallons per minute.
In January 1997, Separation entered into a license agreement
with Lockheed Martin Energy Research Corporation ("Lockheed Martin"), manager of
the Oak Ridge National Laboratory, a DOE national laboratory ("Oak Ridge").
Under the terms of the agreement, Separation received the exclusive worldwide
license, subject to a government use license, to use and develop the technology
related to the separation of the radionuclides technetium and rhenium from mixed
wastes containing radioactive materials. Based on tests conducted at Oak Ridge
since May 1994, the Company believes that this technology is capable of
selectively extracting and recovering technetium, rhenium and other radioactive
isotopes as a concentrated aqueous solution which can be reused in various
scientific applications or disposed of by government-approved techniques
including long-term storage. The Company believes that this technology can be
used to remediate nuclear waste tanks stored at the U.S. Department of
Energy's atomic energy plants in Rocky Flats, Colorado, Idaho Falls, Idaho,
Paducah, Kentucky, Weldon Springs, Missouri, Frenchman Flat, Nevada, Los Alamos,
New Mexico, Aiken, South Carolina, Oak Ridge, Tennessee, Pantex, Texas and
Hanford, Washington, and intends to pursue such opportunities through
Separation. According to DOE sources, there are approximately 100 million
gallons of mixed radioactive and hazardous chemical waste stored at these
plants.
Separation intends to pursue collaborative joint working and
marketing arrangements with, or acquisitions of or investments in, companies
that have a presence in target markets and those that focus on obtaining
environmental remediation projects, including clean-up of harbors, groundwater
and nuclear waste sites. Advanced Sciences will help market SLM(TM) to the DOE
and DOD. Separation has entered into memorandums of understanding for proposed
working arrangements with TBE and Sverdrup, and is bidding on certain projects.
SLM(TM)
Although SLM(TM) uses the same basic principles as other
membrane separation technologies, the Company believes that SLM(TM) represents a
significant advance in membrane separation technology in the treatment of
solubilized feedstreams. SLM(TM) acts by separating and extracting the targeted
material(s) from the feedstream, rather than trapping the target material as the
entire feedstream passes through the filter mechanism. As a result, for the
first time, a single process is capable of treating a wide variety of elements
and compounds in a wide variety of industrial settings, and doing so at great
speed and with a high degree of effectiveness regardless of particle size,
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<PAGE> 11
volume requirements and other variables. The Company also believes that SLM(TM)
is the first membrane separation technology which is capable, in a single
process application, of selectively extracting multiple elements or compounds
from a mixed process stream. The SLM(TM) membrane modules can also be configured
in various sizes and numbers and for varying capacities, and operate on the
manufacturing site at ambient temperatures and pressures.
SLM(TM) involves injecting a contaminated liquid or gaseous
feedstream into the Separation-designed fibrous membrane unit or module. This
module is previously loaded with a series of proprietary chemicals whose
composition will vary depending on the types of compounds in the feedstream. As
the feedstream enters the membrane unit, the metal or other substance to be
extracted reacts with the proprietary chemical solution in the fibrous membrane,
and the metallic or other ions are extracted through the membrane into a strip
solution which is concentrated and gathered in a separate storage container. The
balance of the feedstream is either recycled or simply discharged as normal
effluent. In some instances, additional treatment may be required prior to
disposal, or disposal may need to be made in a regulated manner. The Company
believes that SLM(TM) can be utilized for the separation and recovery of
chromium, cadmium, silver, mercury, platinum, lead, zinc, nickel,
trichlorethylene, polychlorinated biphenyls, methylene chloride, amino acids,
antibiotics, radionuclides, and other organic and inorganic substances.
The typical SLM(TM) module is cylindrical in shape and can be
situated on a surface or in an area the size of a desktop. The module casing is
typically constructed of plastic and contains the microporous fiber membrane
through which the target element or compound is separated from the contaminated
feedstream. At one end of the module, there is attached a set of pumps and
tubing that feeds the contaminated feedstock from its point of origin (such as a
metal plating tank or bath) into the module. Additional pumps and tubing are
attached to feed and recycle the strip solution which concentrates the
contaminant that is being deposited continuously by Separation's proprietary
chemicals resident in the membrane, and discharge tubing or piping is attached
at the other end of the module, to carry away the separated concentrated metal
solution or other compound, and the wastewater and other non-reusable
by-product. Separation plans to produce a range of modules that will precisely
conform to the customer's requirements for volume and capacity, and thus
accommodate the available space in the customer's facility. Separation also
formulates the active chemical compound for the process in each customer
application, and performs the initial installation of the equipment at the
customer site. The customer will operate the equipment and, using computer data
links, Separation will monitor the equipment and process while in operation.
Laboratory and Other Test Results
In more than 100 laboratory and other tests to date, SLM(TM)
has demonstrated the ability to successfully separate a variety of metals and
other substances from liquid and gaseous process streams. In each instance, the
process stream was reduced to levels approaching federal guidelines under the
Federal Clean Water Act for the disposal of the reacted process stream as normal
wastewater effluent, and the recovered materials were of sufficient quantity and
purity as to economically permit the reuse thereof in most commercial
applications. Test results included the following:
<TABLE>
<CAPTION>
APPLICABLE
MATERIAL BEFORE TREATMENT AFTER TREATMENT FEDERAL GUIDELINE
- -------- ---------------- --------------- -----------------
<S> <C> <C> <C>
Metals:
Zinc 1,000 ppm Less than 2 ppm (after 30 minutes) Less than 2 ppm
Nickel 3,200 ppm Less than 1.6 ppm (after 30 minutes) Less than 2 ppm
Chromium (hexavalent) 630 ppm 0.03 ppm (field test) 0.05 ppm
Aluminum 195 ppm 100 ppm (after 15 minutes) 30 ppm
Silver 177 ppm 1 ppm Less than 2 ppm
</TABLE>
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<PAGE> 12
<TABLE>
<CAPTION>
APPLICABLE
MATERIAL BEFORE TREATMENT AFTER TREATMENT FEDERAL GUIDELINE
- -------- ---------------- --------------- -----------------
<S> <C> <C> <C>
Organics:
Phenol 10,000 ppm Less than 10 ppm Less than 30 ppm
Nitrophenol 10,000 ppm Less than 10 ppm Less than 30 ppm
Biochemicals:
Phenylalanine 5,000 ppm Less than 10 ppm Less than 30 ppm
Radionuclides:
Cesium 10 ppm Less than 5 parts per billion (ppb) Less than 10 ppb
Rhenium 5 ppm Less than 5 ppb Less than 10 ppb
Anions:
Nitrates 62,000 ppm Less than 100 ppm Less than 10 ppm
</TABLE>
All of these tests were performed on limited quantities of
process streams, and there can be no assurance that the same or similar results
would or could be obtained on a large-scale commercial basis or on any specific
project. Other than with respect to Separation's tests involving the separation
and recovery of zinc, nickel and chromium, no other tests conducted by
Separation have been independently verified.
Commercialization and Marketing Strategy
During the initial commercialization phase, Separation expects
to lease its equipment to customers, with the lease payments being due and
payable after installation and successful start-up of the equipment. When
replacement modules are required, Separation expects to supply these modules at
a reasonable mark-up over their cost. As new patents are filed and issued,
Separation may, for certain applications, determine to make a direct sale of the
equipment with additional long-term royalty payment provisions. Separation also
expects to obtain revenues through servicing the SLM(TM) equipment, including
periodic replacement of the membrane component. In addition to leasing and
selling its equipment, Separation intends to charge its customers based on a
percentage of the customer's actual cost savings derived from reduced disposal
costs and recovered reusable materials. In applications in which reusable
materials are not recovered, Separation's ongoing charges may be based on the
volume of materials processed. Although Separation plans to focus its initial
marketing efforts on domestic businesses, Separation will also be prepared to
pursue international opportunities, which may arise from successful
presentations to multinational corporations or from overseas referrals by
domestic entities.
In specific industries and for specific applications,
Separation intends to emphasize and exploit the following attributes of SLM(TM).
Metals Separation and Recovery. Separation's initial marketing efforts
will be in the industrial sector, in which the separation and recovery of
metal-bearing liquid solutions present a substantial market. Primary among the
potential customers in this area are metal plating and metal finishing
operations, which generate substantial volumes of mixed metals process streams
for which no previous technology was available to effect proper separation.
In September 1996, Separation installed a commercial scale
SLM(TM) unit on-line at Plating Technology Inc., a Columbus, Ohio metal plating
company ("PTI"). The unit operated in a batch and on a continuous mode for three
months, and, based on operating data results, successfully separated and
recovered nickel and zinc effluent streams with concentrations varying from 100
to 1,000 ppm. DLZ Laboratories, Inc., an independent testing laboratory,
verified that the SLM(TM) unit processed the initial batch of process effluent
stream
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<PAGE> 13
and reduced nickel and zinc contamination from 900 ppm to 2 ppm in one hour.
Separation's own data indicate that, in ongoing use on effluent streams
containing nickel and zinc concentrations of 200 to 400 ppm, this SLM(TM) unit
has consistently reduced the level of contaminants to 1 to 5 ppm. The
decontaminated process effluent stream is being recycled into PTl's plating line
rinse tanks, saving PTI its normal consumption of make-up water at a rate of
five gallons per minute.
Based on management studies and discussions with metals
industry executives, the Company believes that the major competitive technology
in this area is precipitation, which generates a metallic sludge by-product
requiring further treatment prior to landfill disposal. By contrast, SLM(TM)
does not generate harmful metallic sludges, and instead enables nearly 100%
process water recycling, while also enabling recovery of valuable raw materials.
As costs of environmental compliance continue to mount, the Company expects
SLM(TM) to become a preferred alternative to existing metals separation methods.
Gas Separation. The SLM(TM) equipment and technology can also be
utilized to separate and recover valuable gases (such as nitrogen) from mixed
gaseous and liquid compounds. For example, nitrogen is used for a wide variety
of process applications, including oil recovery, food processing, metal heat
treatment and pharmaceutical testing and development.
Nitrogen is typically obtained by separating it from oxygen, using
processes such as cryogenic distillation, absorption, catalytic removal, and
permselective polymeric membrane separation. However, each of these processes
has drawbacks, which can include high energy usage, high pressure and
temperature requirements, and/or relatively low purity of the recovered gas. The
SLM(TM) process is predicted to overcome these drawbacks by yielding relatively
pure nitrogen in a low-energy, low capital cost process conducted at ambient
temperature and pressure. Separation has prepared a proposal for a prototype
unit for the production of high-purity nitrogen for use in food processing, but
has not otherwise developed a strategy or targeted a market for
commercialization of the gas separation application.
Organics Separation and Recovery. As of August 1, 1996, based on market
data compiled by Separation, there were more than 10,000 organic chemical
industry companies operating in the United States. These companies generate
significant volumes of waste process streams, including mixed
organic/non-organic streams. SLM(TM) has been demonstrated to have significant
capabilities in the separation and recovery of a variety of contaminants,
including phenol and nitrophenol (a phenolic derivative), and the Company
believes that such capabilities, although untested, extend to other organic
chemicals such as volatile organic compounds, petrochemicals, other phenolic
derivatives, olefin alkanes and acid gases.
Currently, the primary technology utilized in this area is activated
carbon treatment. Like the other slow biological treatment processes utilized in
this area, the by-products are often more toxic than the original compound.
Separation intends to demonstrate to chemical manufacturers that SLM(TM) is
effective in dealing with the wide variety of contaminants generated by these
businesses, and that use of SLM(TM) will substantially reduce the environmental
risks and costs associated with traditional separation methods.
Biochemicals Separation and Recovery. SLM(TM) has also been
demonstrated to have significant capabilities in the separation and recovery of
biochemicals, including phenylalanine (an amino acid), and the Company believes
that such capabilities, although untested, extend to other biochemicals such as
proteins, other amino acids, antibiotics, glycerides, fatty acids, drug delivery
vehicles and other pharmaceuticals. Mixed wastes containing these materials are
generated in both research and development functions and in manufacturing
functions. These materials have substantial value, and Separation intends to
emphasize both the value of the recovered materials and the enhanced and
speedier environmental compliance attributes of SLM(TM).
Currently, the primary competing technology in this area is
chromatography, which requires substantially greater time to treat significant
volumes of material, and is substantially less selective in the types of
materials that can be separated from the liquid feedstream.
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<PAGE> 14
Environmental Remediation and Restoration. The Company believes that
SLM(TM) has significant potential for application to environmental remediation
and restoration. Separation is currently involved in pilot projects for the
decontamination of water in the Port of Baltimore. In the case of a project such
as the Port of Baltimore project, it is expected that the remediating technology
will be applied continuously over a period of many years, until the subject
contamination (in the case of Baltimore, chromium leaching from underlying soil
into the aquifer) has been demonstrated to have been abated for a significant
period of time.
In contrast to other remediation technologies, the Company believes
that SLM(TM) has the attributes of low initial capital costs, low operating
costs and the ability to recover heavy metals, organic chemicals and varied
volatile organic compounds for reuse.
In August 1996, Separation completed an on-site demonstration of
SLM(TM) for the decontamination of water in the Port of Baltimore. During seven
hours of operation, a single SLM(TM) unit, in a single pass-through of feed-
stream, processed 90 gallons of water containing more than 630 ppm of hexavalent
chromium and reduced the concentration level to 0.7 ppm, slightly above the
federal guidelines for unregulated discharge of total chromium. The results of
this test were verified by Artesian Laboratories, Inc., an independent testing
laboratory. Separation returned to Baltimore in February 1997 at the invitation
of the Port and Maryland Environmental Service. During this demonstration, over
2000 gallons of the same feedstream used in the first demonstration was
processed. Hexavalent chromium was reduced to 0.03 ppm, well below the federal
guidelines for unregulated discharge. Due to the success of these
demonstrations, the State of Maryland informed Separation in February 1997 that
it will recommend including the SLM(TM) process as an eligible technology in the
bid specifications to remediate the groundwater at the Port of Baltimore. The
Company believes that compliance with the federal guideline can be achieved
either by refinement of chemical formulation or process procedure, by dilution
of the processed water with a small amount of uncontaminated water, or by
passing the processed water through a larger or supplemental SLM(TM) unit. The
Company believes that the same process is capable of achieving comparable
results in the same time period on substantially greater volumes of contaminated
water, either by increasing the flow of feedstream into the membrane, by
configuring and utilizing a larger module, or by installing and operating
additional modules. As indicated above, this demonstration was performed on
limited quantities of process streams, and there can be no assurance that the
same or similar results would or could be obtained on a larger scale.
To speed its entry in this market, Separation intends to enter into
collaborative joint working and marketing arrangements with established
engineering and environmental service organizations which are expected to
provide technical and professional expertise, market presence and credibility.
Although Separation has entered into memorandums of understanding with several
such companies, Separation has not to date entered into any definitive
agreements or received any firm contract awards.
Radionuclide/Mixed Waste Separation. In the United States, there are
numerous sites operated or maintained by the DOE and/or the DOD at which there
are present "mixed wastes" containing radionuclides intermingled with other
hazardous wastes. These sites are also contaminated with other compounds
associated with nuclear weapons, testing and energy. SLM(TM) has been
demonstrated to have significant capabilities in the separation of radionuclides
such as cesium, technetium and rhenium, and the Company believes that such
capabilities, although untested, extend to most of the other compounds found at
such sites. The United States government estimates that potential government
expenditures in this market could be between $234 billion and $389 billion over
the course of the next 75 years.
This element of the market is a significant subcategory of the general
environmental remediation that can be undertaken with SLM(TM). In addition to
low initial capital costs and low operational costs, SLM(TM) has the advantage
of cost-effectively separating both dissolved mixed waste and radionuclides, and
allowing separate handling and disposal of both hazardous waste types.
Separation anticipates pursuing this market area in collaboration with ASI and
other established engineering and environmental service organizations, who can
provide technical and professional expertise, market presence and credibility.
Neither Separation nor any of its collaborative partners have been
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<PAGE> 15
awarded any contracts to use SLM(TM), and there can be no assurance as to
whether or when any such contracts may be obtained.
In January 1997, Separation entered into a license agreement with
Lockheed Martin, manager of Oak Ridge (the "Lockheed License Agreement"). Under
the terms of the Lockheed License Agreement, Separation received the exclusive
worldwide license, subject to a government use license, to use and develop the
technology related to the separation of the radionuclides technetium and rhenium
from mixed wastes containing radioactive materials. Separation also received
under the Lockheed License Agreement the right to exploit the technology for
other commercial applications. Pursuant to the Lockheed License Agreement,
Separation made an initial cash payment of $50,000 upon the execution of the
agreement and is obligated to pay, commencing in the third year of the Lockheed
License Agreement, a royalty to Lockheed Martin of 2% of net sales (less
allowances for returns, discounts, commissions, freight, and excise or other
taxes) up to total net sales of $4,000,000 and 1% of net sales thereafter. In
addition, Separation has agreed to guarantee Lockheed Martin, during the term of
the Lockheed License Agreement, an annual minimum royalty, of $15,000 commencing
in the third year of the Lockheed License Agreement. The Lockheed License
Agreement, which may be terminated at any time solely by Separation, has a term
which will last until the end of the life of all patents or patentable claims
described in or ultimately arising out of the provisional patent recently filed
jointly by Separation and three colleagues of Srinivas Kilambi, Ph.D.,
Separation's Vice President-Technology, who worked with him at Oak Ridge,
covering their inventions related to radionuclides. Based on tests conducted at
Oak Ridge since May 1994, the Company believes that this technology is capable
of selectively extracting and recovering technetium, rhenium and other
radioactive isotopes as a concentrated aqueous solution which can be reused in
various scientific applications or disposed of by government -- approved
techniques including long-term storage. The Company believes that this
technology can be used to remediate nuclear waste tanks stored at the DOE's
atomic energy plants in Rocky Flats, Colorado, Idaho Falls, Idaho, Paducah,
Kentucky, Weldon Springs, Missouri, Frenchman Flat, Nevada, Los Alamos, New
Mexico, Aiken, South Carolina, Oak Ridge, Tennessee, Pantex, Texas and
Hanford, Washington, and intends to pursue such opportunities through
Separation. According to DOE sources, there are approximately 100 million
gallons of mixed radioactive and hazardous chemical waste stored at these
plants.
COMMODORE CFC TECHNOLOGIES, INC.
Through Refrigerant, the Company has developed and patented a process
which, in test applications of limited quantities of CFCs has been able to
separate mixtures 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 the end of 1996, there will be over 120,000,000 cars in the United
States alone that will still rely on dichlorodifluoromethane, also known as
freon ("R- 12"), as the refrigerant in their systems. Based on test results to
date, it appears that Refrigerant's process can provide the required stocks of
R-12 economically through its patented separation process.
Refrigerant Technology
Refrigerant'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 Refrigerant
process employs fundamental chemical principles in novel combinations to deal
with two aspects of the CFC problem:
1. 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 using
SET(TM), which is believed to have considerable cost advantage
over alternative destruction processes.
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<PAGE> 16
To date, the separation and destruction technologies have proven
effective in test applications of significant quantities of CFCs. The Company
has begun to place the technologies into commercial-scale use and application.
Joint Ventures
Refrigerant received an exclusive, worldwide license from Applied for
the SET(TM) technology for use relating to destruction of refrigerants. See
"Intercompany License" below. Refrigerant also owns a selective refrigerant
destruction technology based on its aqueous process for which patents are
pending. In addition to these technologies, Refrigerant, through its
wholly-owned subsidiary, Commodore Refrigerant Technologies, Inc. ("CORT"), has
acquired an interest in a refrigerant separation technology owned by Climate
Supply (Atlantic) Inc. ("Climate Supply"), a Canadian corporation located near
Halifax, Nova Scotia. Climate Supply owns patented equipment and a patented
process which separates refrigerants by the "fractional distillation" method.
The fractional distillation technology separates gases, including refrigerants,
through temperature and pressure differentials. On September 1, 1996, CORT
entered into a joint venture with Climate Supply. The joint venture, which is
known as CORTCLIMATE, LLC ("CORTCLIMATE"), is owned one-half by CORT and
one-half by Climate Supply, and is organized as a Delaware limited liability
company.
