<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-10054
COMMODORE ENVIRONMENTAL SERVICES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 87-0275043
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
150 EAST 58TH STREET
NEW YORK, NEW YORK 10155
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 308-5800
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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 [ ].
The number of shares of common stock outstanding at November 5, 1997 was
58,883,583.
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COMMODORE ENVIRONMENTAL SERVICES, INC.
FORM 10-Q
INDEX
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<CAPTION>
PAGE NO.
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PART I . FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 . . . . . . . . . . . . 3
Condensed Consolidated Statement of Operations -
Three months ended September 30, 1997 and 1996
Nine months ended September 30, 1997 and 1996. . . . . . . . . . 5
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 1997 and
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 17
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
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(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 2,054 $ 7,821
Temporary investments 14,297 7,459
Accounts receivable, net 3,372 7,149
Notes and advances to related parties 5,050 3,034
Restricted cash 50 670
Prepaid assets and other current assets 716 735
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TOTAL CURRENT ASSETS 25,539 26,868
Certificates of deposit and restricted cash 1,123 1,145
Other receivables 309 384
Other investments 2,961 862
Property and equipment, net 2,768 2,044
Non-performing note receivable 912 912
Deferred financing costs, net 120 192
Patents and completed technology, net 1,114 1,004
Goodwill, net 7,417 7,560
Other assets 111 142
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TOTAL ASSETS $ 42,374 $ 41,113
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</TABLE>
See notes to condensed consolidated financial statements.
3
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COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - - (CONT'D)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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LIABILITIES AND
STOCKHOLDERS' EQUITY (unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities $ 2,309 $ 3,801
Notes payable 55 --
Current portion of long-term debt 48 89
Line of credit 1,309 7,042
Other accrued liabilities 3,095 2,755
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TOTAL CURRENT LIABILITIES 6,816 13,687
Insurance loss reserve 1,275 1,275
Bonds payable 4,000 4,000
Due to related parties 186 186
Other long term debt 22 29
Deferred gain 690 690
Promissory note to related party 2,250 2,250
Minority interest 7,817 6,165
Minority interest in preferred stock of subsidiary 1,626 --
Redeemable preferred stock 8,640 --
Stockholders' Equity:
Preferred stock, par value $.01 per share
authorized 10,000,000 issued and
outstanding 4,224,461 and 4,641,167 42 46
Common stock, par value $.01 per share
authorized 100,000,000 and shares
issued and outstanding 58,758,583
and 57,924,368 588 579
Additional paid-in capital 46,688 41,768
Retained earnings (deficit) (38,241) (29,537)
------------ ------------
9,077 12,856
Less cost of 506,329 shares of common
stock held in treasury (25) (25)
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TOTAL STOCKHOLDERS' EQUITY 9,052 12,831
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,374 $ 41,113
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
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COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996(*) 1997 1996(*)
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<S> <C> <C> <C> <C>
REVENUES:
Contract revenues $ 5,738 $ 28 $ 15,717 $ 163
Other operating revenues -- -- -- 31
------------ ------------ ------------ ------------
5,738 28 15,717 194
COSTS AND EXPENSES:
Cost of sales 4,481 64 12,479 149
Research and development 752 977 2,185 2,139
General and administrative 4,160 1,291 11,032 2,384
Depreciation and amortization 289 -- 771 --
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 9,682 2,332 26,467 4,672
LOSS FROM OPERATIONS (3,944) (2,304) (10,750) (4,478)
OTHER INCOME (EXPENSE):
Interest income 368 265 828 265
Interest expense (265) (145) (874) (394)
Equity in losses from
unconsolidated subsidiary (512) -- (1,466) --
Minority interest 1,200 302 3,558 302
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
NET (LOSS) $ (3,153) $ (1,882) $ (8,704) $ (4,305)
============ ============ ============ ============
NET (LOSS) PER SHARE
(Based on weighted average
shares of 58,252,000 and 57,872,000
in 1997 and 57,125,000 and 56,935,000
in 1996) (* *) $ (.05) $ (.03) $ (.15) $ (.08)
============ ============ ============ ============
</TABLE>
(*) Reclassified to conform to current year presentation.
(* *) Common stock equivalents are not included in the net loss per share
calculation since they are antidilutive.
See notes to condensed consolidated financial statements.