CORT has licensed to the joint venture the SET(TM) process for
refrigerant destruction and the aqueous technology for selective refrigerant
destruction. Climate Supply has licensed its fractional distillation technology
for separating refrigerants to the joint venture. The purpose of the joint
venture is to pursue, with certain limited territorial exceptions, worldwide
refrigerant destruction, selective destruction and separation based on the
SET(TM) process, the aqueous technology and Climate Supply's fractional
distillation technology.
On September 17, 1996, CORTCLIMATE entered into a series of agreements
with Refrigerant Products Limited of Manchester, England ("RPL"), pursuant to
which CORTCLIMATE sold fractional distillation refrigerant separation equipment
to RPL on a restricted basis and licensed the fractional distillation technology
to RPL throughout the United Kingdom in exchange for a royalty equivalent to 50%
of the net profits. The equipment recently was shipped to England where it is
expected to undergo brief operational trials before entering full-scale
commercial operations.
On August 1, 1996, CORTCLIMATE entered into a License and Processing
Agreement with North East Separation Technologies, LLC ("North East") pursuant
to which CORTCLIMATE licensed fractional distillation refrigerant separation
equipment. In return, North East agreed to process mixed refrigerant supplied to
it by CORTCLIMATE and obtained by itself for a specified fee. CORTCLIMATE
expects to profit from the difference between the fees it receives for
processing mixed refrigerant and the fee it pays North East for processing it,
as well as from the fee it will receive from refrigerants obtained directly and
processed by North East.
CORTCLIMATE is currently negotiating with a number of other companies
throughout the United States and throughout the world to establish refrigerant
processing centers where used refrigerant can be destroyed, selectively
destroyed or separated based on the SET(TM), aqueous and fractional distillation
separation technologies. Refrigerant believes that international business
arrangements are likely to resemble the RPL business arrangement and that U.S.
business arrangements are likely to resemble the North East business
arrangement.
On February 6, 1997, CORTCLIMATE entered into a series of agreements
with Solvents Australia (Pty.) Limited ("Solvents Australia") pursuant to which
CORTCLIMATE sold fractional distillation refrigeration separation equipment to
Solvents Australia on a restricted basis and licensed the fractional
distillation technology to Solvents Australia for the use throughout Australia
in exchange for a royalty ranging from 4-1/2% to 9% of net sales of products and
processes attributable to the use of the fractional distillation technology in a
refrigerant separation business owned and operated by Solvents Australia, plus a
50% interest in the net profits earned by the Solvents Australia refrigerant
separation business. The business arrangement is in full-scale commercial
operation.
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<PAGE> 17
INTELLECTUAL PROPERTY
COMMODORE ADVANCED SCIENCES, INC.
CAS has seven United States patents which issued between 1987 and 1996,
and which relate to SET(TM), electrochemistry of halogenated organic compounds,
separation and destruction of CFCs and decontamination of soils containing
mercury and radioactive metals. CAS also has one Canadian patent relating to its
SET(TM) technology and is in the process of prosecuting one patent in Japan on
such technology. CAS has filed five additional United States patent applications
relating to separation and destruction of CFCs and removal of heavy metals from
soil. In November 1995, Applied filed a provisional patent application relating
to the destruction of chemical warfare agents. CAS is pursuing foreign patent
protection where it deems appropriate.
COMMODORE SEPARATION TECHNOLOGIES, INC.
Separation has filed one United States utility patent application and
two United States provisional patent applications covering the principal
features of its SLM(TM) technology. One provisional patent application covers
the joint inventions of Dr. Kilambi and Lockheed Martin, and a corresponding
utility patent application containing the specific patent claims is expected to
be filed in the near future. Separation may also pursue foreign patent
protection where it deems appropriate.
COMMODORE CFC TECHNOLOGIES, INC.
Refrigerant has one patent and one patent filing as of the date of this
Annual Report, and Refrigerant is licensed to utilize SET(TM) for CFC
applications.
INTERCOMPANY LICENSE
CAS has granted to Applied and its subsidiaries (other than CAS and its
subsidiaries) the exclusive world-wide right (with the right to sublicense) to
make, use, sell and exploit, for itself or jointly with other third parties, in
all domestic and international markets and for all applications, all of the
inventions and technology under all patents, discoveries, technology and other
intellectual property now or hereafter owned or otherwise possessed by CAS in
connection with SET(TM); provided that such license expressly limits the
licensees' rights to the licensed patents and technology to the destruction of
CFCs and other ozone-depleting substances. It is contemplated that subsidiaries
of CAS will render services in the future to Applied in respect of Refrigerant's
business.
COMPETITION
COMMODORE ADVANCED SCIENCES, INC.
CAS anticipates that the initial market for commercial private sector
applications of SET(TM) will be the hazardous and non-hazardous waste and
industrial by-products treatment and disposal market. This market is
characterized by several large domestic and international companies and numerous
small companies, many of whom, including Molten Metal Technology, Inc., have
substantially greater financial and other resources than CAS. Although CAS
believes that it possesses the only Nationwide Permit for destroying PCBs, any
one or more of CAS's competitors or other enterprises not presently known may
develop technologies which are superior to the technologies utilized by CAS. To
the extent that CAS's competitors are able to offer comparable services at lower
prices or of higher quality, or more cost-effective remediation alternatives,
CAS's ability to compete effectively could be adversely affected.
The domestic and international governmental public sector of the market
is dominated by many large multinational corporations who are presently engaged
in providing incineration and other conventional technologies in decontaminating
chemical weapons and warfare agents, concentration of nuclear wastes and the
decontamination
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<PAGE> 18
of military vessels and other hardware. These competitors include Raytheon
Corporation (the current general contractor for the Johnston Atoll incinerator),
EG&G, Inc. (the general contractor for the Tooele Army Depot), Mason and Hanger
(the general contractor for the Newport News naval facility), Waste Management
Corporation (a bidder for domestic "large burial" stockpile weapons
decontamination), and others, including Browning-Ferris Industries, Inc., Jacobs
Engineering, Inc., Fluor Daniel Corporation and Lockheed Martin Marietta
Corporation. All of these corporations have substantially greater financial,
personnel and other resources than CAS. In addition, many prospective users of
SET(TM) have already committed substantial resources to other forms of
environmental remediation technology, including incineration, plasma arc,
vitrification, molten metal, molten salt, chemical neutralization, catalytic
electrochemical oxidation and supercritical wet oxidation.
CAS believes that its ability to compete in both the commercial private
and governmental public sectors is dependent upon SET(TM) being a superior, more
cost-effective method to achieve decontamination of a variety of materials.
ADVANCED SCIENCES, INC.
Advanced Sciences has been primarily engaged in providing environmental
engineering and scientific support services to United States government
agencies, such as the DOE and DOD. Based on market data compiled by Advanced
Sciences, the largest market for environmental services today is the United
States government, which is expected to increase its spending level for
environmental services to approximately $11.2 billion by 1999. The DOE and DOD
are expected to account for approximately 66% of such expenditures. Advanced
Sciences currently occupies a position in the waste management and environmental
services arena by virtue of its long-term record for providing environment
services to the DOE and DOD.
External developments and forces affecting Advanced Sciences include
competition from its competitors, as well as demographic and technological
trends that influence the composition and needs of its customer base and the
usefulness and competitive position of its services. In addition, in order to
maintain its position in its market, Advanced Sciences must be able to respond
to economic trends and regulatory actions that affect the usefulness and
accessibility of its services and control its costs of doing business.
In the hazardous waste management market, Advanced Sciences'
competitors include such firms as Roy F. Weston, Jacobs Engineering, Science
Applications International Corp., CH2M Hill, and CDM. In providing environmental
impact assessment services, Advanced Sciences' principal competition in this
market sector include Tetra Tech, The Earth Technology Corp., Dames & Moore and
Woodward-Clyde. Primary factors affecting Advanced Sciences' competitiveness in
this market are (i) its ability to continue to attract and retain qualified
technical and professional staff with quality project performance records and
(ii) its ability to control its costs of doing business.
In an effort to maintain its competitive position, Advanced Sciences
has developed a solid infrastructure, acquired a qualified professional staff,
and developed aggressive marketing objectives to provide hazardous waste
management and environmental sciences to the DOE, DOD and private sector
industrial clients. Advanced Sciences' believes its competitive position with
the DOE and DOD is enhanced by the physical proximity of its plants to DOE and
DOD sites, its skilled professional staff, prior project experience with the DOE
and DOD, numerous existing multi-year contracts with the DOE and DOD, integrated
services, and high quality performance.
COMMODORE SEPARATION TECHNOLOGIES, INC.
The most common alternative methods for metals separation from
solubilized process streams presently include ion exchange, reverse osmosis,
precipitation, ultrafiltration and chromatography. The Company believes that
most of these methods have certain drawbacks, including lack of selectivity in
the separation process, inability to handle certain metals in the process
streams, and the creation of sludges and other harmful by-products which require
further post-treatment prior to disposal. For example, reverse osmosis and
ultrafiltration are incapable of
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<PAGE> 19
separating chrome and chromium materials from wastewater streams, and
precipitation results in the production of sludge which requires dewatering,
drying and disposal in a landfill. Certain of these other technologies also
entail long process times, and are relatively expensive.
By contrast, SLM(TM) is capable of handling a broad range of compounds
in a faster and relatively inexpensive manner. Furthermore, the by-products of
the SLM(TM) process consist primarily of wastewater, which can be discharged as
normal wastewater effluent, and to a substantially lesser extent and in only
rare circumstances, materials requiring landfill disposal.
Separation technologies are currently utilized by a wide variety of
domestic and international companies, including several large companies having
substantially greater financial and other resources than the Company. Although
the Company believes that SLM(TM) has substantial advantages over all other
known separation technologies, any one or more of the Company's competitors, or
other enterprises not presently known, may develop technologies which are
superior to SLM(TM). To the extent the Company's competitors are able to offer
comparable services at lower prices or of higher quality, or more cost-effective
alternatives, the Company's ability to compete effectively could be materially
adversely affected. The Company believes that its ability to compete in both the
commercial and governmental sectors is dependent upon SLM(TM) being a superior,
more cost-effective method to achieve separation and/or recovery of a variety of
materials in varying amounts and configurations. In the event that the Company
is unable to demonstrate that SLM(TM) is a technical and cost-effective
alternative to other separation technologies on a commercial scale, the Company
may not be able to successfully compete.
COMMODORE CFC TECHNOLOGIES, INC.
The Company believes that the market for CFC separation, selective
destruction, and full destruction will continue to be fragmented due to existing
technologies in the marketplace and inconsistent supplies of products to be
separated and destroyed. In the case of full destruction, incineration is the
main competition. In several countries, incineration is not permitted, which
gives the SET(TM) technology an operating advantage. In the area of CFC
separation, the Company believes that Refrigerant holds one of the most
efficient and portable technologies in the world for the effective separation of
CFCs and Halons. Although several companies have entered into this market in the
past 12 months with other forms of non-portable technology, Applied and its
joint venture partners believe the mobility and ease of use of Refrigerant's
technologies make them more attractive then the alternatives in the marketplace.
RESEARCH AND DEVELOPMENT
Research and development activities are ongoing and utilize internal
technical staff as well as independent consultants retained by the Company and
its subsidiaries. All such activities are company-sponsored. Research and
development expenditures for the Company and its subsidiaries were $2,997,000
and $1,990,000 for each of the years ended December 31, 1996 and 1995,
respectively.
ENVIRONMENTAL MATTERS
SET(TM)
The environmental legislation and policies which the Company believes
are applicable to SET(TM) in the United States primarily include the Toxic
Substances Control Act ("TSCA"), and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), as amended by Superfund
Amendments and Reauthorization Act of 1986 ("SARA"), and may include, on a case
by case basis, the Clean Air Act of 1970, as amended (the "Clean Air Act").
These laws regulate the management and disposal of toxic and hazardous
substances, provide for the protection of land and groundwater resources, and
control the discharge of pollutants into the air. Many of these laws have
international counterparts, particularly in Europe and elsewhere in North
America.
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<PAGE> 20
TSCA regulates the manufacture, distribution, and sale of chemical
substances, and requires testing of new chemicals and new uses of known
chemicals that may present an unreasonable risk of injury to health or the
environment. The EPA, through TSCA, has adopted comprehensive regulations for
PCB's and other halogenated substances, as part of a vast regulatory program
covering thousands of chemicals.
CERCLA and subsequent amendments under SARA (often referred to
collectively as Superfund) impose strict, retroactive liability upon persons who
generated, transported or arranged for the transportation of hazardous
substances or owned or operated the vessels or facilities at which such
substances were disposed. CERCLA provides for the investigation and remediation
of hazardous substance sites and mandates that any hazardous substances
remaining on-site must meet certain regulatory requirements, with a preference
for innovative technology. These program regulations may create an incentive to
utilize environmental-friendly technologies such as SET(TM), which destroy
targeted wastes without creating additional residual waste product. Moreover, to
the extent hazardous substances are effectively destroyed, potential liability
can be eliminated or significantly reduced.
The Clean Air Act empowered the EPA to establish and enforce ambient
air quality standards and limitations on emissions of air pollutants from
specific facilities. In 1987, the EPA began to enforce stricter standards for
incineration emissions. With more stringent regulations on waste reduction
technologies, the Company believes that SET(TM) could obtain a desired market
share since, in most cases, it produces little or no air emissions.
CERCLA imposes strict, joint and several liability upon owners or
operators of facilities when a release or threatened release of a hazardous
substance has occurred, upon parties who generated hazardous substances that
were released at such facilities and upon parties who arranged for the
transportation of hazardous substances to and from such facilities. CAS's plans
to own and operate SET(TM) at on-site installations expose CAS to potential
liability under CERCLA for releases of hazardous substances at those sites. In
the event that off-site treatment storage or disposal facilities utilized by CAS
for final disposition of residues from SET(TM) are targeted for investigation
and clean-up under CERCLA, CAS could incur liability as a generator of such
materials or by virtue of having arranged for their transportation and disposal.
In light of such potential liability, CAS has designed the SET(TM)
technology to minimize the potential for release of hazardous substances into
the environment. In addition, CAS has developed plans to manage the risk of
CERCLA liability, including training of operators, use of operational controls
and structuring of its relationships with the entities responsible for the
handling of waste materials and by-products. CAS also maintains insurance with
respect to environmental claims, although there can be no assurance that such
insurance will be adequate.
The Clean Air Act Amendments of 1990 impose strict requirements upon
owners and operators of facilities that discharge pollutants into the
environment. These amendments may require that certain air emission control
technology be installed on the SET(TM) systems in the event that there is any
discharge of non-recovered gases into the environment. Such additional air
emission controls can be costly and require an air permit to construct and
operate.
On April 3, 1996, Applied was selected by the White House as one of
nine companies to participate in the Rapid Commercialization Initiative ("RCI"),
which is a component of the Clinton Administration's efforts to streamline the
commercialization process for new environmental technologies, and to build
cooperative interactions between business and government to bring environmental
technologies to market more rapidly and efficiently. Under the RCI, Applied
intends to form "working partnerships" with the EPA and other governmental
agencies for the purpose of developing and implementing policies and strategies
for the commercialization of SET(TM). Although there is no funding through the
RCI, it is expected that the EPA and other governmental agencies will provide
permitting and siting assistance under the program to facilitate and expedite
the issuance of permits for site specific demonstrations of SET(TM), as well as
assistance to certify and publish the on-site test results of such
demonstrations.
Effective March 18, 1996, the EPA lifted a ban dating to 1980 on the
import of waste materials containing certain high concentrations of PCBs. The
new regulations are expected to make disposal capacity in the United
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<PAGE> 21
States available to waste generators in Mexico and Canada, where PCB waste
disposal capacity is less available. The EPA has estimated that these
regulations may create an additional market for United States-based PCB
disposers of between $50.0 million and $100.0 million per year for the next five
years.
CAS possesses a Nationwide Permit issued by the EPA under the
Alternative Destruction Technology Program that allows CAS to use SET(TM)
on-site to treat PCB-contaminated soils and metallic surfaces. The Nationwide
Permit contains numerous conditions for maintaining the Nationwide Permit and
there can be no assurance that CAS will be able to comply with such conditions
to maintain and/or secure renewal of the Nationwide Permit. In addition, if
environmental legislation or regulations are amended, or are interpreted or
enforced differently, CAS may be required to meet stricter standards of
operation and/or obtain additional operating permits or approvals. Failure to
obtain such permits or otherwise comply with such regulatory requirements could
have a material adverse effect on CAS and its operations. See "-- EPA Nationwide
Permit and Testing Results."
SLM(TM)
Separation's operations, as well as the use of specialized technical
equipment by its customers, are subject to numerous federal, state and local
regulations relating to the storage, handling and transportation of certain
regulated materials. Although Separation's role is generally limited to the
leasing of its specialized technical equipment for use by its customers, there
is always the risk of the mishandling of such materials or technological or
equipment failures, which could result in significant claims against Separation.
Any such claims against Separation could materially adversely affect the
Company's business, financial condition and results of operations.
Separation maintains environmental liability insurance with limits of
$1.0 million per occurrence and $1.0 million in the aggregate. Separation may be
required to obtain environmental liability insurance in greater amounts in the
future as SLM(TM) is commercialized. There can be no assurance that such
insurance will provide coverage against all claims, and claims may be made
against Separation (even if covered by Separation's insurance policy) for
amounts substantially in excess of applicable policy limits. Any such event
could have a material adverse effect on Separation's business, financial
condition and results of operations.
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
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 deposited
into a Harvest interest-bearing account. As of December 31, 1996, Harvest had
$1,095,000 in an interest-bearing account and an amended $4,238,000 intercompany
demand note (the "Company 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.
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<PAGE> 22
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.
Harvest currently has a reinsurance quote of $1,275,000 and the Company
has adjusted the insurance reserve on its balance sheet to reflect this.
EMPLOYEES
The Company (including all of its direct and indirect subsidiaries) had
a total of 144 employees as of March 14, 1997. None of such employees are
covered by collective bargaining agreements, and the Company's relations with
its employees are believed to be satisfactory.
ITEM 2. PROPERTIES
THE COMPANY
The Company's executive offices are located in New York City in
approximately 2,000 square feet of space leased by an affiliate of Bentley J.
Blum, a director and a principal shareholder of the Company. The Company's
financial offices are located in Great Neck, New York, in approximately 2,000
square feet of space leased from a non-affiliate, under a lease terminating on
September 30, 1998. The Company's total annual rent expense is approximately
$89,000.
In March 1991, the Company paid $200,000 to acquire a 14.0625% working
interest in an oil and gas field located in Oklahoma (the "Field"). The Blum
Family Trust, of which Mr. Blum is a trustee, also participated in this
acquisition. The Company invested an additional $9,375 and $37,500 in the
venture in 1993 and 1992, respectively.
In 1994, the Company exchanged its interest in the Field for a joint
ownership interest in an oil and gas field located in Louisiana (the "Louisiana
Property"). The Company has a 22.67% 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 require minor
work to be brought back on line. In addition, a geological and geophysical study
on the Louisiana Property was performed in 1995 to recommend new drilling
locations and the operator is preparing to initiate a drilling program. The
Company's portion of revenues and expenses relating to the property were
$12,627 and $57,220, respectively in 1996 and $4,300 and $13,600,
respectively, in 1995. The Blum Family Trust also participated in this
acquisition.
APPLIED
Applied leases approximately 7,000 square feet in Columbus, Ohio from
an unaffiliated third party under a month to month lease, which Applied uses as
its laboratory and offices. Applied also leases approximately 10,000 square feet
of space in Marengo, Ohio (approximately 30 miles north of Columbus, Ohio) from
an affiliated third party under a lease expiring in August 1997, which Applied
uses as its equipment and SET(TM) demonstration and testing facilities. In the
event that Applied does not extend or renew such leases, the Company believes
that there are comparable facilities available at lease rates comparable to
those currently paid by Applied.
Applied's principal executive offices are located in approximately
2,000 square feet of office space in McLean, Virginia under a lease expiring in
May 2002. Applied pays $2,500 per month, on a month-to-month basis, under such
lease.
Applied has leased approximately 11,000 square feet of space, and plans
to lease approximately 10,000 square feet of additional space, in Houston,
Texas, for testing, additional research and development, equipment
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<PAGE> 23
demonstration and assembly, and executive and administrative offices. Upon
occupation of this facility, Applied will terminate its existing leases in
Columbus and Marengo, Ohio.
Applied has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which will provide administration offices, research and
testing laboratories and a SLM(TM) manufacturing plant.
ITEM 3. LEGAL PROCEEDINGS
In or about September 1991, Hesco, a former subsidiary of the Company
and a named insured under insurance policies issued by Harvest, was served with
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 which plaintiffs
claim was caused by the negligence of Hesco. The complaint seeks $1,250,000 in
damages. Harvest, through its counsel, is in the process of investigating and
defending the action brought against Hesco in accordance with the terms,
conditions and limitations of the insurance policy issued by Harvest to Hesco.
The outcome of the litigation cannot be determined or predicted at this time.
The Company is involved in other litigation incidental to the conduct
of its business, none of which management believes is, individually or in the
aggregate, material to the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
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<PAGE> 24
PART II
MARKET FOR REGISTRANT'S COMMON
ITEM 5. EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE INFORMATION
The Company's Common Stock is traded in the over-the-counter market.
Stock price quotations for the Company's common stock were reported on the
NASDAQ System under the symbol COES from January l, 1988 until December 26,
1989. Since December 26, 1989, stock price quotations for the Company's Common
Stock have been reported in the "pink sheets" by the National Quotation Bureau
and through the NASD OTC Bulletin Board. The quotations as reported by the
National Quotation Bureau and the NASD OTC Bulletin Board reflect inter-dealer
quotations without retail markup, markdown or commission and may not necessarily
represent actual transactions. The following table sets forth the high and low
bid quotations for the Company's Common Stock for each full quarterly period
within the two most recent fiscal years.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
High: $.938 $.938 $1.968 $1.843
Low: $.343 $.406 $ .75 $ .938
- ---------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
High: $.781 $.968 $.75 $.50
Low: $.375 $.50 $.437 $.343
- ---------------------------------------------------------------------------------------
</TABLE>
As of March 14, 1997, the Company had 58,014,368 outstanding shares of
Common Stock held by approximately 2,137 shareholders of record.
DIVIDENDS
The Company has not, for the last three fiscal years, paid cash
dividends on its Common Stock nor does the Company plan to do so in the future.
The Company paid $300,000 of dividends on its Series AA Preferred Stock in 1996.
Payment of cash dividends in the future will be dependent on the financial
condition, capital requirements and earnings of the Company and such other
factors as the Board of Directors may deem relevant.
REGISTRAR AND TRANSFER AGENT
The Bank of New York, 101 Barclay Street, New York, New York 11286, acts as the
Company's Registrar and Transfer Agent.
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<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data included in the following table as of
December 31, 1996, for the years ended December 31, 1996, 1995, 1994, 1993 and
1992 are derived from the Consolidated Financial Statements appearing elsewhere
herein. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" and the Consolidated Financial Statements and notes thereto
appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED Year Ended Year Ended Year Ended
DECEMBER 31, DECEMBER 31, December 31, December 31, December 31,
1996 1995 1994 1993 1992
----
<S> <C> <C> <C> <C> <C>
Revenue $5,253,000 $1,044,000 $1,801,000 $ 803,000 $1,075,000
Net Income (Loss) (8,311,000) (2,969,000) (3,767,000) (2,463,000) 121,000
Net Income (Loss) Per Share (.14) (.05) (.07) (.05) .003
Dividends Per Share - - - - -
Total Assets 41,113,000 5,321,000 10,776,000 15,129,000 11,418,000
Long-Term Obligations 8,333,000 4,994,000 5,735,000 8,243,000 4,292,000
(including current portions)
Redeemable Preferred Stock 0 0 0 567,000 517,000
(including accrued interest)
</TABLE>
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<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company, since its acquisition of Commodore Laboratories,
Inc. ("Commodore Labs") in December 1993, has not generated material revenues,
except from the acquisition of Advanced Sciences by Applied in the fourth
quarter of 1996, or any profits.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER
31, 1995
Revenues were $5,253,000 for the year ended December 31, 1996,
compared to $0 for the year ended December 31, 1995. Cost of sales increased to
$4,291,000 from $1,044,000 for the same periods. These increases were primarily
due to the Company's acquisition of Advanced Sciences, effective October 1,
1996. In 1995, revenues relate to income from mortgage receivables. The Company
expects a minimal amount of revenue to be generated from the remaining
non-performing mortgage in the future. An allowance has been set up to record
the receivable at its net realizable value.
For the year ended December 31, 1996, the Company incurred
research and development costs of $2,997,000, as compared to $1,990,000 for the
year ended December 31, 1995. Research and development costs include salaries,
wages and other related costs of personnel engaged in research and development
activities, contract services and materials, test equipment and rent for
facilities involved in research and development activities. Research and
development costs are expensed when incurred, except that those costs related to
the design of construction of an asset having an economic useful life are
capitalized, and then depreciated over the estimated useful life of the asset.
Research and development increased for the year ended December 31, 1996 as
compared to the year ended December 31, 1995 primarily due to the continued use
of independent consultants in the development of SET(TM). Also, the Company
hired additional technical and operational personnel to develop the SET(TM)
process.
General and administrative expenses for the year ended
December 31, 1996 were $6,406,000, as compared to $1,518,000 for the year ended
December 31, 1995. The Company and its subsidiaries hired additional executives
and staff and opened new facilities to support the increased activities of its
two new public subsidiaries in its efforts to commercialize its technology in
1996. General and administrative salaries increased by approximately $1,036,000
from 1995 to 1996. The Company experienced an increase in professional fees
including legal and accounting of approximately $723,000. Approximately
$1,038,000 of the increase relates to expenses incurred at the newly acquired
Advanced Sciences subsidiary. In addition approximatley $316,000 of expenses
relate to the closing of the Ohio facilities and relocation of its employees
and equipment to Houston, Texas. The Comapny recorded an additional $281,000 of
insurance loss reserve relating to its wholly owned captive insurance company
for which it is obtaining reinsurance. The Company also expensed approximately
$282,000 of registration costs relating to a proposed merger which did not
materialize in 1996.
Annual interest income was $621,000 for the year ended
December 31, 1996, as compared to $45,000 for the year ended December 31, 1995.
This increase resulted from the investment of the proceeds of the Company's
initial public offering during the last six months of 1996.
Interest expense for the year ended December 31, 1996 was
$808,000, as compared to $550,000 for the year ended December 31, 1995.
Interest expense increased due to additional indebtedness incurred by the
Company which included a line of credit outstanding for a portion of the year
at the Applied subsidiary, a bank loan outstanding at the Advanced Sciences
subsidiary and a note payable to a related party outstanding from July of 1996.
Equity in losses of unconsolidated subsidiary for the year
ended December 31, 1996 was $495,000, as compared to $0 for the year ended
December 31, 1995. The Company's Teledyne-Commodore, LLC joint venture commenced
reporting results of operations in October 1996.
Minority interest income for 1996 relates to the losses of the
minority ownership of the Applied subsidiary. As of December 31, 1996, the
Company owns 69.3% of Applied and therefore adjusts its consolidated results to
reflect the portion Applied's losses which it does not own.
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<PAGE> 27
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER
31,1994
The Company's purchase price at the time of the acquisitions
of Commodore Labs and Refrigerant exceeded the historical cost of the net assets
purchased by $2,457,201. This excess purchase price was previously recorded by
the Company and reported in the Company'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, the Company 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, the Company 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
$1,044,000 as compared with $1,801,000 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
$3,508,000 as compared with $4,851,000 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 Refrigerant .
- - 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.
- - In 1995, general and administrative expenses increased from
$1,357,000 to $1,518,000, an increase of $161,000. 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.
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<PAGE> 28
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.
LIQUIDITY AND CAPITAL RESOURCES
From its inception through the second quarter of 1996, the
operations of the Company's subsidiaries were financed principally by loans and
investments from the Company. On June 28, 1996, Applied successfully completed
an initial public offering of its common stock and warrants from which it
received net proceeds of approximately $30.5. In connection with the initial
public offering, Applied incurred transaction costs of approximately $649,000.
Applied allocated approximately $12.0 million of the net proceeds for the
funding of proposed collaborative joint ventures, $1.0 million of which was
allocated to Teledyne-Commodore, LLC. In addition, Applied allocated $2.0
million of the net proceeds for the leasing of a facility for testing,
additional research and development, equipment demonstration and assembly, and
executive and administrative offices. Applied anticipates continuing its
research and development activities through 1997.
In July 1996, Applied utilized a portion of the net proceeds
from its initial public offering to repay an outstanding line of credit of $2.0
million, as well as a $5,925,426 promissory note to the Company. Applied set
aside $1.0 million cash collateral to support a loan made by a commercial bank
to the Company in December 1993. In September 1996, such cash collateral was
released by the bank.
At December 31, 1996, Applied had a $7,042,000 outstanding
balance on a $9,250,000 revolving line of credit due September 30, 1997. This
increase in debt was attributable to the line of credit assumed in Applied's
acquisition of Advanced Sciences, effective October 1, 1996. See
"Business--Recent Developments-- Acquisition of Advanced Sciences, Inc." Applied
anticipates refinancing the revolving line of credit in the third quarter of
1997. In addition, Applied plans to pursue various options to finance its
anticipated capital expenditures for 1997 and 1998.
For the year ended December 31, 1996, the Company incurred a
net loss of $8,311,000. At December 31, 1996, the Company had working capital of
$12,995,000.
Effective as of December 2, 1996, the Company sold (i) all of
the outstanding capital stock of Separation and (ii) all of the outstanding
capital stock of Refrigerant to Applied, its 69.3% owned subsidiary, as part of
a corporate restructuring of the Company to consolidate all of its current
environmental technology businesses with Applied. In addition, the Company
assigned to Applied outstanding Separation notes aggregating $976,200 at
December 2, 1996, representing advances previously made by the Company to
Separation, which Applied has contributed to the equity of Separation. In
consideration for the transfer of all of the outstanding capital stock of
Separation and Refrigerant to Applied, Applied paid the Company $3.0 million in
cash and, subject to compliance with any applicable stockholder approval or
notice requirements, will issue to the Company a warrant expiring December 2,
2003 to purchase 7,500,000 shares of common stock, par value $.001 per share, of
Applied at an exercise price of $15.00 per share, valued at $2.4 million. See
"Business--Recent Developments--Sale of Commodore Separation Technologies, Inc.
and Commodore CFC Technologies, Inc." and "Certain Relationships and Related
Transactions."
In April 1997, Separation successfully completed an initial
public offering of its equity securities, from which it received net proceeds of
approximately $11.7 million. Such funds will be used primarily to finance
Separation's operations through 1997.
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.
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<PAGE> 29
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 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 deposited
into a Harvest interest-bearing account. As of December 31, 1996, Harvest had
$1,095,000 in an interest-bearing account and an amended the Company 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 and defended by Harvest.
Harvest currently has a reinsurance quote of $1,275,000 and
the Company has adjusted the insurance reserve on its balance sheet to reflect
this.
NET OPERATING LOSSES
The Company has net operating loss carry forwards of
approximately $25,197,000 which expire in the years 2000 through 2011. The
amount of net operating loss carry forward that can be used in any one year will
be limited by the applicable tax laws which are in effect at the time such carry
forward can be utilized. A valuation allowance of $12,308,000 has been
established to offset any benefit from the net operating loss carry forwards it
cannot be determined when to if the Company will be able to utilize the net
operating losses.
-27-
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company
and subsidiaries are included as ITEM 8 and can be found beginning on page F-1
herein:
Report of Independent Public Accountants.
Consolidated Balance Sheet as of December 31, 1995 and 1996.
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996.
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996.
Notes to Consolidated Financial Statements.
All financial statement schedules for which provision is made
in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable,
and, therefore, have been omitted.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company and its former auditors, Tanner + Co. ("Tanner")
mutually agreed on December 11,1996 to terminate their relationship. During the
Company's last two fiscal years, Tanner's reports on the Company's financial
statements neither contained any adverse opinions nor were qualified or
modified as to any uncertainty, except that Tanner's auditor's reports on the
Company's consolidated financial statements for the years ended December 31,
1995 and 1994 contained additional paragraphs relating to the Company
continuing as a going concern, due to significant losses and a deficit in
working capital.
During the last two fiscal years, there were no disagreements
with Tanner on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Tanner, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report.
The Company has retained Price Waterhouse LLP as its auditors
as of December 19, 1996.
-28-
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The names and ages of the executive officers, key employees
and directors of the Company, and their positions with the Company, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Paul E. Hannesson 55 Chairman of the Board and Chief Executive Officer
Edwin L. Harper, Ph.D. 55 President and Chief Operating Officer
Jerry Karlik 42 Vice President, Treasurer and Director
Andrew P. Oddi 35 Vice President, Finance
Rayburn Hanzlik 58 Vice President, General Counsel and Secretary
Bentley J. Blum 55 Director
Kenneth L. Adelman, Ph.D 49 Director
Herbert A Cohen 62 Director
David L. Mitchell 75 Director
</TABLE>
PAUL E. HANNESSON has been a director of the Company since February
1993 and was appointed its Chairman of the Board and Chief Executive Officer
in November 1996. Mr. Hannesson also served as President of the Company until
July 1996. Mr. Hannesson has been a director of Applied since March 1996,
served as its Chief Executive Officer from March 1996 to October 1996 and was
reappointed Chief Executive Officer on November 18, 1996, has served as its
Chairman of the Board since November 1996 and served as its President from
March to September 1996. Mr. Hannesson has been a director of Separation since
November 1995 and also currently serves as a director of CAS and Refrigerant.
Mr. Hannesson was a private investor and business consultant from 1990 to 1993,
and was also an officer and director of Specialty Retail Services, Inc. from
1989 to August 1991. He has served as the Chairman of the Board of Lanxide
since 1983. Mr. Hannesson is the brother-in-law of Bentley J. Blum, a director
and the principal stockholder of the Company.
EDWIN L. HARPER, PH.D. has been the President and Chief Operating
Officer of both the Company and Applied since November 18, 1996, and has also
served as Applied's Co-Vice Chairman since that date. Dr. Harper also serves as
the Chairman of the Board and Chief Executive Officer of Separation, CAS and
Refrigerant. Dr. Harper had been the President and Chief Executive Officer of
the Association of American Railroads, a trade association for the major
railroads in North America, since January 1992. Prior to such appointment, Dr.
Harper was the Co-Chief Executive Officer of Campbell Soup Company from November
1989 through January 1990, and its Executive Vice President and Chief Financial
Officer from 1986 to 1991. Dr. Harper has held several other senior executive
officer positions in the past, with Dallas Corporation (1983 to 1986), Emerson
Electric Company (1978 to 1981) and CertainTeed Corporation (1975 to 1978), and
served in the White House as Assistant to the President, Deputy Director of the
Office of Management and Budget and Chairman of the President's Council on
Integrity and Efficiency in Government from 1981 to 1983. Dr. Harper holds a
Ph.D. degree from the University of Virginia.
JERRY KARLIK has served as Vice President, Treasurer and a director of
the Company for more than the past five years.
-29-
<PAGE> 32
ANDREW P. ODDI was appointed Vice President, Finance of the Company in
April 1997. Mr. Oddi served as Vice President of Finance & Administration and
Chief Financial Officer of the Company from 1987 to April 1997, and was the Vice
President of Finance, Chief Financial Officer and Secretary of Applied from
March to November 1996. Mr. Oddi also served as Vice President-Finance of
Separation from September 1996 to April 1997. From 1982 to 1987, Mr. Oddi was
employed by Ernst & Young, independent accountants, and held the position of
audit manager in 1986 and 1987. Mr. Oddi is a certified public accountant.
RAYBURN HANZLIK joined the Company in January 1997 as Vice President,
General Counsel and Secretary. He also serves in similar capacities with
Applied, CAS, Separation and Refrigerant. During the previous five years, he
founded and was chairman of Lanxide Sports International, Inc. and Stealth
Propulsion International, Ltd., two San Diego-based technology companies in the
sporting goods and boating industries. Mr. Hanzlik has held other senior
executive positions in business and government, including partner and director
of Heidrick & Struggles, Inc. from 1985 through 1990; Administrator of the
Department of Energy's Economic Regulatory Administration from 1981 through
1985; and, White House staff from 1970 through 1975. He has also been a member
of several law firms in Washington, D.C. and Los Angeles, California. Mr.
Hanzlik holds J.D. and M.A. degrees from the University of Virginia.
BENTLEY J. BLUM served as the Chairman of the Board of the Company from
1984 to November 1996, and has served as a director of the Company since that
date. Mr. Blum served as Chairman of the Board of Applied and Commodore Labs
until November 1996, and has served as a director of Applied since that date.
Mr. Blum also currently serves as a director of Separation, CAS and Refrigerant.
For more than 15 years, Mr. Blum has been actively engaged in real estate
acquisitions and currently is the sole stockholder and director of a number of
corporations which hold real estate interests, oil drilling interests and other
corporate interests. Mr. Blum is Director of Lanxide Corporation, a research and
development company developing metal and ceramic materials; Federal Resources
Corporation, a company formerly engaged in manufacturing, retail distribution
and natural resources development; Specialty Retail Services, Inc., a former
distributor of professional beauty products; and North Valley Development Corp.,
an inactive real estate development company. Mr. Blum is the controlling
stockholder of the Company. Mr. Blum is the brother-in-law of Paul E. Hannesson,
the Chairman of the Board and Chief Executive Officer of the Company.
KENNETH L. ADELMAN, PH.D. joined the Board of Directors of the Company
and Applied in July 1996. Since 1987, Dr. Adelman has been an independent
consultant on international issues to various corporations, including Lockheed
Martin Marietta Corporation and Loral Corporation. Previously, Dr. Adelman held
positions of responsibility in arms control during most of the Reagan
Administration. From 1983 to the end of 1987, he was Director of the United
States Arms Control and Disarmament Agency. Dr. Adelman was a Professor at
Georgetown University and writer for Washingtonian Magazine from 1987 to 1991.
Dr. Adelman accompanied Ronald Reagan on summits with Mikhail Gorbachev, and
negotiated with Soviet diplomats on nuclear and chemical weapons control issues,
from 1985 to 1987. He also headed the United States team on annual arms control
discussions with top-level officials of the People's Republic of China from 1983
through 1986. From 1981 to 1983, he served as Deputy United States
Representative to the United nations with the rank of Ambassador Extraordinary
and Plenipotentiary. Dr. Adelman holds M.A. and Ph.D. degrees from Georgetown
University.
HERBERT A. COHEN joined the Board of Directors of the Company and
Applied in July 1996. Mr. Cohen has been a practicing negotiator for the past
three decades acting in an advisory capacity in hostage negotiations and crisis
management. He has been an advisor to Presidents Carter and Reagan in the
Iranian hostage crisis, the government's response to the skyjacking of TWA
Flight 847 and the seizure of Achille Lauro. Mr. Cohen's clients have included
large corporations and government agencies such as the Department of State,
the federal Bureau of Investigation, the Conference of Mayors, the Bureau of
Land Management, Lands and Natural Resources Division in Conjunction with the
EPA, and the United States Department of Justice. In addition, Mr. Cohen was
an advisor and consultant to the Strategic Arms Reduction Talks negotiating
team. Mr. Cohen holds a law degree from New York University School of Law, and
has lectured at numerous academic institutions.
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<PAGE> 33
DAVID L. MITCHELL joined the Board of Directors of the Company and
Applied in July 1996. For the past thirteen years, Mr. Mitchell has been
President and co-founder of Mitchell & Associates, Inc., a banking firm
providing financial advisory services in connection with corporate mergers,
acquisitions and diversities. Prior to forming Mitchell & Associates in 1982,
Mr. Mitchell was a Managing Director of Shearson/American Express. From 1979 to
1982, a Managing Director of First Boston Corporation from 1976 to 1978, and a
Managing Director of the investment banking firm of S.G. Warburg & Company
from 1965 to 1976. Mr. Mitchell holds a bachelor's degree from Yale University.