5
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COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
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OPERATING ACTIVITIES
Net loss $ (8,704) $ (4,305)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation and amortization 771 238
Interest (non cash) 72 72
Undistributed losses of unconsolidated subsidiary 1,466 --
Minority ownership in losses (3,558) (302)
Issuance of stock options 623 --
Changes in assets and liabilities:
Accounts receivable 3,777 (55)
Inventories -- 45
Other assets 50 (287)
Restricted cash 642 (270)
Accounts payable and accrued liabilities (1,152) 715
Other current liabilities 14 --
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NET CASH USED IN OPERATING ACTIVITIES (5,999) (4,149)
INVESTING ACTIVITIES
Payments received on receivables 75 7
Acquisition of patents (116) --
Purchase of equipment (1,346) (917)
Purchase of temporary investments (6,838) (20,766)
Other investments (3,565) (1,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (11,790) (22,676)
FINANCING ACTIVITIES
Proceeds from sale of subsidiary stock 12,695 30,568
Issuance of preferred stock 7,832 --
Increase in line of credit -- 2,000
Payment on line of credit (5,733) (2,000)
Issuance of common stock 55 155
Payment of long term debt (7) --
Payment of dividends on preferred stock (508) (225)
Advances from (payment to) related parties (2,016) (1,483)
Other (296) --
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 12,022 29,015
------------ ------------
INCREASE (DECREASE) IN CASH (5,767) 2,190
Cash at beginning of period 7,821 36
------------ ------------
CASH AT END OF PERIOD $ 2,054 $ 2,226
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
6
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COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 1997
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Commodore Environmental Services, Inc. and subsidiaries ("the Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. The financial statement information was derived
from unaudited financial statements unless indicated otherwise. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended September 30,
1997, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
The current principal businesses of Commodore Environmental Services,
Inc. are conducted through its 65.9% owned subsidiary, Commodore Applied
Technologies, Inc. ("Applied"), and consist of the development of technologies
or the destruction of neutralization of hazardous waste and the separation of
hazardous waste from other materials. Applied owns technologies related to the
separation and destruction of polychlorinated biphenyls (PCBs) and
chloroflourocarbons (CFCs). In addition Applied owns 100% of Advanced
Sciences, Inc. ("ASI"), a subsidiary acquired on October 1, 1996. ASI has been
primarily engaged in providing environmental engineering and scientific support
services to United States government agencies, such as the Department of Energy
and the Department of Defense. Applied also owns 87% of Commodore Separation
Technologies, Inc., whose principal business is to separate and extract
various solubilized materials from liquid and gaseous streams. The
consolidated financial statements include accounts of Applied and its
majority-owned subsidiaries. All significant intercompany balances have been
eliminated. All joint ventures with a 50% or less ownership have been
accounted for under the equity method since Applied does not have a controlling
interest.
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 former asbestos abatement
subsidiaries. The policies were issued from July 1987 through January 1989.
The maximum exposure under the outstanding policies is $5,000 in aggregate.
7
<PAGE> 8
In December 1994, The Vermont Department of Banking and Insurance (the
"Department"), and the Company entered into an agreement which required the
Company to deposit an additional $750 in an interest bearing account as a
capital contribution to Harvest. As of September 30, 1997, Harvest had $1,123
in an interest-bearing account and an amended $4,239 intercompany demand note
(the "Company Note") from the Company. The Company and/or Harvest have the
rights to use the proceeds from the reserve account to purchase reinsurance in
order to eliminate all or part of the insurance risk.
The Company has reached an agreement with the third party to re-insure
the total Harvest liability for a one-time payment of $1,275, and as of
December 31, 1996, the Company adjusted its insurance loss reserve accordingly.
On March 29, 1996, the Company, in exchange for the issuance of
15,000,000 shares of Applied common stock, capitalized Applied, as follows: (1)
contributed 90.05 percent of the outstanding common stock of Commodore
Laboratories, Inc. ("Labs") and 100 percent of the outstanding capital stock of
Commodore Technologies, Inc. ("Technologies"), Commodore Government
Environmental Technologies, Inc. ("Government"), Commodore Remediation
Technologies, Inc. ("Remediation"), and Sandpiper Properties, Inc.
("Sandpiper"), (2) assigned all rights, titles, and interest in its contracts,
assets, and properties related to Commodore's SET(TM) technology to Applied,
and (3) contributed $3,000 of a promissory note to Applied for the purpose of
funding the development of SET(TM).
In June of 1996, Applied completed an initial public offering of
5,750,000 shares of its common stock, par value $.001 per share of common
stock, at a price to the public of $6.00 per share. Along with each share was
one detachable warrant valued at $.10, which entitles the holders to purchase
one Applied share of stock at the price of $8.40 per share from 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 $18.00 per share. Net proceeds from the
offering were $30,551.
In July 1996, the Company acquired the remaining 9.95 percent of Labs
and contributed its investment to Applied. The excess of the Company's
purchase price of $3,000 over the $2,294 fair value of the net assets acquired
has been recorded as completed technology and is being amortized over 7 years.