The Company's officer's are elected annually by, and serve at the
pleasure of, the Board of Directors, subject to the terms of any employment
agreements.
BOARD COMMITTEES
The Company's Board of Directors currently has an Audit Committee and a
Compensation Committee. The responsibilities of the Audit Committee (which
consists of Messrs. Mitchell (Chairman) and Cohen) include recommending to the
Board of Directors the firm of independent accountants to be retained by the
Company, reviewing with the Company's independent accountants the scope and
results of their audits, and reviewing with the independent accountants and
management the Company's accounting and reporting principles, policies and
practices, as well as the Company's accounting, financial and operating controls
and staff. The Compensation Committee (which consists of Messrs. Cohen
(Chairman), Mitchell and Hannesson) has responsibility for establishing and
reviewing employee compensation.
COMPENSATION OF DIRECTORS
Non-management directors of the Company will receive directors' fees of
$500 per meeting for attendance at Board of Directors meetings, and are
reimbursed for actual expenses incurred in respect of such attendance. The
Company does not intend to separately compensate employees for serving as
directors.
COMPLIANCE WITH SECTION 16(a)
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors and officers, and persons who
own more than ten percent of the Company's Common Stock, par value $.001 per
share (the "Common Stock"), to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the American Stock
Exchange. Based on the Company's review of the copies of such reports received
by the Company and on written representations received by the Company, the
Company believes that no director, officer or holder of more than ten percent of
the Common Stock failed to file on a timely basis the reports required by
Section 16(a) of the Exchange Act during fiscal 1996.
-31-
<PAGE> 34
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by
the Company and/or its affiliates and allocated to the Company's operations for
services rendered during each of 1996, 1995, and 1994 to the person serving as
the Company's current Chief Executive Officer and to each of the Company's most
highly compensated executive officers other than the Chief Executive Offer whose
total salary and bonus compensation exceeded $100,000 during any such year (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------------------------------------------
Other
Name Annual All Other
Principal Position Year Salary($) Bonus($) Compensation($) Compensation($)
- ------------------ ---- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Paul E. Hannesson 1996 310,627 200,000 -0- -0-
Chief Executive Officer 1995 186,476 -0- 96,000(1) -0-
1994 186,476 -0- 24,000(1) -0-
Edwin L. Harper 1996 14,583 100,000 -0- -0-
President and Chief 1995 -0- -0- -0- -0-
Operating Officer 1994 -0- -0- -0- -0-
Andrew P. Oddi 1996 109,230 35,000 -0- -0-
Vice President, Finance 1995 100,000 -0- -0- -0-
1994 90,000 15,000 -0- -0-
</TABLE>
(1) Represents amounts paid to Mr. Hannesson as an allowance for
living expenses in the New York Metropolitan area.
-32-
<PAGE> 35
STOCK OPTIONS
The Company does not currently have a stock option plan for
executives and/or other employees of the Company currently in effect. The
Company's 1987 Stock Option Plan, under which options to purchase an aggregate
of 300,000 shares of Common Stock were granted, expired in December 1992 and no
options were permitted to be granted thereunder since such date.
The following table sets forth certain information concerning
options granted in fiscal 1996 to the Named Executive Officers outside of any
qualified stock option plan. The Company has no outstanding stock appreciation
rights and granted no stock appreciation rights during fiscal 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realized Value at Assumed
Annual Rates of Stock Price
% of Total Appreciation
Options for Option Term
Granted to Exercise or ------------------------------------
Options Employees in Base Price Expiration 5% 10%
Name Granted (#) Fiscal Year(5) ($/sh) Date ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Paul E. Hannesson(1) 3,450,000 56.1% 1.12 11/2001 172,500 345,000
Paul E. Hannesson(2) 500,000 8.1% .53 2/2001 25,000 50,000
Edwin L. Harper(3) 2,000,000 32.5% 1.12 11/2001 100,000 200,000
Andrew P. Oddi(4) 200,000 3.3% 1.12 11/2001 10,000 20,000
</TABLE>
(1) These options were grated in November 1996. 950,000 are
exercisable immediately and 2,500,000 are exercisable at
the rate of 20% each year through November 2001.
(2) These options were granted in February 1996 and are
exercisable at the rate of 20% each year through February
2001.
(3) These options were granted in November 1996. 200,000 are
exercisable immediately and 1,800,000 are excerisable at
the rate of 20% each year through November 2001.
(4) These options were granted in November 1996 and are
exercisable at the rate of 20% each year through November
2001.
(5) Percentages based on 6,150,000 stock options granted to
employees in fiscal year 1996.
The following table sets forth certain information concerning
the exercise of options and the value of unexercised options held at December
31, 1996 by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)(1)
Shares Acquired Value Realized --------------------- ----------------
Name on Exercise (#) ($)(2) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Paul E. Hannesson -0- -0- 1,450,000 2,500,000 664,750 637,500
Edwin L. Harper -0- -0- 200,000 1,800,000 51,000 459,000
Andrew P. Oddi -0- -0- -0- 200,000 -0- 51,000
</TABLE>
(1) Represents the difference between the last sale price of the
Common Stock of $1.375 on December 31, 1996, and the exercise
price of the option multiplied by the applicable number of
options.
(2) Represents the difference between the exercise price and the
closing price on the date of exercise, multiplied by the
number of shares acquired.
-33-
<PAGE> 36
EMPLOYMENT AGREEMENTS
Paul E. Hannesson, the Company's Chairman of the Board and
Chief Executive Officer, entered into an employment agreement with the Company
in October 1996 for a term expiring on December 31, 1999. Pursuant to such
employment agreement, Dr. Harper agreed to devote his business and professional
time and efforts to the business of the Company as its Chairman of the Board and
Chief Executive Officer, and to serve in senior executive positions with one or
more of the Company's subsidiaries. The employment agreement provides that Mr.
Hannesson shall receive, among other things, a fixed base salary at an annual
rate of $395,000 for services rendered to the Company and its subsidiaries.
Pursuant to the employment agreement, Mr. Hannesson will also receive options to
purchase an aggregate of 3,450,000 shares of Common Stock, exercisable in
installments over a period of five years commencing on the date of his
employment agreement, and is also eligible to receive options to purchase common
stock of each publicly-traded subsidiary of the Company in the amount of 1.0% of
such subsidiary's total outstanding shares of common stock on the date of grant.
Applied has paid Mr. Hannesson's salary under the employment agreement since
October 1996, and will continue to pay his salary in the future.
Edwin L. Harper, Ph.D., the Company's President and Chief
Operating Officer, entered into an employment agreement with the Company in
October 1996 for a term expiring on December 31, 1999. Pursuant to such
employment agreement, Dr. Harper agreed to devote his business and professional
time and efforts to the business of the Company as its President and Chief
Operating Officer, and to serve in senior executive positions with one or more
of the Company's subsidiaries. The employment agreement provides that Dr. Harper
shall receive, among other things, a fixed base salary at an annual rate of
$375,000 for services rendered to the Company. Pursuant to the employment
agreement, Mr. Harper will also receive options to purchase an aggregate of
2,000,000 shares of Common Stock, exercisable in installments over a period of
five years commencing on the date of his employment agreement, and is also
eligible to receive options to purchase common stock of each publicly-traded
subsidiary of the Company in the amount of .75% of such subsidiary's total
outstanding shares of common stock on the date of grant. Applied has paid Dr.
Harper's salary under the employment agreement since October 1996, and will
continue to pay his salary in the future.
Each of Messrs. Hannesson and Harper are entitled to
participate in the Company's Executive Bonus Program.
Each of the foregoing employment agreements requires the
full-time services of the employees, subject to permitted service with
professional-related service organizations and other outside activities that do
not materially interfere with the individual's duties to the Company. The
agreements also contain covenants (a) restricting the employee from engaging in
any activities competitive with the business of the Company during the term of
such employment agreements, (b) prohibiting the employee from disclosure of
confidential information regarding the Company, and (c) confirming that all
intellectual property developed by the employee and relating to the business of
the Company constitutes the sole property of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee were Messrs. Herbert
A. Cohen (Chairman), David L. Mitchell and Paul E. Hannesson during the fiscal
year ended December 31, 1996. Mr. Hannesson also served as the Chairman of the
Board and Chief Executive Officer of the Company during 1996, and as its
President until July 1996. Mr. Hannesson has been the Chief Executive Officer
and a director of Applied since March 1996, has served as its Chairman of the
Board since November 1996 and served as its President from March to September
1996. Mr. Hannesson also served as a director of Separation during 1996, and
continues to serve in such capacity. No other member of the Compensation
Committee has any interlocking relationship with any other corporation that
requires disclosure under this heading.
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<PAGE> 37
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") of the Board of
Directors of the Company was established in July 1996 and did not hold any
meetings during the fiscal year ended December 31, 1996. The duties and
responsibilities of the Committee include the following:
(a) approval of annual salaries and other benefits provided
for executive officers of the Company;
(b) approval of the adoption of compensation plans in which
the executive officers of the Company may be participants and awarding of
benefits under such plans;
(c) administration and interpretation of the Company's stock
option plans, and determination of the recipients, amounts and other terms
(subject to the requirements of the Company's stock option plans) of options
which may be granted under the stock option plans from time to time; and
(d) undertaking studies and making recommendations with
respect to the Company's compensation structure and policies and the development
of management personnel.
The Committee's policies with respect to executive
compensation are intended to achieve the following goals. First, they are
intended to create base compensation levels sufficient to attract and retain
talented and dedicated executive officers. Second, the compensation policies are
intended to provide a direct link between performance during the year (both the
performance of the Company as a whole and the performance of the individual
officer) as a part of the officer's compensation. Third, the compensation
policies are intended to provide executive officers with the opportunity to
acquire an entity stake in the Company through the grant of options pursuant to
the Company's stock option plans.
During the fiscal year ended December 31, 1996, the full Board
of Directors approved bonuses and granted options to certain of its executive
officers and certain employees. In each case, the Board of Directors' decision
was based upon the principles and procedures outlined above.
COMPENSATION COMMITTEE
Herbert A. Cohen
David L. Mitchell
Paul E. Hannesson
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<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March
14, 1997 with respect to (i) the beneficial ownership of the Common Stock of the
Company by each beneficial owner of more than 5% of the outstanding shares of
Common Stock of the Company, each director, each executive officer and all
executive officers and directors of the Company as a group, and (ii) the number
of shares of Common Stock owned by each such person and group. Unless otherwise
indicated, the owners have sole voting and investment power with respect to
their respective shares.
<TABLE>
<CAPTION>
Number of Shares of Percentage of Outstanding
Number and Address of Beneficial Common Stock Beneficially Common Stock
Owner(1) Owned(2) Beneficially Owned
- -------- ------------------------- -------------------------
<S> <C> <C>
Bentley J. Blum................................ 30,224,050(3) 52.2%
Paul E. Hannesson.............................. 6,750,000(4) 11.4%
Credit Agricole Deux Sevres.................... 6,000,000(5) 9.4%
Jerry Karlik................................... 200,000 *
Andrew P. Oddi................................. 252,000 *
Kenneth L. Adelman............................. 35,000(6) *
Herbert A. Cohen............................... 35,000(6) *
David L. Mitchell.............................. 35,000(6) *
All executive officers
and directors as
a group (7 persons).......................... 37,531,050 63.1%
</TABLE>
- --------------
Percentage ownership is less than 1%.
(1) The addresses of each of Bentley J. Blum, Paul E. Hannesson, Jerry
Karlik, Kenneth L. Adelman, Herbert A. Cohen and David L. Mitchell is
150 East 58th Street, Suite 3400, New York, New York 10155. The address
of Mr. Oddi is 40 Cutter Mill Road, Suite 509, Great Neck, New York
11021. The addresses of Credit Agricole Deux Sevres is 4 Boulevard Louis
Tardy, 79000 Niort, France. Bentley J. Blum and Paul E. Hannesson are
brothers-in-law.
(2) As used herein, the term beneficial ownership with respect to a security
is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, as consisting of sole or shared voting power (including the
power to vote or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise, including a right to acquire such power(s) during the next 60
days. Unless otherwise noted, beneficial ownership consists of sole
ownership, voting and investment rights.
(3) Represents Mr. Blum's beneficial ownership of 28,224,050 shares and his
spouse's ownership of 2,000,000 shares of common stock of the Company,
representing together 52.2% of the outstanding shares of Common Stock.
As of December 31, 1996, there were 57,924,368 outstanding shares of
Common Stock. Does not include 440,000 shares of Common Stock owned by
Simone Blum, the mother of Mr. Blum, and 395,000 shares of Common Stock
owned by Samuel Blum, the father of Mr. Blum. Mr. Blum disclaims any
beneficial interest in the shares of Common Stock owned by his spouse,
mother and father.
-36-
<PAGE> 39
(4) Consists of (i) an aggregate of 2,650,000 shares of Common Stock owned
by Suzanne Hannesson, the spouse of Mr. Hannesson, (ii) 2,650,000 shares
of Common Stock owned by the Hannesson Family Trust (Suzanne Hannesson
and John D. Hannesson, trustees) for the benefit of Mr. Hannesson's
spouse and (iii) currently exercisable options to purchase 500,000 and
950,000 shares of Common Stock at $.53 per share and $1.12 per share,
respectively, representing collectively 11.4% of the outstanding shares
of Common Stock. Does not include 1,000,000 shares of Common Stock owned
by each of Jon Paul and Krista Hannesson, the adult children of Mr.
Hannesson, and additional stock options to purchase 2,500,000 shares of
Common Stock at $1.12 per share, which vest and become exercisable
ratably on November 18 of each of 1997 through 2001. Mr. Hannesson
disclaims any beneficial interest in the shares of Common Stock owned by
or for the benefit of his spouse and children.
(5) Consists of (i) the number of shares of Common Stock which could be
acquired at any time upon the conversion into Common Stock of $4,000,000
principal amount of outstanding convertible bonds (4,000,000 shares of
Common Stock) and 500,000 shares of Series AA Preferred Stock (500,000
shares of Common Stock) and (ii) the number of share of Common Stock
which could be acquired at any time upon the exercise of outstanding
warrants to acquire 1,500,000 shares of Common Stock at $.10 per share.
(6) Consists of 33-1/3% of the 105,000 stock options granted to each of
Messrs. Adelman, Cohen and Mitchell, which are immediately exercisable.
See "Executive Compensation - Stock Options."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORGANIZATION AND CAPITALIZATION OF THE COMPANY'S SUBSIDIARIES
Since its acquisition of the capital stock of Commodore Labs (formerly
A.L. Sandpiper Corporation) in 1993, the Company has advanced an aggregate of
$8,925,426 to Applied, which has been used to finance the development of
SET(TM), including salaries of personnel, equipment, facilities and patent
prosecution. These cash advances by the Company were evidenced by successive
unsecured 8% promissory notes of Applied's predecessors, and, at December
31,1995, by the Environmental Funding Note. Kraft Capital Corporation ("Kraft"),
a corporation wholly owned by Bentley J. Blum, a director and the principal
stockholder of the Company, and a director of Applied and Separation, provided
approximately $656,000 of such financing to the Company. The Company has
provided additional advances to Applied of $978,896 for the three months ended
March 31, 1996, which were repaid by Applied subsequent to its obtaining a
line of credit provided by a commercial bank in April 1996.
In March 1996, Applied was formed as a wholly-owned subsidiary of the
Company. Prior to Applied's June 1996 initial public offering, in exchange for
the issuance of 15,000,000 shares of Applied common stock, the Company
contributed to Applied (i) all of the assets and properties (including joint
working proposals, quotations and bids in respect to projects and contracts
awarded for feasibility studies), subject to all of the liabilities, of its
operating divisions relating to SET(TM) and the exploitation of the SET(TM)
technology and processes in all commercial and governmental applications; (ii)
all of the outstanding shares of the capital stock of each of Commodore Labs,
Inc., Commodore Remediation Technologies, Inc., Commodore Government
Environmental Technologies, Inc., Commodore Technologies, Inc. and Sandpiper
Properties, Inc. (except for a 9.95% minority interest in Commodore Labs, which
was held by Albert E. Abel but acquired by the Company (and thereafter
contributed by the Company to Applied upon completion of its June 1996 initial
public offering); and (iii) a portion of the Environmental Funding Note in the
amount of $3.0 million.
In April 1996, Bentley J. Blum personally guaranteed a $2.0 million
line of credit for Applied from a commercial bank. The initial borrowings under
the line of credit, in the approximate amount of $1.0 million, were utilized to
repay advances made by the Company to Applied in 1996, and the Company, in turn,
utilized such funds to repay Kraft the funds provided by Kraft to the Company
for purposes of the advances to Applied. Applied applied
-37-
<PAGE> 40
$2.0 million of the net proceeds of its June 1996 initial public offering to
repay the line of credit, and Mr. Blum's guarantee was released at such time.
In June 1996, the Company acquired from Albert E. Abel, Applied's Vice
President, the remaining 9.95% of the outstanding shares of common stock of
Commodore Labs which was not owned by Applied, and the Company contributed such
shares to Applied, for no additional consideration. To acquire the remaining
shares of Commodore Labs, the Company paid Mr. Abel the sum of $750,000 in cash,
and issued a ten-year, 8% promissory note to Mr. Abel in the principal amount of
$2,250,000, payable as to interest only until the maturity of the note on the
tenth anniversary of the date of issuance. Simultaneously, Applied settled all
outstanding obligations for accrued compensation payable to Mr. Abel and for
amount receivable by Applied from Mr. Abel, and that the net payment to Mr. Abel
arising therefrom approximated $120,000. Applied paid such amount to Mr. Abel
from the proceeds of its June 1996 initial public offering.
At December 31, 1996, the Company and its subsidiaries had advanced an
aggregate amount of $3,000,000 to Lanxide Performance Materials, Inc. ("LPM"), a
wholly owned subsidiary of Lanxide Corporation, a Delaware corporation which
specializes in the manufacture of ceramic bonding and refractory materials.
Lanxide Corporation is related to the Company by significant common ownership.
The promissory notes become due on February 28, 1998. Interest receivable on the
note totaled $18,000 as of December 31, 1996. The notes are collateralized by
the assets of LPM and guaranteed by Lanxide Corporation on behalf of its
subsidiary.
Separation was organized in November 1995 as a wholly owned subsidiary
of the Company. Effective February 29, 1996, pursuant to an assignment of
technology agreement between Separation and Srinivas Kilambi, Ph.D.,
Separation's Vice President-Technology, Separation acquired the rights to the
SLM technology from Dr. Kilambi. In consideration for such technology,
Separation transferred to Dr. Kilambi 200,000 shares of Common Stock of the
Company, which had been contributed to Separation by the Company to effect the
transaction. In exchange for the Company's issuance of such shares to
Separation, as well as the Company's funding and support of Separation,
Separation issued to the Company 10,000,000 shares of Separation common stock.
Since Separation's inception, the Company has financed the research and
development activities of Separation through direct equity investments and
loans to Separation. As of December 2, 1996, Separation's aggregate
indebtedness to the Company was approximately $976,200. The Company agreed to
contribute the entire amount of such intercompany debt to Separation's equity,
without the requirement of the issuance of any additional shares of capital
stock.
Effective as of December 2, 1996, as part of a corporate restructuring
to consolidate all of its current environmental technology businesses within
Applied, the Company transferred to Applied 100% of the capital stock of
Separation and 100% of the capital stock of Refrigerant. In addition, the
Company assigned to Applied notes aggregating $976,200 at December 2, 1996,
representing advances previously made by the Company to Separation. Such
advances have been capitalized by Applied as its capital contribution to
Separation. In consideration for such transfers, Applied paid the Company $3.0
million in cash and, subject to any applicable stockholder approval and
notification requirements, shall issue to the Company a warrant expiring
December 2, 2003 to purchase 7,500,000 shares of Applied common stock at an
exercise price of $15.00 per share, valued at $2.4 million. See
"Business--Recent Developments-- Sale of Commodore Separation Technologies,
Inc. and Commodore CFC Technologies, Inc." and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
LICENSES OF SET(TM) TECHNOLOGY
As a result of its acquisitions of the capital stock of Commodore Labs,
Applied acquired all patents, discoveries, technology and other intellectual
property in connection with the SET(TM) process system which it later
transferred to CAS effective December 1, 1996. The Company licenses from CAS the
exclusive worldwide right with the right to sublicense, to make, use, sell and
exploit, itself or jointly with other third parties, for the life of
-38-
<PAGE> 41
all patents now or hereafter owned by the CAS, the SET(TM) process and all
related technology underlying such patents and intellectual property in all
domestic and international commercial and industrial applications, in connection
with the destruction of CFCs and other ozone-depleting substances (the "CFC
Business"); provided that such license expressly limits the rights of the
licensee(s) and others who may be sub-licensees or users of CAS's patents and
technologies to the CFC Business.
TECHNOLOGY SERIES
Applied has entered into five-year technology and technical support
agreement with the Company and CFC Technologies. Pursuant to such agreement,
Applied will provide certain research and development, equipment engineering and
technical support to enable the Company and CFC Technologies to exploit the CFC
Business. Under such agreement, Applied will provide the Company and CFC the
services of certain Applied personnel and equipment. Applied will charge CFC
Technologies and the Company a fee equal to the sum of (a) the actual costs of
all materials and equipment utilized in connection with such services; and (b)
an hourly rate allocable to the services rendered by all Applied personnel which
shall be equal to 120% of the average hourly rate of compensation then payable
by Applied to such persons (based on a 35-hour work week). Under the terms of
the technology and technical services agreement, in no event will the employees
of Applied be required to expend in access of 25% of their business and
professional time in any 90-day period to rendering services to the Company or
CFC Technologies, without the majority approval or consent of Kenneth L.
Adelman, Herbert A. Cohen and David L. Mitchell, or such other members of the
Board of Directors of Applied not otherwise affiliated with or employed by the
Company, Applied or any of their respective subsidiaries.
-39-
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report:
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Financial Statements.
Report of Independent Public Accountants......................... F-1
Consolidated Balance Sheet as of December 31, 1995 and 1996...... F-2
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996........................ F-3
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996.................. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996........................ F-5
Notes to Consolidated Financial Statements....................... F-6
Financial Statement Schedules............................................. None
Exhibits.
</TABLE>
EXHIBITS NO. DESCRIPTION
3.1 Certificate of Incorporation of Commodore Environmental
Services, Inc. (1)
3.2 Certificate of Stock Designation of Commodore Environmental
Services, Inc. (6)
3.3 By-Laws of Commodore Environmental Services, Inc. (1)
10.1 Certificate from the State of Vermont for Harvest American
Insurance Company. (1)
10.2 Letter Agreement, dated March 18, 1991 with Ameritech Oil
and Gas Corporation with respect to Oklahoma oil & gas
Field. (1)
10.3 Operating Agreement, dated March 22, 1991 with Ameritech
Oil and Gas Corporation with respect to to Oklahoma oil &
gas Field. (3)
10.4 Assumption Agreement, dated April 11, 1991 by and between
Commodore Environmental Services, Inc. and Harvest American
Insurance Company. (3)
10.5 Option Agreement, dated March 15, 1993, and among Commodore
Environmental Services, Inc. and the Principal Shareholders
and Board of Directors of A.L. Sandpiper Corporation and
CFC Technologies, Inc. (4)
10.6 Option Agreement, dated March 15, 1993, by and among
Commodore Environmental Services, Inc. and Paul Hannesson.
(4)
-40-
<PAGE> 43
EXHIBITS NO. DESCRIPTION
10.7 Option Agreement, dated March 15, 1993, by and among
Commodore Environmental Services, Inc. and the Principal
Shareholders and Board of Directors of A.L. Sandpiper
Corporation and CFC Technologies, Inc. (4)
10.8 Agreement and Plan of Merger dated as of June 24, 1993
between the Company, Sandpiper, its principal shareholders
and ALS Acquisition Corp. (5)
10.9 License Agreement between Sandpiper and the Company. (5)
10.10 Employment Agreements between Sandpiper and Abel and Augur,
respectively. (5)
10.11 Non-competition Agreements between Sandpiper and Abel and
Augur. (5)
10.12 Form of the Company's Warrant. (5)
10.13 Stock Option Agreements between the Company and Abel and
Augur, respectively. (5)
10.14 Security Agreement between Sandpiper and the Company. (5)
10.15 Escrow Agreement between the Company, Sandpiper, its
principal shareholders and counsel to the parties. (5)
10.16 $125,000 Non-Recourse, Non-Negotiable, secured Promissory
Note from Albert and Connie Abel to the Company. (5)
10.17 Tax and loan Indemnity Agreement between the Company and
Albert Abel and Connie Abel. (5)
10.18 Agreement and Plan of Merger dated July 28, 1993 between the
Company, CFC, Abel, Augur and CFC Acquisition Corp. (5)
10.19 Sublicense Agreement between the Company and CFC
Technologies, Inc. (5)
10.20 Escrow Agreement between the Company, CFC Technologies,
Inc., Abel, Augur and counsel to the parties. (5)
10.21 Securities Purchase Agreement by and between Commodore
Environmental Services, Inc. and purchasers of Series "AA"
Preferred Stock. (6)
10.22 Bond Purchase Agreement by and between Commodore
Environmental Services, Inc. and purchasers of Convertible
Bonds. (6)
10.23 Stock Option Agreement, dated November 22, 1993, by and
between Commodore Environmental Services, Inc. and Jim
DeAngelis. (6)
10.24 Employment Agreement, dated January 1, 1994, by and between
Commodore Environmental Services, Inc. and Jim DeAngelis.
(6)
10.25 Employment Agreement, dated October 3, 1994, by and between
Commodore Environmental Services, Inc. and Vincent Valeri.
(7)
10.26 Warrant, dated October 3, 1994, by and between Commodore
Environmental Services, Inc. and Vincent Valeri. (7)
-41-
<PAGE> 44
EXHIBITS NO. DESCRIPTION
10.27 Employment Agreement, dated June 1, 1995, by and between
Commodore Environmental Services, Inc. and Neil Drobny. (7)
10.28 Stock Option Agreement, dated June 1, 1995, by and between
Commodore Environmental Services, Inc. and Neil Drobny. (7)
10.29 Employment Agreement, dated August 31, 1995, by and between
Commodore Environmental Services, Inc. and Carl Magnell.
(7)
10.30 Stock Option Agreement, dated August 31, 1995, by and
between Commodore Environmental Services, Inc. and Carl
Magnell. (7)
10.31 Assignment of Technology Agreement, dated December, 1995, by
and between Commodore Membrane Technologies, Inc. and Sri
Kilambi. (7)
10.32 Stock Option Agreement, dated as of February 16, 1996, by
and between Commodore Environmental Services, Inc. and Paul
E. Hannesson. (7)
10.33 Employment Agreement, dated as of October 31, 1996, by and
between the Company and Edwin L. Harper, Ph.D. (8)
10.34 Form of Employment Agreement by and between the Company
and Paul E. Hannesson.*
10.35 Agreement and Plan of Merger, dated November 13, 1996, by
and among the Company, Lanxide Corporation and COES
Acquisition Corp. (9)
10.36 Line of Credit Agreement, dated November 13, 1996, by and
between the Company and LPM. (9)
10.37 Line of Credit Promissory Note, dated November 13, 1996, by
LPM in favor of the Company. (9)
10.38 Security Agreement, dated November 13, 1996, by and between
the Company and LPM. (9)
10.39 Guarantee, dated November 13, 1996, by Lanxide Corporation
in favor of the Company. (9)
22.1 Subsidiaries of the registrant.*
27.1 Financial Data Schedule.*
* Filed herewith.
(1) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated April 14, 1988.
-42-
<PAGE> 45
(2) Incorporated by reference to Exhibits 10.1 through 10.13 to the
Registrant's Form 10-Q for the quarter ended June 30, 1990.
(3) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated April 30, 1992.
(4) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated March 23, 1993.
(5) Incorporated by reference to Exhibit 10 in the Registrant's Form 8-K
dated August 10, 1993.
(6) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated April 14,1994.
(7) Incorporated by reference to Exhibit 10 in the Reigistrant's Form
10-K for the fiscal year ended December 31, 1995 filed with the
Commission on April 12, 1996.
(8) Incorporated by reference to Exhibit 10.12 to Amendment No. 3 to
Separation's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on January 23, 1997 (File No. 333-
11813).
(9) Incorporated by reference to Exhibits 1, 3, 4, 5 and 6 in the
Registrant's Form 8-K dated November 13, 1996.
Reports on Form 8-K:
On October 15, 1996, the Company filed with the Commission a Current Report
on Form 8-K with respect to Applied's acquisition of Advanced Sciences, Inc. and
A.S. Environmental, Inc.
November 27, 1996, the Company filed with the Commission a Current Report on
Form 8-K with respect to its execution of the Agreement and Plan of Merger,
dated November 13, 1996, by and among the Company, Lanxide Corporation and COES
Acquisition Corp., relating to the Company's proposed acquisition of Lanxide
Corporation.
On December 11, 1996, the Company filed with the Commission a Current Report
on Form 8-K with respect to the mutual agreement of the Company and Tanner & Co
to terminate their relationship.
On January 22, 1997, the Company filed with the Commission a Current Report
on Form 8-K with respect to its sale of all of the capital stock of Commodore
Separation Technologies, Inc. and Commodore CFC Technologies, Inc. to Commodore
Applied Technologies, Inc.
On March 27, 1997, the Company filed with the Commission Amendment No. 1 on
Form 8-K/A to the Company's Current Report on Form 8-K with respect to its sale
of all of the capital stock of Commodore Separation Technologies, Inc. and
Commodore CFC Technologies, Inc. to Commodore Applied Technologies, Inc.
-43-
<PAGE> 46
SIGNATURES
Pursuant to the requirements to Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of New
York, State of New York, on April 15, 1997.
COMMODORE ENVIRONMENTAL SERVICES, INC.
By: /s/ ANDREW P. ODDI
-------------------------------------------
Andrew P. Oddi, Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ EDWIN L. HARPER President and Chief April 15, 1997
- ------------------ Operation Officer (Principal
Edwin L. Harper Executive Officer)
/s/ ANDREW P. ODDI Vice President, Finance April 15, 1997
- ------------------ (Principal Financial Officer)
Andrew P. Oddi
/s/ PAUL E. HANNESSON Chairman of the Board April 15, 1997
- --------------------- and Chief Executive Officer
Paul E. Hannesson
/s/ KENNETH L. ADELMAN Director April 15, 1997
- ----------------------
Kenneth L. Adelman
/s/ BENTLEY J. BLUM Director April 15, 1997
- -------------------
Bentley J. Blum
/s/ HERBERT A. COHEN Director April 15, 1997
- --------------------
Herbert A. Cohen
/s/ DAVID L. MITCHELL Director April 15, 1997
- ---------------------
David L. Mitchell
</TABLE>
-44-
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Commodore Environmental Services, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Commodore
Environmental Services, Inc. and its subsidiaries at December 31, 1996, and the
results of their operations and their cash flows for the year in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, Pennsylvania
April 11, 1997
F-1
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
[TANNER + CO. LETTERHEAD]
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 the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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 the
results of their operations and their cash flows for each of the two years then
ended, in conformity with generally accepted accounting principles.
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 reflect a reserve of $994,000 to offset possible
future claims. As discussed in note 15, 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
F-1A
<PAGE> 49
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
(Dollars In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash (Note 2) $ 7,821 $ 36
Temporary investments (Note 2) 7,459 --
Accounts receivable, net (Notes 2, 5 and 9) 7,149 40
Notes and advances to related parties 3,034 7
Restricted cash (Note 2) 670 --
Prepaid and other assets 735 71
-------- --------
Total current assets 26,868 154
Certificates of deposit and restricted cash (Note 2) 1,145 1,843
Other receivables (Note 5) 384 303
Other investments (Note 7) 862 357
Property and equipment, net (Notes 2 and 8) 2,044 1,054
Note receivable from related party (Note 14) -- 125
Non-performing notes receivable (Note 6) 912 912
Other assets (Note 2):
Deferred financing costs, net of accumulated amortization
of $288 and $192, respectively 192 288
Deferred acquisition costs, net of accumulated amortization of $90 -- 45
Patents and completed technology, net of accumulated
amortization of $140 and $19, respectively 1,004 206
Goodwill, net of accumulated amortization of $113 7,560 --
Other 142 34
-------- --------
8,898 573
-------- --------
Total Assets $ 41,113 $ 5,321
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 3,801 $ --
Payables to related parties (Note 14) 186 1,086
Current portion of long term debt (Note 10) 89 --
Line of credit (Note 9) 7,042 --
Other accrued liabilities 2,755 670
-------- --------
Total current liabilities 13,873 1,756
Insurance loss reserve (Notes 2 and 15) 1,275 994
Bonds payable (Note 10) 4,000 4,000
Other long term debt (Note 10) 29 --
Deferred gain 690 --
Promissory note to related party (Note 3) 2,250 --
-------- --------
Total Liabilities 22,117 6,750
Minority interests 6,165 --
Commitments and contingencies (Note 15) -- --
Stockholders' equity (Note 12):
Preferred stock, par value $0.01 per share, authorized 10,000,000 shares,
issued and outstanding 4,641,167 shares and 4,534,709 shares 46 45
Common stock, par value $0.01 per share, authorized 100,000,000 shares,
issued 57,924,368 shares and 56,768,953 shares 579 568
Additional paid-in capital 41,768 19,209
Accumulated deficit (29,537) (21,226)
-------- --------
12,856 (1,404)
Less 506,329 shares of treasury stock, at cost (25) (25)
-------- --------
Total stockholders' equity 12,831 (1,429)
-------- --------
Total Liabilities and Stockholders' Equity $ 41,113 $ 5,321
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 50
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Contract revenues (Note 2) $ 5,123 $ -- $ --
Income from commercial real estate
activities (Notes 2 and 6) -- 1,041 965
Other operating income 130 3 --
Non-operating income -- -- 836
-------- ------- -------
Total revenues 5,253 1,044 1,801
Costs and expenses:
Cost of sales 4,291 -- --
Research and development 2,997 1,990 1,037
Amortization (Note 2) 219 -- --
In-process technology acquired 78 -- 2,457
General and administrative 6,406 1,518 1,357
-------- ------- -------
Total costs and expenses 13,991 3,508 4,851
-------- ------- -------
Loss before interest, taxes and equity in losses
of unconsolidated subsidiary (8,738) (2,464) (3,050)
Interest income (621) (45) (46)
Interest expense 808 550 763
Income tax expense (Note 11) -- -- --
-------- ------- -------
Net loss before affiliate losses (8,925) (2,969) (3,767)
Equity in losses of unconsolidated subsidiaries 495 -- --
-------- ------- -------
Loss before minority interest (9,420) (2,969) (3,767)
Minority interest (1,109) -- --
-------- ------- -------
Net loss $ (8,311) $(2,969) $(3,767)
======== ======= =======
Net loss per share (Note 2) $ (.14) $ (.05) $ (.07)
======== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 51
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
---------------- ----------------- PAID-IN ACCUMULATED STOCK HELD
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT IN TREASURY
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 925,000 $ 9 55,586,687 $556 $ 16,397 $(14,490) $(25)
Issuance of Series AA preferred stock 1,975,000 20 -- -- 1,595 -- --
Issuance of Series B preferred stock 1,534,709 15 -- -- 1,520 -- --
Issuance of common stock - exercise
of options and warrants -- -- 820,000 8 4 -- --
Issuance of common stock options -- -- -- -- 25 -- --
Dividend on preferred stock -- -- -- -- (143) -- --
Dividend on redeemable preferred stock -- -- -- -- (11) -- --
Net loss -- -- -- -- -- (3,767) --
--------- --- ---------- ---- -------- -------- ----
BALANCE, DECEMBER 31, 1994 4,434,709 44 56,406,687 564 19,387 (18,257) (25)
Issuance of Series AA preferred stock 100,000 1 -- -- 99 -- --
Issuance of common stock - exercise
of options and warrants -- -- 362,266 4 20 -- --
Dividends on preferred stock -- -- -- -- (297) -- --
Net loss -- -- -- -- -- (2,969) --
--------- --- ---------- ---- -------- -------- ----
BALANCE, DECEMBER 31, 1995 4,534,709 45 56,768,953 568 19,209 (21,226) (25)
Issuance of common stock -- -- 200,000 2 66 -- --
Issuance of common stock - exercise
of options and warrants -- -- 955,415 9 86 -- --
Issuance of common stock options -- -- -- -- 59 -- --
Issuance of Series C preferred stock 106,458 1 -- -- 105 -- --
Dividend on preferred stock -- -- -- -- (300) -- --
Gain on subsidiary's sale of common
stock -- -- -- -- 21,641 -- --
Gain on subsidiary's issuance of stock
in connection with the acquisition of
Advanced Sciences, Inc. -- -- -- -- 902 -- --
Net loss -- -- -- -- -- (8,311) --
--------- --- ---------- ---- -------- -------- ----
BALANCE, DECEMBER 31, 1996 4,641,167 $46 57,924,368 $579 $ 41,768 $(29,537) $(25)
========= === ========== ==== ======== ======== ====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 52
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,311) $(2,969) $(3,767)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority interests in net losses of subsidiary (1,109) -- --
Depreciation and amortization 643 106 62
Non-cash interest expense -- 96 96
Undistributed losses of unconsolidated subsidiary 495 -- --
Bad debt recovery -- (573) (147)
Increase in insurance loss reserve 281 -- (836)
Write off of technology purchased in non-cash transactions 68 -- 2,457
Non-cash compensation expenses 59 -- 25
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (2,326) -- (40)
Other receivables (81) -- --
Patents (213) (137) (67)
Prepaid and other assets (378) (78) 3
Other assets (108) -- --
Trade payables 567 -- --
Other accruals 154 (369) 441
-------- ------- -------
Net cash used in operating activities (10,259) (3,924) (1,773)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivables -- 3,242 4,048
Increase in related party receivables (2,902) 1 (904)
Purchase of furniture and equipment (881) (387) (708)
Increase in temporary investments (7,459) -- --
Increase in other investments (1,000) -- (110)
Payments received on nonperforming assets -- -- 38
Cash acquired in subsidiary's purchase 199 -- --
Purchase of minority interest in subsidiary (750) -- --
(Increase) decrease in restricted cash 179 (1,501) (11)
-------- ------- -------
Net cash provided by (used in) investing activities (12,614) 1,355 2,353
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subsidiary's sale of stock 30,551 -- --
Proceeds from exercise of options and warrants 95 24 12
Proceeds from the sale of preferred stock, net 106 100 1,615
Borrowings under the line of credit 1,361 -- --
Issuance of bonds -- -- 1,500
Payments on long-term debt, net (255) (24) (2,454)
Preferred stock dividends and redemption (300) (297) (721)
Payments to related parties, net (900) (209) (142)
Increase in deferred financing costs -- -- (78)
-------- ------- -------
Net cash provided by (used in) financing activities 30,658 (406) (268)
-------- ------- -------
Increase (decrease) in cash 7,785 (2,975) 312
Cash, beginning of period 36 3,011 2,699
-------- ------- -------
Cash, end of period $ 7,821 $ 36 $ 3,011
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (SEE NOTE 4):
Interest paid $ 169 $ 454 $ 662
======== ======= =======
Taxes paid $ 53 $ 81 $ 90
======== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 53
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Dollars In Thousands except per share data)
- --------------------------------------------------------------------------------
1. BACKGROUND
Commodore Environmental Services, Inc., and subsidiaries ("Commodore"),
from January 1, 1991 to December 31, 1995 had been engaged primarily in
real estate operations. Since then, Commodore has been engaged in the
decontamination of hazardous waste and the separation of hazardous
waste from other materials. Commodore owns technologies related to the
separation and destruction of polychlorinated biphenyls (PCBs) and
chlorofluorocarbons (CFCs).
Commodore is currently working on the commercialization of these
technologies through various acquisitions, licensing agreements and
joint ventures. Through Advanced Sciences, Inc. ("ASI"), a subsidiary
acquired on October 1, 1996, Commodore has contracts with various
government agencies and private companies in the United States and
abroad. As some government contracts are funded in one year increments,
there is a possibility for cutbacks. As these contracts constitute a
major portion of the subsidiary's revenues, such a reduction would
materially affect its operations. However, management believes the
subsidiary's existing client relationships will allow Commodore to
obtain new contracts in the future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Commodore
and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The investment in
Teledyne-Commodore, LLC, a 50% owned joint venture with Teledyne
Environmental, Inc., has been accounted for under the equity method
since Commodore does not have a controlling interest in the venture.
SEGMENT REPORTING
Commodore currently has one principal business line in environmental
technologies. In 1995 and prior, Commodore's principal activity was
real estate.
CASH AND CASH EQUIVALENTS
Commodore considers cash and highly liquid debt instruments with
original maturities of three months or less to be cash equivalents. At
December 31, 1996 cash and cash equivalents included cash of $1,251 and
highly liquid investments of $6,570.
RESTRICTED CASH AND CERTIFICATES OF DEPOSIT
Restricted cash consists of cash held in interest bearing deposit or
escrow accounts in the amount of $670 as collateral on a line of credit
of a subsidiary at December 31, 1996; $1,000 as collateral on bonds
payable at December 31, 1995; and $1,095 and $793 pursuant to the
Harvest American Insurance Company settlement agreement (see Note 15)
at December 31, 1996 and 1995, respectively. In addition, Commodore
maintained $50 in certificates of deposit as security on a line of
credit at December 31, 1996 and 1995, respectively. Restricted cash and
certificates of deposit are classified according to the term of their
restriction.
DEBT AND EQUITY INVESTMENTS
Commodore adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in
1996. Prior to 1996, no material debt or equity securities were held.
F-6
<PAGE> 54
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Management determines the appropriate classification of its investments
at the time of purchase and reevaluates such determinations at each
balance sheet date. Commodore currently invests only in short term
investments of less than six months which it classifies as available
for sale. Commodore's investments in debt and equity securities are
diversified among securities with high credit ratings in accordance
with the company's investment policy.
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.
Convertible bonds, notes receivable and temporary investments are
financial instruments that are subject to possible material market
variations from the recorded book value. There are no material
differences between the fair value of these financial instruments and
the recorded book value as of December 31, 1996.
REALIZATION ALLOWANCE
Mortgage receivables are recorded net of allowances for the difference
between the original mortgage notes receivable with the accrued
interest and the estimated fair market value of the underlying
collateral.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as
incurred except for those costs relating to the design or construction
of assets having economic useful lives which are capitalized and
depreciated over the estimated useful life.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Improvements which
substantially increase the useful lives of assets are capitalized.
Maintenance and repairs are expensed as incurred. Upon retirement or
disposal, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss is recorded.
Depreciation and amortization are computed on the straight-line method
based on the estimated useful lives of assets. Management anticipates
that research equipment constructed by Commodore and its subsidiaries
during 1996 will be placed in service in 1997.
OTHER ASSETS
Goodwill represents the fair value of securities issued plus the fair
value of net liabilities assumed in connection with the acquisition of
ASI (see Note 3). Goodwill is being amortized on a straight line basis
over its estimated 30 year life. Completed technology represents
certain technology and related patents acquired in connection with the
purchase of third-party interests in Commodore Laboratories, Inc.
("Labs") (see Note 3). Completed technology and patents are being
amortized on a straight-line basis over their estimated 7 and 17 year
lives, respectively. The Company annually evaluates the existence of
impairment on the basis of whether the goodwill and the patents and
completed technology are fully recoverable from the projected
undiscounted cash flows of the assets to which they relate.
Deferred financing costs are being amortized over 5 years.
REVENUE RECOGNITION
Real Estate. Revenues are recognized from sales of real estate under
the installment method of accounting.
Interest Income. Commodore recognizes interest income on notes
receivable when earned (see Note 5). The recognition of interest income
on notes receivable is discontinued when management determines that the
continuing accrual of interest may exceed the net realizable value of
the receivable (see Note 6).
F-7
<PAGE> 55
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Contracts. Substantially all of the company's revenues are derived from
ASI, and consist of engineering and scientific services performed for
the U.S. Government and prime contractors that serve the Federal
Government under a variety of contracts, most of which provide for
reimbursement of costs plus fixed fees. Revenue under
cost-reimbursement contracts is recorded under the percentage of
completion method as costs are incurred and include estimated earned
fees in the proportion that costs incurred to date bear to total
estimated costs.
Anticipated losses on contracts are provided for by a charge to
expense during the period such losses are first identified. Changes in
job performance, job conditions, estimated profitability (including
those arising from contract penalty provision) and final contract
settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
Allowances for anticipated losses totaled $2,306 at December 31, 1996.
Contract costs, both direct and indirect, are subject to audit by the
Defense Contract Audit Agency ("DCAA"). Management believes appropriate
allowances have been established to cover potential audit
disallowances. Contract revenues have been recorded in amounts which
are expected to be realized upon final settlement. The DCAA has audited
ASI contracts through September 30, 1993. An allowance for doubtful
accounts and potential disallowances has been established based upon
the portion of billed and unbilled receivables that management believes
may be uncollectible.
INSURANCE LOSS RESERVE
Insurance loss reserves include estimates of the cost of both reported
and unreported claims incurred and unpaid at year-end (see Note 15).
LOSS PER SHARE
Loss per share is computed based on the weighted average number of
shares outstanding at the end of the period. Shares used to determine
loss per share exclude common stock equivalents as they are
antidilutive. Accordingly, loss per share is based on the weighted
average shares outstanding of 57,454,091; 56,212,000 and 55,535,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
CONCENTRATION OF CREDIT RISK
In prior years, Commodore's principal operations and substantially all
revenues were from collections on mortgage notes receivable. These
mortgage notes receivables were from real estate transactions in
Illinois and North Carolina (see Notes 5 and 6).
Commodore maintains cash in bank deposit accounts which, at times, may
exceed federally insured limits. Commodore has not experienced any
losses in such accounts. Commodore believes it is not exposed to any
significant credit risk on cash and cash equivalents.
INCOME TAXES
Commodore provides for deferred income taxes based on estimated future
tax effects of temporary differences between financial statement
carrying amounts and the tax bases of existing assets and liabilities.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
F-8
<PAGE> 56
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with the 1996
presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In 1996, Commodore adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of" which requires
the recognition of an impairment loss for long-lived assets held for
use when the estimate of undiscounted future cash flows expected to be
generated by the individual asset is less than its carrying amount.
Management estimates that none of the Company's long-lived assets are
impaired under this definition at December 31, 1996. Although
management uses the best information available on which to base its
assumptions, future impairments could occur based upon future changes
in economic conditions.
In October 1995, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") which established financial
accounting and reporting standards for stock-based compensation. The
new standard defines a fair value method of accounting for employee
stock options or similar equity instruments. FAS 123 allows the Company
the choice between adopting the fair value method or continuing to use
the intrinsic value method under Accounting Principles Board Opinion
No. 25 ("APB 25") with footnote disclosures of the pro forma effects if
the fair value method is adopted. Commodore has adopted the disclosure
approach (see Note 13).
3. ACQUISITIONS AND REORGANIZATIONS
On December 22, 1993, Commodore acquired 90.05 percent of the issued
and outstanding shares of voting common stock of Labs and of Commodore
CFC Technologies ("CCFC"). As part of the acquisition, Commodore
entered into a license agreement with Labs and a sublicense agreement
with CCFC pursuant to which all patents, confidential information, and
know-how owned by Labs and licensed to CCFC were acquired by Commodore.
The excess purchase price of $2,457 over the value of the net assets
acquired was considered in-process technology, which was charged
against operations in 1994.
In 1993 and concurrent with the Labs acquisition, the holders of Labs
common stock received 577,081 shares of 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. Mr. Albert Abel, the president of Labs,
retained ownership of 9.95 percent of the Labs common stock and
received 1,000,000 shares of Commodore common stock. In connection with
the CCFC acquisition, Commodore acquired 90.05 percent of the
outstanding shares of CCFC common stock through the issuance of 750,000
shares of its common stock to Mr. Allison Augur, Jr., the former
president of CCFC, and a cash payout of $70 in aggregate to Mr. Abel
and Mr. Augur. The remaining 9.95 percent of CCFC common stock was
retained by Mr. Abel. In addition, Commodore issued to Mr. Abel and Mr.
Augur non-qualified stock options to purchase an aggregate of 1,500,000
shares of Commodore common stock at an exercise price of $.10 per
share.
In December 1994, Commodore extended an agreement to the holders of
Labs Series "A" and "B" preferred stock to exchange their Labs
preferred stock for Commodore Series "B" preferred stock (see Note 12).
Commodore received acceptance from shareholders holding all 977 shares
of series "A" preferred stock and 557,709 of the 577,081 shares of
series "B" preferred stock. Commodore accrued a liability of $19 for
those shareholders that had not returned the agreement. Commodore did
not record minority interest related to the merger because Labs and
CCFC both had accumulated deficits in stockholders' equity at the date
of acquisition and still do as of December 31, 1996.
In exchange for the issuance of 15,000,000 shares of common stock,
Commodore capitalized Commodore Applied Technologies, ("Applied") on
March 29, 1996 by (1) contributing 90.05 percent of the outstanding
F-9
<PAGE> 57
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
common stock of Labs and 100 percent of the outstanding capital stocks
of Commodore Technologies ("Technologies"), Commodore Government
Environmental ("Government"), Commodore Remediation Technologies
("Remediation"), and Sandpiper Properties ("Sandpiper"), (2) assigning
all rights, titles, and interests in its contracts, assets, and
properties related to AGENT 313 to Applied, and (3) contributing to
Applied $3,000 of a $8,925 promissory note owed to Commodore by Labs,
the proceeds of which had been used by Labs to fund the development of
the AGENT 313 technology. The contributions were recorded at historical
book values.
In June of 1996, Applied sold 5,750,000 shares of its $.001 par value
common stock for $6.00 per share in an initial public offering. Along
with each share was one detachable warrant valued at $.10, which
entitles its owner to one Applied share of stock at the price of $8.40
per share for the period from June 28, 1997 until June 28, 2001. These
warrants are redeemable by Applied for $.01 per share if the average
trading price of Applied stock for any 20 day period is greater than or
equal to $18 per share. Net proceeds from the offering were $30,551.
Commodore's gain on the transaction, which consists of the increase in
the book value of its investment in Applied, has been recorded as a
direct adjustment to the paid-in capital of Commodore. Deferred taxes
have not been provided against the gain as the underlying basis
difference is not considered to be temporary.
In July 1996, Commodore acquired the remaining 9.95% of all
subsidiaries owned by Mr. Abel for a purchase price of $3,000 of which
$750 was paid in cash. The remaining $2,250 was paid in the form of a
promissory note due on July 3, 2006 at 8 percent interest per year. The
$706 excess of the purchase price over the fair value of the net assets
acquired was recorded as completed technology. Commodore contributed
the newly acquired ownership of the subsidiaries to Applied for no
additional consideration.
In October 1996, Applied acquired all of the outstanding voting common
stock of ASI and A.S. Environmental, Inc. ("ASE"). This transaction
also included the purchase of ASI's foreign subsidiaries, Advanced
Sciences Integrada, S.A., ("ASI Argentina") and Advanced Sciences
Integrated Mexico, S.A., ("ASI Mexico"). The acquisition has been
recorded using the purchase method of accounting. Accordingly, the
results of operations of ASI have been included in those of Commodore
for the period subsequent to the date of acquisition.
In consideration for the ASI and ASE stock, ASI and ASE shareholders
were issued 900,000 shares of Applied common stock with a fair value of
$2,250. Assets and liabilities acquired in the ASI purchase are as
follows:
<TABLE>
<S> <C>
Cash $ 199
Accounts receivable 4,783
Prepaid expenses 286
Restricted cash 151
Property and equipment 377
Trade payables (3,234)
Accrued expenses (1,931)
Line of credit (5,681)
Notes payable (200)
Capital leases and other long-term obligations (173)
-------
Net liabilities in excess of assets purchased (5,423)
Issuance of common stock (2,250)
-------
Goodwill $(7,673)
=======
</TABLE>
F-10
<PAGE> 58
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Commodore's gain on the transaction, which consists of the increase in
the book value of its investment in Applied, has been recorded as a
direct adjustment to the paid-in capital of Commodore. Deferred taxes
have not been provided against the gain as the underlying basis
difference is not considered to be temporary.
The unaudited pro forma combined results of operations of Commodore and
ASI for the years ended December 31, 1996 and 1995, as if the
acquisition had occurred on January 1, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Revenue $ 26,779 $ 34,382
Net loss $(12,529) $ (5,275)
Net loss per share $ (0.22) $ (0.09)
</TABLE>
Due to the fact that ASI's year end prior to the acquisition date was
as of September 30, the foregoing unaudited pro forma results of
operations consists of the combination of Commodore's annual results as
of December 31, 1996 and 1995 and ASI annual results for the period
ended September 30, 1996 and 1995.
On December 2, 1996, Commodore sold Commodore Separation Technologies
("Separation"), CFC Technologies ("CFC"), and CCFC to Applied for
$5,400 consisting of $3,000 in cash, and (subject to compliance with
any applicable stockholder approval or notice requirements) warrants
to purchase 7,500,000 shares of Applied's common stock at an exercise
price of $15.00 per share with a termination date of December 2, 2003.
The acquisition has been accounted for as a transaction between
entities under common control. The $690 net gain on the sale has
been deferred and is being amortized over 30 years.
4. CASH FLOW INFORMATION
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1996, Commodore had the following
non-cash transactions:
Commodore organized Applied and acquired the minority interests in
subsidiaries owned by Mr. Abel and ASI as described in Note 3. In
addition, Commodore sold Separation, CFCC and CFC to Applied as
described in Note 3.
In January 1996, Commodore acquired all patent rights, applications,
confidential know-how and technologies related to the separation and
remediation process in exchange for $10 and 200,000 shares of Commodore
$.01 par value common stock. The stock was valued at the fair market
price on the grant date of $68. The purchase price was written-off as
in-process technology and the related technology was subsequently
contributed to Separation.
During 1995, Commodore 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, which Commodore owed. The net book
value of the note receivable at the date of payoff was $1,137 and
Commodore recognized a gain on the recovery of bad debt of $573.
F-11
<PAGE> 59
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
5. RECEIVABLES
Commodore was the holder of certain notes receivable and other related
receivables at December 31, 1996, 1995 and 1994, which arose through
the sale of real estate properties.
On December 30, 1994, Commodore entered into an agreement with one of
its debtors whereby the debtor would pay to Commodore all future
proceeds from a note which the debtor received as proceeds from the
sale of the property. Management has adjusted the realization allowance
to reflect its estimate of the net realizable value of the receivable.
Payments have been made in accordance with the agreement on the
remaining receivable and the balance appears collectible, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Note receivable, with interest at 10.0%,
in various installments through 2002, unsecured $261 $275
Other receivables 123 28
---- ----
Total mortgage and notes receivable,
net of realization allowance $384 $303
==== ====
</TABLE>
The components of the company's trade receivable are as follows as at
December 31, 1996:
<TABLE>
<S> <C>
Contract receivables:
Amounts billed $ 9,066
Retainages 128
Unrecovered costs and estimated profits
subject to future negotiation - not billed 71
-------
9,265
Less: Allowance for doubtful accounts and potential disallowances (2,306)
-------
Contract receivables - net 6,959
Other receivables, net of allowance of $306 190
-------
Total receivables - net $ 7,149
=======
</TABLE>
The balances billed but not paid by customers pursuant to retainage
provisions are due upon completion and acceptance of the contracts.
Unbilled receivables include current and prior year costs and fees
billable upon specified events (including settlement of prior years'
government audits). All such amounts have been classified as current
assets although certain amounts may not be collected within one year
depending on when the conditions are satisfied.
Substantially all of trade receivables are pledged to secure its line
of credit (see Note 9).
F-12
<PAGE> 60
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
6. NON-PERFORMING RECEIVABLES
Commodore holds a mortgage note receivable and other receivables of
$2,514 and $2,394 at December 31, 1996 and 1995, respectively. Because
the note and receivables are non-performing according to their terms,
Commodore has recorded realization allowances of $1,602 and $1,482 at
December 31, 1996 and 1995, respectively, in order to reduce the net
book value of the receivables to $912 at each date. Commodore is in a
second position on the real estate securing the mortgage note
receivable. The realization allowances are based upon the estimated
recoverability of the receivables and the underlying value of the real
estate. Commodore is not recognizing interest income on the receivables
and is applying all payments received as a reduction of accrued
interest receivable. Commodore received no payments relating to the
non-performing assets for the years ended December 31, 1996 and 1995,
respectively.
7. OTHER INVESTMENTS
In 1994, Commodore obtained a $357 interest in an oil and gas field
located in Louisiana (the "Louisiana property"), in which the Blum
Family Trust had an ownership interest of 56.33 percent. The Louisiana
property is approximately 10,000 acres and contains a number of oil
producing wells. Remedial work and other minor repairs are being
completed to bring some of its wells on line. Geological and
geophysical studies on the Louisiana property have been performed and
new drilling locations have been identified. The investment is
accounted for under the equity method. Condensed financial information
is not presented as the investment and its operations are immaterial to
Commodore.
On August 6, 1996, Teledyne Environmental, Inc. and Government formed a
joint venture named Teledyne-Commodore, LLC (the "LLC") and signed a
licensing agreement for one of Applied's patented remediation
technologies. Both partners funded the LLC by a $1,000 capital
contribution on October 1, 1996 and each have a 50 percent controlling
interest in the LLC. This investment is accounted for under the equity
method.
Summarized information of the LLC results of operations is as follows
at December 31, 1996:
<TABLE>
<S> <C>
Revenues $ 16
Expenses 1,006
-------
Net loss (990)
-------
Commodore equity in net loss (50%) $ (495)
=======
Investment in LLC:
Gross value $ 1,000
Equity in net loss (495)
-------
Net amount $ 505
=======
</TABLE>
F-13
<PAGE> 61
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
8. PROPERTY AND EQUIPMENT
Property and equipment, including assets acquired under capital lease
obligations at ASI, consists of the following major classes:
<TABLE>
<CAPTION>
AVERAGE DECEMBER 31,
USEFUL LIFE 1996 1995
----------- ------- ------
<S> <C> <C> <C>
Machinery and equipment 10 $ 1,987 $1,068
Furniture and fixtures 5 427 127
Other 5 38 --
------- ------
2,452 1,195
Less: accumulated depreciation and amortization (408) (141)
------- ------
Total property and equipment $ 2,044 $1,054
======= ======
</TABLE>
9. LINE OF CREDIT
At December 31, 1996, ASI has a $7,042 outstanding balance on a $9,250
revolving line of credit due September 30, 1997 with interest payable
monthly at prime plus 1 percent (9.25 percent as of December 31, 1996).
The credit line is secured by $670 of restricted cash, a $2,000
guarantee from Applied and the receivables of ASI. The line of credit
contains certain financial covenants and restrictions including minimum
ratios that ASI must satisfy. ASI was not in compliance with the
covenants at December 31, 1996. On January 17, 1997, ASI entered into a
revised line of credit agreement and received a waiver and forbearance
of amounts due related to their previous covenant violations.
10. LONG-TERM DEBT
BONDS PAYABLE
In 1993 and 1994, Commodore issued $4,000 of convertible bonds which
carry an interest rate of 8.5%, payable quarterly, and mature on
December 3, 1998. The bonds have detachable warrants for the purchase
of 500,000 shares of common stock, exercisable at $.10 per share (see
Note 13). No value was ascribed to the warrants in the transaction. The
bonds are secured by 8,000,000 unissued shares of Commodore's common
stock. The bonds are convertible at any time into common stock of
Commodore at the rate of one share per $1.00 of bond principal.
Commodore paid an aggregate commission of $480 in cash plus 5 year
warrants to purchase 2,233,332 shares of common stock at $.10 per
share. The bonds are redeemable at Commodore's option at the face
amount thereof plus accrued interest when the bid price of Commodore's
common stock exceeds $1.25 per share. In 1995, as consideration to
modify the collateral agreement, Commodore issued warrants to the
lender for the purchase of 2,000,000 shares of common stock at a price
of $.68 per share through December 31, 2000 (see Note 13).
CAPITAL LEASE OBLIGATIONS
The company has capital lease obligations of $118, net of imputed
interest at rates ranging from 8 to 12 percent of which $89 is recorded
as a current liability and $29 is due through to 1999.
F-14
<PAGE> 62
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
11. INCOME TAXES
Commodore 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 1996, 1995 and 1994 and the
amount presented in the financial statements is due to the change in
the tax valuation allowance which offsets the income tax benefit of the
operating loss. Because Commodore is in a net operating loss
carryforward position, there is no income tax provision for the three
years ended December 31, 1996. The components of the net deferred
income tax as of December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Components of the current deferred taxes - net:
Reserve for uncollectible receivables
and potential disallowances $ 1,689 $ 3,376 $ 2,800
Insurance loss reserve 540 412 412
Net operating loss carryforward 10,079 5,471 4,212
-------- ------- -------
Total 12,308 9,259 7,424
Less: Valuation allowance (12,308) (9,259) (7,424)
-------- ------- -------
Total $ -- $ -- $ --
======== ======= =======
</TABLE>
Commodore conducts a periodic assessment of its valuation allowance.
Factors considered in the evaluation include recent and expected future
earnings and Commodore's liquidity and equity positions. As of December
1996 and 1995, Commodore has established a valuation allowance for the
entire amount of net deferred tax assets.
Commodore has net operating loss ("NOL") carryforwards at December 31,
1996 of approximately $25,197 which expire in the years 1997 through
2011. Of the total amount of NOL carryforwards at December 31, 1996,
approximately $12,118 and $2,600 are limited to use against future
taxable income of Applied and ASI, respectively. If a substantial
change in Commodore's ownership should occur, there would be an annual
limitation of the amount of NOL carryforwards which could be utilized.
12. STOCKHOLDERS' EQUITY
COMMON STOCK
Commodore has authorized 100,000,000 shares of common stock, of which
57,924,368 and 56,768,953 shares were issued at December 31, 1996 and
1995, respectively. Of the total shares issued, 506,329 were held in
treasury at December 31, 1996 and 1995.
In 1996, Commodore issued 200,000 shares of common stock in order to
purchase the technologies related to the separation and remediation
process. Common stock issued through the exercise of options and
warrants is described in Note 14.
F-15
<PAGE> 63
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
PREFERRED STOCK
Commodore Preferred stock consists of Series AA Preferred which was
issued in 1993, 1994 and 1995 for cash; Series B Preferred which was
issued in 1994 in connection with the acquisition of the preferred
shares of Labs and Series C preferred which was issued in 1996 for
cash.
Commodore has authorized 3,000,000 shares of Series AA preferred stock,
par value $.01 per share. The Series AA Preferred stock pays
non-cumulative dividends from current earnings at $.10 per annum per
share and has a liquidation value of $1.00 per share. The Series AA
Preferred stock is redeemable by Commodore at any time the bid price of
Commodore's common stock equals or exceeds $1.25 per share at a
redemption price of $1.00 per share and is convertible to shares of
Commodore common stock at a 1 to 1 ratio. The Series AA Preferred
shares carry detachable warrants to purchase 6,000,000 shares of
Commodore Common stock at an exercise price of $.10 per share (see Note
13). Commodore issued Series AA preferred shares in the amounts of
925,000 shares, 1,975,000 shares and 100,000 shares in 1993, 1994 and
1995, respectively. Commissions paid out of the proceeds of the sales
totaled $360.
Commodore has authorized 1,600,000 shares of Series B Preferred stock,
par value $.01 per share. The Series B preferred stock pays
non-cumulative dividends from current earnings at $.08 per annum per
share (commencing in 1998) and has a liquidation value of $1.00 per
share. The Series B Preferred stock is redeemable by Commodore at any
time at a redemption price of $1.10 per share and is convertible to
Commodore Common stock at a ratio of 3 shares of Series B Preferred to
1 share of Common. Commodore issued 1,534,709 shares of Series B
Preferred in 1994 in connection with the acquisition of the preferred
stock of Labs (see Note 3).
Commodore has authorized 1,500,000 shares of Series C Preferred stock ,
par value of $.01 per share. The Series C Preferred stock does not pay
dividends. On December 31, 1997, the Series C Preferred stock will
automatically convert to Commodore Common stock at a ratio based on the
market value of the common stock at that time compared to an assumed
value of Series C Preferred of $1.00 per share. The market value used
in this conversion will not exceed $1.50 per share or be less than $.50
per share. Commodore issued 106,458 shares of Series C Preferred in
January 1996.
13. STOCK OPTIONS AND STOCK WARRANTS
Commodore has adopted the intrinsic value method of accounting for
stock options and warrants under APB 25 with footnote disclosures of
the pro forma effects as if the FAS 123 fair value method had been
adopted.
Had compensation expense for Commodore's employee stock options been
determined based on the fair value at the grant date for awards in 1995
and 1996 consistent with the provisions of FAS 123, Commodore's net
loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
--------- ---------
<S> <C> <C>
Net Loss - as reported $ (8,311) $ (2,969)
Net Loss - pro forma $ (9,858) $ (3,538)
Loss per share - as reported $ (.14) $ (.05)
Loss per share - pro forma $ (.17) $ (.06)
</TABLE>
F-16
<PAGE> 64
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
FAS 123 requires stock options to be valued using an approach such as
the Black-Scholes option pricing model. The Black-Scholes model
calculates the fair value of the grant based upon certain assumptions
about the underlying stock. The expected dividend yield of the stock is
zero, the expected volatility is 60.77 percent, the expected life of
the options is 4 years, and the expected risk-free rate of return is
6.04 percent calculated as the rate offered on U.S. Government
securities with the same term as the expected life of the options. The
weighted average remaining contractual life of options and warrants
outstanding at December 31, 1996 is 2.75 years and 4.62 years for
Commodore and Applied, respectively. The weighted average fair values
of options granted during 1996 and 1995 are $0.55 and $0.34, for
Commodore and $3.37 in 1996 for Applied. There were no options granted
in 1995 for Applied.
Compensation expense under APB 25 of $59 has been recognized for the
stock options and warrants issued to employees and directors in 1996.
STOCK OPTIONS
In 1994, options to purchase an aggregate of 500,000 shares of common
stock were granted to an unrelated party at an exercise price of $.01
per share, for future services. An expense of $10 was recognized using
the intrinsic value approach of APB 25. Also during 1994, options for
the purchase of 820,000 shares of common stock were exercised.
In 1995, options to purchase an aggregate of 480,000 shares of common
stock were granted to employees at an exercise price of $.50 per share,
vesting over three years. Under APB 25, no compensation expense was
recorded related to these options. Also during 1995, options for the
purchase of 360,000 share of common stock were exercised.
In 1996, options to purchase an aggregate of 7,005,000 shares of common
stock were granted to employees as presented in the table below. Also
during 1996, options for the purchase of 320,000 shares of common stock
were exercised.
The following table presents the outstanding options (vested and non
vested) at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
NUMBER OF GRANTED NUMBER OF
OPTIONS (FORFEITED) EXERCISED OPTIONS EXERCISE EXPIRATION
1995 1996 1996 1996 PRICE DATE
- --------- ----------- --------- --------- -------- ---------------------
<S> <C> <C> <C> <C> <C>
100,000 -- 100,000 -- .03 December 1996
320,000 -- 160,000 160,000 .01 - .03 December 1997
1,300,000 (300,000) -- 1,000,000 0.10 December 1998
480,000 -- 60,000 420,000 0.50 May - August 1999
-- 5,650,000 -- 5,650,000 1.12 November 2001
-- 300,000 -- 300,000 0.38 December 2000
-- 555,000 -- 555,000 0.60 February - March 2002
-- 500,000 -- 500,000 0.53 February 2001
- --------- --------- ------- ---------
2,200,000 6,705,000 320,000 8,585,000
========= ========= ======= =========
</TABLE>
At December 31, 1996, stock options for the purchase of 2,190,000
shares of common stock were currently exercisable at an average
exercise price of $.60 per share
F-17
<PAGE> 65
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
STOCK WARRANTS
As part of its acquisition in 1993 of Commodore Labs and CCFC,
Commodore issued warrants to acquire shares of Commodore's common stock
totaling 3,000,000 shares at an exercise price of $.05 per share.
During 1995, warrants to acquire 2,266 shares of common stock were
exercised.
As part of Commodore's 1993 issuance of series "AA" preferred stock,
Commodore issued five year detachable warrants to purchase 6,000,000
shares of Commodore's common stock at an exercise price of $.10 per
share. Additional warrants to purchase 2,783,332 shares of common stock
at an exercise price of $.10 per share were issued to nonrelated third
parties in connection with this transaction.
Attached to the $4,000 in bonds issued in 1993 (see Note 10) were
detachable warrants which expire in 1998. The warrants give the holder
the right to purchase 500,000 shares of Commodore common stock for $.10
per share.
In October 1994, Commodore entered into an employee agreement and
issued warrants to purchase 500,000 shares of Commodore's common stock
at an exercise price of $.14 per share exercisable 20 percent per year
over a five year period. An expense of $15 was recognized by Commodore
under the APB 25 intrinsic value methodology .
In 1995, as consideration to modify the collateral agreement related to
the bonds, Commodore issued warrants for the purchase of 2,000,000
shares of common stock at an exercise price of $.68 per share.
In 1996, warrants for the purchase of 635,415 shares of common stock
were exercised.
Outstanding warrants (vested and not vested) at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
WARRANTS GRANTED EXERCISED WARRANTS EXERCISE EXPIRATION
1995 1996 1996 1996 PRICE DATE
- ---------- ---- ------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
2,997,734 -- 335,415 2,662,319 $ 0.05 July 1998
1,000,000 -- -- 1,000,000 1.00 September 1998
9,283,332 -- -- 9,283,332 0.10 December 1998
500,000 -- 300,000 200,000 0.14 October 1999
2,000,000 -- -- 2,000,000 0.68 December 2000
- ---------- ------- ----------
15,781,066 -- 635,415 15,145,651
========== ======= ==========
</TABLE>
As of December 31, 1996, all stock warrants were currently exercisable.
14. RELATED PARTY TRANSACTIONS
Commodore was allocated rental charges of $89, $58 and $63 for the
years ended December 31, 1996, 1995 and 1994, respectively by an entity
owned by the Company's principal shareholder and chairman. Amounts owed
to the entity totaled $0 and $656 as of December 31, 1996 and 1995,
respectively.
At December 31, 1996, Commodore and its subsidiaries had advanced an
aggregate amount of $3,000 to Lanxide Performance Materials, Inc.
("LPM"), a wholly-owned subsidiary of Lanxide Corp. Lanxide is related
F-18
<PAGE> 66
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
to Commodore by substantial common ownership. Lanxide is related to
Commodore by significant common ownership. The promissory notes become
due on February 28, 1998. Interest receivable on the note totaled $18
as of December 31, 1996. The notes are collateralized by the assets of
LPM and guaranteed by Lanxide Corp. on behalf of its subsidiary.
15. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Commodore and its subsidiaries are committed under non cancelable
operating leases for office space and other equipment. Future
obligations under the leases for the next five years are as follows:
<TABLE>
<S> <C>
1997 $ 772
1998 427
1999 358
2000 221
2001 227
------
$2,005
======
</TABLE>
Rent expense and lease payments approximated $318, $127, and $98 in
1996, 1995 and 1994, respectively. The lease commitments are offset by
subleases of $310 and $78 in 1997 and 1998, respectively, which are not
included in the obligations above.
CAPITAL LEASE OBLIGATIONS
ASI has capital lease obligations of $118, net of imputed interest at
rates ranging from 8 percent to 12 percent, of which $89 is due in 1997
and is recorded as a current liability and the remaining $29 is due
through 1999.
EMPLOYMENT AGREEMENTS
Commodore and its subsidiaries have employment agreements with 14
executives and key personnel. Aggregate minimum payments under the
employment agreements for the following five years are as follows:
<TABLE>
<S> <C>
1997 $2,562
1998 1,842
1999 1,722
2000 170
2001 89
------
Total $6,385
======
</TABLE>
The company have a five-year Executive Bonus Plan (the "Plan") under
which a number of executives and employees of the company are entitled
to formula bonuses. Since inception of the Plan, bonus criteria have
not been met.
SELF INSURANCE
Harvest American. In July 1987, Commodore established Harvest American
Insurance Company, a wholly-owned license "captive" insurance company
subsidiary. Harvest issued insurance policies exclusively to
Commodore's former asbestos abatement subsidiaries. The policies were
in effect from July 1987 through January 1989. The maximum exposure
under policies is $5,000 in the aggregate.
F-19
<PAGE> 67
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
In December, 1994, the governing insurance regulators and Commodore
entered into a Settlement Agreement which required Commodore to deposit
$750 into an interest bearing account as a capital contribution to
Harvest. As of December 31, 1996, Harvest had $1,095 in an interest
bearing account and a $4,238 intercompany demand note from Commodore.
Both the regulator and Harvest have the right to use proceeds from the
reserve account to purchase reinsurance in order to eliminate part or
all of the contingent risk. An independent actuary determined that the
loss reserve required in connection with the policies issued by Harvest
as of December 31, 1994 was $994. Commodore has reached a tentative
agreement with a third party to re-insure the total Harvest liability
for a one-time payment of $1,275 and as of December 31, 1996 Commodore
adjusted its insurance loss reserve accordingly.
Benefit Plan. During fiscal years 1996 and 1995, the company operated a
health benefit plan for certain employees under which it is partially
self-insured. The maximum liability is limited to $65 per individual
per year. Claims in excess of the company's maximum liability are
insured by a health insurance carrier.
LITIGATION
Commodore has matters of litigation arising in the ordinary course of
its business which in the opinion of management will not have a
material adverse effect on the financial condition or results of
operation.
16. SUBSEQUENT EVENTS
In April 1997, Separation made an initial public offering of 1,500,000
shares of its $0.001 par value common stock for $5.00 per share,
600,000 shares of its $0.001, 10 percent senior convertible redeemable
preferred stock for $10.00 per share and 2,100,000 warrants for the
purchase of common and preferred stock for $0.10 per warrant. Net
proceeds from the Separation offering totaled approximately
$11,668,000. Subsequent to Separation's initial public offering,
Applied owns 87% of the common stock ownership of Separation.
On January 5, 1997, Lockheed Martin Energy Research Corporation
("LMER") and Separation signed a license agreement of proprietary
rights, processes and products owned and manufactured by the two
companies for the purpose of engaging in commercial activities with
LMER customers and the Department of Energy. Separation paid $50 to
LMER in consideration of the agreement. Royalties will be paid to LMER
in the amount of 2 percent of the first $4,000 of Separation's net
annual sales and 1 percent thereafter. Separation has a minimum royalty
liability of $15 per year.
In January 1997, Commodore advanced LPM an additional $1,500 under
terms similar to those outlined herein (See Note 14).
In February 1997 and pursuant to the joint venture agreement, Applied
advanced an additional $1,000 payment to the Teledyne - Commodore joint
venture (See Note 7).
In March 1997, Separation secured a bank line of credit for $1,500
expiring on April 17, 1997. Applied has guaranteed the line of credit
by pledging cash collateral in an amount equal to the line of credit.
F-20
<PAGE> 68
EXHIBIT INDEX
EXHIBITS NO. DESCRIPTION
3.1 Certificate of Incorporation of Commodore Environmental
Services, Inc. (1)
3.2 Certificate of Stock Designation of Commodore Environmental
Services, Inc. (6)
3.3 By-Laws of Commodore Environmental Services, Inc. (1)
10.1 Certificate from the State of Vermont for Harvest American
Insurance Company. (1)
10.2 Letter Agreement, dated March 18, 1991 with Ameritech Oil
and Gas Corporation with respect to Oklahoma oil & gas
Field. (1)
10.3 Operating Agreement, dated March 22, 1991 with Ameritech
Oil and Gas Corporation with respect to to Oklahoma oil &
gas Field. (3)
10.4 Assumption Agreement, dated April 11, 1991 by and between
Commodore Environmental Services, Inc. and Harvest American
Insurance Company. (3)
10.5 Option Agreement, dated March 15, 1993, and among Commodore
Environmental Services, Inc. and the Principal Shareholders
and Board of Directors of A.L. Sandpiper Corporation and
CFC Technologies, Inc. (4)
10.6 Option Agreement, dated March 15, 1993, by and among
Commodore Environmental Services, Inc. and Paul Hannesson.
(4)
<PAGE> 69
EXHIBITS NO. DESCRIPTION
10.7 Option Agreement, dated March 15, 1993, by and among
Commodore Environmental Services, Inc. and the Principal
Shareholders and Board of Directors of A.L. Sandpiper
Corporation and CFC Technologies, Inc. (4)
10.8 Agreement and Plan of Merger dated as of June 24, 1993
between the Company, Sandpiper, its principal shareholders
and ALS Acquisition Corp. (5)
10.9 License Agreement between Sandpiper and the Company. (5)
10.10 Employment Agreements between Sandpiper and Abel and Augur,
respectively. (5)
10.11 Non-competition Agreements between Sandpiper and Abel and
Augur. (5)
10.12 Form of the Company's Warrant. (5)
10.13 Stock Option Agreements between the Company and Abel and
Augur, respectively. (5)
10.14 Security Agreement between Sandpiper and the Company. (5)
10.15 Escrow Agreement between the Company, Sandpiper, its
principal shareholders and counsel to the parties. (5)
10.16 $125,000 Non-Recourse, Non-Negotiable, secured Promissory
Note from Albert and Connie Abel to the Company. (5)
10.17 Tax and loan Indemnity Agreement between the Company and
Albert Abel and Connie Abel. (5)
10.18 Agreement and Plan of Merger dated July 28, 1993 between the
Company, CFC, Abel, Augur and CFC Acquisition Corp. (5)
10.19 Sublicense Agreement between the Company and CFC
Technologies, Inc. (5)
10.20 Escrow Agreement between the Company, CFC Technologies,
Inc., Abel, Augur and counsel to the parties. (5)
10.21 Securities Purchase Agreement by and between Commodore
Environmental Services, Inc. and purchasers of Series "AA"
Preferred Stock. (6)
10.22 Bond Purchase Agreement by and between Commodore
Environmental Services, Inc. and purchasers of Convertible
Bonds. (6)
10.23 Stock Option Agreement, dated November 22, 1993, by and
between Commodore Environmental Services, Inc. and Jim
DeAngelis. (6)
10.24 Employment Agreement, dated January 1, 1994, by and between
Commodore Environmental Services, Inc. and Jim DeAngelis.
(6)
10.25 Employment Agreement, dated October 3, 1994, by and between
Commodore Environmental Services, Inc. and Vincent Valeri.
(7)
10.26 Warrant, dated October 3, 1994, by and between Commodore
Environmental Services, Inc. and Vincent Valeri. (7)
<PAGE> 70
EXHIBITS NO. DESCRIPTION
10.27 Employment Agreement, dated June 1, 1995, by and between
Commodore Environmental Services, Inc. and Neil Drobny. (7)
10.28 Stock Option Agreement, dated June 1, 1995, by and between
Commodore Environmental Services, Inc. and Neil Drobny. (7)
10.29 Employment Agreement, dated August 31, 1995, by and between
Commodore Environmental Services, Inc. and Carl Magnell.
(7)
10.30 Stock Option Agreement, dated August 31, 1995, by and
between Commodore Environmental Services, Inc. and Carl
Magnell. (7)
10.31 Assignment of Technology Agreement, dated December, 1995, by
and between Commodore Membrane Technologies, Inc. and Sri
Kilambi. (7)
10.32 Stock Option Agreement, dated as of February 16, 1996, by
and between Commodore Environmental Services, Inc. and Paul
E. Hannesson. (7)
10.33 Employment Agreement, dated as of October 31, 1996, by and
between the Company and Edwin L. Harper, Ph.D. (8)
10.34 Form of Employment Agreement, by and between the Company
and Paul E. Hannesson.*
10.35 Agreement and Plan of Merger, dated November 13, 1996, by
and among the Company, Lanxide Corporation and COES
Acquisition Corp. (9)
10.36 Line of Credit Agreement, dated November 13, 1996, by and
between the Company and LPM. (9)
10.37 Line of Credit Promissory Note, dated November 13, 1996, by
LPM in favor of the Company. (9)
10.38 Security Agreement, dated November 13, 1996, by and between
the Company and LPM. (9)
10.39 Guarantee, dated November 13, 1996, by Lanxide Corporation
in favor of the Company. (9)
22.1 Subsidiaries of the registrant.*
27.1 Financial Data Schedule.*
* Filed herewith.
(1) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated April 14, 1988.
<PAGE> 71
(2) Incorporated by reference to Exhibits 10.1 through 10.13 to the
Registrant's Form 10-Q for the quarter ended June 30, 1990.
(3) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated April 30, 1992.
(4) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated March 23, 1993.
(5) Incorporated by reference to Exhibit 10 in the Registrant's Form 8-K
dated August 10, 1993.
(6) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated April 14,1994.
(7) Incorporated by reference to Exhibit 10 in the Reigistrant's Form
10-K for the fiscal year ended December 31, 1995 filed with the
Commission on April 12, 1996.
(8) Incorporated by reference to Exhibit 10.12 to Amendment No. 3 to
Separation's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on January 23, 1997 (File No. 333-
11813).
(9) Incorporated by reference to Exhibits 1, 3, 4, 5 and 6 in the
Registrant's Form 8-K dated November 13, 1996.
<PAGE> 1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of
the 18th day of November 1996, by and between COMMODORE ENVIRONMENTAL SERVICES,
INC., a Delaware corporation having offices at 150 East 58th Street, Suite 3400,
New York, New York 10155 (the "Company"), and PAUL E. HANNESSON, an individual
residing at 2361 Golf Brook Drive, West Palm Beach, Florida 33414 (the
"Employee").
W I T N E S S E T H:
WHEREAS, the Employee has substantial knowledge and experience
relating to the management and operation of technology-driven developmental
businesses, and the Company desires to obtain the full-time services of the
Employee to serve in an executive capacity with the Company; and
WHEREAS, the Employee is ready, willing and able to serve as an
executive officer of the Company, all upon the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the parties hereto hereby agree as follows:
Part A. Employment.
1. Duties. Subject to the terms and conditions of this Agreement,
the Company shall employ the Employee and the Employee shall render services to
the Company in the capacities and with the titles of Chairman and Chief
Executive Officer of the Company. In addition, the Employee shall serve in such
capacity and have such title with such of the
<PAGE> 2
Company's subsidiaries as may be requested from time to time by the Company,
without requirement of any additional compensation to the Employee.
2. Full-Time Employment. Throughout the period of his employment
hereunder, the Employee shall devote his full and entire professional and
business time, attention, knowledge and skills to faithfully, diligently and to
the best of his abilities perform his duties hereunder. It is expected that the
Employee will render his services primarily from the Company's New York, New
York office, provided that the Employee will engage in such travelling as may be
reasonably required in connection with the performance of his duties hereunder.
3. Director. The Company will cause the Employee to be elected a
member of the Board of Directors of the Company and each of its publicly-traded
subsidiaries, for so long as the Employee remains the Company's Chairman and
Chief Executive Officer.
Part B. Term of Employment; Termination of Agreement.
1. Term. Subject to prior termination in accordance with the
provisions hereof, the term of this Agreement shall commence on November 1, 1996
and shall continue through and including December 31, 1999 (the "Term").
2. Termination For Cause. Anything contained in Section 1 of this
Part B to the contrary notwithstanding, this Agreement may be terminated at the
option of the Board of Directors of the Company (the "Board") for "Cause" (as
hereinafter defined), effective upon the giving of written notice of termination
to the Employee. As used herein, the term "Cause" shall mean and be limited to:
2
<PAGE> 3
a. any act committed by the Employee against the Company, or
any of its subsidiaries or divisions, constituting: (i) fraud, (ii)
misappropriation of corporate opportunity, breach of fiduciary duty or
non-disclosure of a conflict of interest, (iii) self-dealing, (iv) embezzlement
of funds, (v) felony conviction for conduct involving moral turpitude or other
criminal conduct, or (vi) the disregard by the Employee of the reasonable
directions of the Board; or
b. the breach or default by the Employee in the performance of
any material provision of this Agreement (including but not limited to Part D
below); or
c. alcoholism or any other form of addiction which impairs the
Employee's ability to perform his duties hereunder.
3. Death or Disability. Anything contained in Section 1 of this Part
B to the contrary notwithstanding, this Agreement may be terminated by the
Company: (i) upon the death of the Employee, or (ii) on thirty (30) days' prior
written notice to the Employee, in the event that the Employee shall be
physically or mentally disabled or impaired so as to prevent him from continuing
the normal and proper performance of his duties and responsibilities hereunder
for a period of three (3) consecutive months. The initial determination as to
whether the Employee is disabled or impaired shall be made by the physician
regularly treating the condition causing the disability. The Company shall have
the right to require the Employee to be examined by a physician duly licensed to
practice medicine in the State in which the Employee has his primary residence
to determine such physician's opinion as to the Employee's disability. If such
physician's opinion differs from that of the physician treating the Employee, or
a physician thereafter retained by the Employee, they shall forthwith select a
third physician
3
<PAGE> 4
so licensed whose opinion, after examination and review of available
information, shall be conclusive and binding upon all parties hereto. All costs
of the physician regularly treating or thereafter retained by the Employee shall
be paid by the Employee. All costs of the physician retained by the Company
shall be paid by the Company. If a third physician is required, then the costs
of that physician shall be paid by the Company.
4. No Further Obligations. Upon any termination of this Agreement by
the Company for "Cause" pursuant to Section 2 of this Part B, or by reason of
the Employee's death or disability pursuant to Section 3 of this Part B, neither
the Company nor any subsidiary or division thereof shall be liable for or be
required to pay to the Employee any further remuneration, compensation or other
benefits hereunder.
Part C. Compensation; Expenses.
1. Base Salary. As compensation for his services during the Term,
the Company shall pay or cause to be paid to the Employee a fixed base salary at
the annual rate of Three Hundred Ninety-Five Thousand Dollars ($395,000).
2. Signing Bonus. The Employee shall be paid a signing bonus of
$150,000 upon the execution of this Agreement.
3. Company Stock Options. In consideration for the Employee's
entering into this Agreement with the Company, the Company is, as of the date
hereof, granting to the Employee a stock option (the "Stock Option") to purchase
an aggregate of 2,500,000 shares of common stock, par value $.01 per share, of
the Company (the "Common Stock"), at an exercise price per share equal to the
closing sale or bid price of the Common Stock as reported or quoted on the OTC
Bulletin, Nasdaq Stock Market or American Stock Exchange, as the case may be,
4
<PAGE> 5
on the last trading day prior to the date hereof. Provided that the Employee is
in the full-time employ of the Company on each date of exercise, such Stock
Option will be exercisable as to 500,000 shares of Common Stock commencing on
the first anniversary of this Agreement (the "Initial Vesting Date") and as to
an additional 500,000 shares of Common Stock commencing on each of the four
successive anniversaries of the Initial Vesting Date. The other terms and
conditions of the Stock Option shall be as set forth in a separate Stock Option
Agreement between the Company and the Employee. In addition, the Company
acknowledges and agrees that the stock options to purchase 500,000 shares of
Common Stock at an exercise price of $.53 per share currently held by the
Employee will vest effective as of the date of this Agreement.
4. Subsidiary Stock Options. As additional consideration for the
Employee's entering into this Agreement with the Company, the Company is, as of
the date hereof granting, and will from time to time in the future grant, as
applicable, to the Employee stock options to purchase common stock of each
publicly-traded subsidiary of the Company in the amount of 1.0% of such
subsidiary's total outstanding shares of common stock on the date of grant and
at an exercise price per share equal to the then-current fair market value per
share on the date of grant.
5. Incentive Compensation. The Employee will be entitled to receive
incentive compensation of up to $200,000 per year for achieving goals
established and determined by the parties within 120 days after the date of this
Agreement.
6. Benefits. In addition to the foregoing compensation, the Employee
shall, throughout the period of his employment hereunder, be eligible to
participate in any and all group health, group life and/or other benefit plans
generally made available by the Company to
5
<PAGE> 6
its employees, provided that nothing herein contained shall be deemed to require
the Company to maintain or continue any particular plan or policy.
7. Vacation. The Employee shall be entitled to up to four (4) weeks
of vacation per year, to be taken at such times as shall be mutually agreeable
to the Company and the Employee, and so as not to unduly interfere with the
business of the Company. The Employee may carry over, to the next annual period
hereunder, up to two (2) weeks of unused vacation time as at the end of each
year of the term of this Agreement.
8. Expenses. In addition to the compensation set forth above,
throughout the period of the Employee's employment hereunder, the Company shall
also reimburse the Employee or cause the Employee to be reimbursed, upon
presentment by the Employee to the Company of appropriate receipts and vouchers
therefor, for any reasonable business expenses incurred by the Employee in
connection with the performance of his duties and responsibilities hereunder;
provided, however, that in order to be reimbursable hereunder, any such expense
must be deductible (in whole or in part) by the Company for federal income tax
purposes.
Part D. Confidentiality; Non-Competition. As a material inducement to
cause the Company to enter into this Agreement, the Employee hereby covenants
and agrees that:
1. Confidential Information. The Employee shall, at all times during
and subsequent to the Term, keep secret and retain in strictest confidence all
confidential matters of the Company, and the "know-how", trade secrets,
technical processes, inventions, equipment specifications, equipment designs,
plans, drawings, research projects, confidential client lists, details of
client, subcontractor or consultant contracts, pricing policies, operational
methods, marketing plans and strategies, project development, acquisition and
bidding techniques and
6
<PAGE> 7
plans, business acquisition plans, and new personnel acquisition plans of the
Company and its subsidiaries and divisions (whether now known or hereafter
learned by the Employee), except to the extent that (i) such information is
generally available to the public without restriction, (ii) the Employee obtains
confidentiality agreements with respect to such confidential information, (iii)
the Employee is requested by the Board of Directors of the Company or a
Committee thereof, to disclose such confidential information, (iv) such
information is provided to a customer of the Company pursuant to a request
received from such customer in the ordinary course of business, or (v) the
Employee is under compulsion of either a court order or a governmental agency's
or authority's inquiry, order or request to so disclose such information.
2. Property of the Company.
(a) Except as otherwise provided herein, all lists, records
and other non-personal documents or papers (and all copies thereof) relating to
the Company and/or any of its subsidiaries or divisions, including such items
stored in computer memories, on microfiche or by any other means, made or
compiled by or on behalf of the Employee, or made available to the Employee, are
and shall be the property of the Company, and shall be delivered to the Company
on the date of termination of the Employee's employment with the Company, or
sooner upon request of the Company at any time or from time to time.
(b) All inventions, including any procedures, formulas,
methods, processes, uses, apparatuses, patterns, designs, plans, drawings,
devices or configurations of any kind, any and all improvements to them which
are developed, discovered, made or produced, and all trade secrets and
information used by the Company and/or its subsidiaries and divisions
(including, without limitation, any such matters created or developed by the
Employee during
7
<PAGE> 8
the term of this Agreement), shall be the exclusive property of the Company or
the subject subsidiary, and shall be delivered to the Company or the subject
subsidiary (without the Employee retaining any copies, components or records
thereof) on the date of termination of the Employee's employment with the
Company; provided, however, that nothing herein contained shall be deemed to
grant to the Company any property rights in any inventions or other intellectual
property which may at any time be developed by the Employee which is wholly
unrelated to any business then engaged in or under development by the Company.
3. Employees of the Company. The Employee shall not, at any time
(whether during the term of this Agreement or at any time thereafter), directly
or indirectly, for or on behalf of any business enterprise other than the
Company and/or its subsidiaries and affiliates, solicit any employee of the
Company or any of its subsidiaries to leave his or her employment with the
Company or such subsidiary, or encourage any such employee to leave such
employment, without the prior written approval of the Company in each instance.
4. Non-Competition. For so long as the Employee shall be receiving
any compensation or remuneration under this Agreement, and for a further period
of one (1) year thereafter, the Employee shall not, directly or indirectly,
whether individually or as an employee, stockholder (other than the passive
ownership of up to 5% of the capital stock of a publicly traded corporation),
partner, joint venturer, agent or other representative of any other person, firm
or corporation, engage or have any interest in any business (other than the
Company or any of its subsidiaries or affiliates) which, in any country in which
the Company or any of its subsidiaries or divisions does or solicits business
during the Term, is engaged in or derives any revenues from performing any
functionally equivalent services or marketing any
8
<PAGE> 9
functionally equivalent products as those services provided and products
marketed by the Company or any of its subsidiaries or divisions during the Term.
5. Severability of Covenants. The Employee acknowledges and agrees
that the provisions of this Part D are (a) made in consideration of the premises
and undertakings of the Company set forth herein, (b) made for good, valuable
and adequate consideration received and to be received by the Employee, and (c)
reasonable and necessary, in terms of the time, geographic scope and nature of
the restrictions, for the protection of the Company and the business and good
will thereof. It is intended that the provisions of this Part D be fully
severable, and in the event that any of the foregoing restrictions, or any
portion of the foregoing restrictions, shall be deemed contrary to law, invalid
or unenforceable in any respect by any court or tribunal of competent
jurisdiction, then such restrictions shall be deemed to be amended, modified and
reduced in scope and effect, as to duration and/or geographic area, only to that
extent necessary to render same valid and enforceable (and in such reduced form,
such provisions shall then be enforceable), and any other of the foregoing
restrictions shall be unaffected and shall remain in full force and effect.
6. Equitable Remedies. The parties hereby acknowledge that, in the
event of any breach or threatened breach by the Employee of the provisions of
this Part D, the Company will suffer irreparable harm and will not have an
adequate remedy at law. Accordingly, in the event of any such breach or
threatened breach, the Company may seek and obtain appropriate equitable relief
to restrain or enjoin such breach or threatened breach and/or to compel
compliance herewith.
9
<PAGE> 10
Part E. Miscellaneous.
1. Binding Effect. All of the terms and conditions of this Agreement
shall be binding upon and inure to the benefit of the Employee, the Company and
their respective heirs, executors, administrators, personal representatives,
successors and permitted assigns.
2. Notices. Except as may otherwise be provided herein, any notice,
request, demand or other communication required or permitted under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or when mailed by certified mail, return receipt requested,
addressed to a party at the address of such party first set forth above, or at
such other address as such party may hereafter have designated by notice. Copies
of all notices hereunder shall simultaneously be sent by first class post-paid
mail to Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, Citicorp Center,
153 East 53rd Street, New York, New York 10022, Attn: Stephen A. Weiss, Esq.
3. Waivers. Neither this Agreement nor any of the terms or
conditions hereof may be waived, amended or modified except by means of a
written instrument duly executed by the party to be charged therewith.
4. Captions. The captions and paragraph headings used in this
Agreement are for convenience of reference only, and shall not affect the
construction or interpretation of this Agreement or any of the provisions
hereof.
5. Governing Law. This Agreement, and all matters or disputes
relating to the validity, construction, performance or enforcement hereof, shall
be governed by, and construed under, the laws of the State of New York, without
giving effect to principles of conflicts of laws thereof.
10
<PAGE> 11
6. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original hereof, but all of
which together shall constitute one and the same instrument.
7. Arbitration. Except for any court action or proceeding to obtain
equitable relief in respect of the provisions of Part D above, any dispute
involving the interpretation or application of this Agreement shall be resolved
by final and binding arbitration before an arbitrator designated by, and
mutually acceptable to, the Company and the Employee. In the event that the
parties cannot agree to the appointment of a mutually acceptable arbitrator, the
subject dispute shall be resolved by final and binding arbitration before one or
more arbitrators designated by the American Arbitration Association in New York,
New York, unless mutually agreed to otherwise. The award of any of such
arbitrator(s) may be enforced in any court of competent jurisdiction.
8. Assignment.
(a) This Agreement is intended for the sole and exclusive
benefit of the parties hereto and their respective heirs, executors,
administrators, personal representatives, successors and permitted assigns, and
no other person or entity shall have any right to rely on this Agreement or to
claim or derive any benefit herefrom absent the express written consent of the
party to be charged with such reliance or benefit.
(b) The Employee may not assign or otherwise transfer any of
his obligations or duties hereunder to any other person, firm or corporation, it
being understood and agreed that this Agreement is intended to be for the
personal services of the Employee only and of no other person.
11
<PAGE> 12
(c) The Company shall have the right, at any time and from
time to time, to cause any payments required hereunder to be made by any
subsidiary of the Company. Furthermore, the Company may assign this Agreement to
any successor-in-interest who may acquire, whether by direct purchase, sale of
securities, merger or consolidation, the assets, business or properties of the
Company; provided that no such assignment shall relieve the Company of its
duties and obligations to the Employee hereunder, without the prior written
consent of the Employee.
9. Superseding Effect. This Agreement supersedes and replaces any
previous employment agreement entered into by the Employee with the Company or
any subsidiary or
affiliate thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on and as of the date first set forth above.
COMMODORE ENVIRONMENTAL SERVICES, INC.
By:
----------------------------------------------
Name: Bentley J. Blum
Title: Chairman of the Board
--------------------------------------------------
Paul E. Hannesson
12
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION PERCENTAGE OWNED
- ------------------ ---------------------- ----------------
<S> <C> <C>
Commodore Applied
Technologies, Inc Delaware 69.3%
Commodore Advanced+
Sciences, Inc. Delaware 69.3%
Commodore Separation++
Technologies, Inc. Delaware 60.3%**
Commodore CFC+
Technologies, Inc. Delaware 69.3%
CFC Technologies, Inc.+ Ohio 69.3%
Advanced Sciences, Inc.* New Mexico 69.3%
A.S. Environmental, Inc.* Delaware 69.3%
Commodore Laboratories, Inc.* Ohio 69.3%
Commodore Remediation
Technologies, Inc.* Delaware 69.3%
Commodore Governmental
Environmental
Technologies, Inc.* Delaware 69.3%
Commodore Technologies, Inc.* Ohio 69.3%
Sandpiper Properties, Inc.* Ohio 69.3%
Commodore Refrigerant
Technologies, Inc. Delaware 69.3%
</TABLE>
+ Wholly owned subsidiary of Commodore Applied Technologies, Inc.
++ 87% owned subsidiary of Commodore Applied Technologies, Inc.
* Wholly owned subsidiary of Commodore Advanced Sciences, Inc.
** Represents the Company's 69.3% beneficial ownership of 87.0%
of Separation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,821
<SECURITIES> 0
<RECEIVABLES> 9,455
<ALLOWANCES> (2,306)
<INVENTORY> 0
<CURRENT-ASSETS> 26,868
<PP&E> 2,452
<DEPRECIATION> (408)
<TOTAL-ASSETS> 41,113
<CURRENT-LIABILITIES> 13,873
<BONDS> 8,244
0
46
<COMMON> 579
<OTHER-SE> 12,206
<TOTAL-LIABILITY-AND-EQUITY> 41,113
<SALES> 0
<TOTAL-REVENUES> 5,253
<CGS> 0
<TOTAL-COSTS> 4,291
<OTHER-EXPENSES> 10,195
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 808
<INCOME-PRETAX> (8,311)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,311)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,311)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