8
<PAGE> 9
On October 1, 1996, Applied acquired all of the outstanding voting
common stock of Advanced Sciences, Inc. ("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 Applied for the period
subsequent to the date of acquisition.
In consideration for the ASI and ASE stock, Applied issued 900,000
shares of common stock to ASI and ASE shareholders, with a fair value of
$2,250. Assets and liabilities acquired are as follows:
<TABLE>
<S> <C>
Cash $ 199
Accounts Receivables 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>
On December 2, 1996, Applied purchased Commodore Separation
Technologies, Inc. ("Separation"), Commodore CFC Technologies, Inc.
("Refrigerant") and CFC Technologies, Inc. ("CFC") from the Company for $5,400,
consisting of $3,000 in cash and warrants to purchase 7,500,000 shares of
Applied's common stock at an exercise price of $15.00 per share and with
termination date of December 2, 2003. The acquisition has been accounted for
as a transaction between entities under common control. Applied has recorded
its investment in Separation, CFC and Refrigerant as $753, which is equal to
the Company's historical basis in these subsidiaries. The difference between
this amount and the $5,400 paid to the Company has been recorded as a direct
reduction in the paid-in capital of Applied.
Substantially all of Applied's revenues are from ASI and consist of
engineering and scientific services performed for the U.S. Government and prime
contractors that serve the U.S. Government under a variety of contracts, most
of which provide for reimbursement of cost plus fixed fees. Revenue under
cost-reimbursement contracts is recorded under the percentage of completion
method as costs are incurred and include estimated 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 income
during the period such losses are identified. Changes in job performance, job
conditions, estimated profitability (including those arising from contract
penalty provisions) and final contract settlements may result in revisions to
cost 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, and $993 at September 30, 1997.
9
<PAGE> 10
The Company's condensed consolidated financial statements for the nine
month period ended September 30, 1996, do not include the accounts for ASI and
are therefore not comparable to the condensed consolidated financial statements
of the Company for subsequent periods. The acquisition of ASI occurred on
October 1, 1996. The consolidated financial statements include the accounts of
the Company 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 as Applied does not have a
controlling interest in the venture.
At September 30, 1997, the Company and its subsidiaries had advanced
an aggregate amount of $4,500 to Lanxide Performance Materials, Inc. ("LPM"), a
wholly-owned subsidiary of Lanxide Corporation ("Lanxide"), which specializes
in the manufacture of ceramic bonding and refractory materials. Lanxide is
related to the Company by 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 on behalf of its subsidiary.
On July 3, 1997, the Company announced it had effective control of
Lanxide pursuant to a Voting Agreement, dated July 3, 1997, which is in effect
until December 31, 1998. In addition, pursuant to a Securities Agreement dated
July 3, 1997, the Company agreed to purchase up to $25 million of Lanxide's
Series G Preferred Stock (the "Series G Stock") as follows: (i) on July 3,
1997, the Company purchased 10,000 shares of Series G Stock for a purchase
price of $1.0 million in cash; (ii) on July 28, 1997, the Company purchased
10,000 shares of Series G Stock for $1.0 million in cash; (iii) if prior to
August 27, 1997, the Company receives $10.5 million in financing, the Company
will purchase 85,000 shares of Series G Stock to be paid in the form of (x)
$4.0 million in cash and (y) the cancellation of Lanxide's outstanding
indebtedness to the Company and Applied in the amount of $4.5 million. The
financing contemplated in (iii) above did not occur. In addition, Lanxide
issued a Warrant (the "Warrant") to the Company for the purchase of 250,000
shares of Series F Preferred Stock of Lanxide (the "Series F Stock") at an
exercise price of $100 per share, which Warrant may be exercised, in part, by
the exchange of shares of Series G Stock for a like number of Series F Stock.
The amount and the nature of the consideration paid, by the Company for such
securities was determined as a result of arm's-lengths negotiations among
representative of the Company and Lanxide and certain of the Lanxide
Stockholders.
In May 1997, the Company sold $6.0 million of 7 percent Series D
redeemable convertible preferred stock, par value $.01 per share (the "Series D
Preferred Stock"), and warrants to purchase 600,000 shares of Applied common
stock currently held by the Company. In August 1997, the Company amended the
May 1997 sale by issuing additional warrants entitling holders to purchase an
additional 150,000 shares of Applied common stock currently held by the
Company. In August 1997, the Company sold an additional $2.8 million of Series
D Preferred Stock and warrants to purchase an additional 425,000 shares of
Applied common stock currently held by the Company. The Company received and
aggregate net proceeds of approximately $7.8 million from the offerings.
Additionally, the Company issued warrants to affiliates of the placement agent
to purchase an aggregate of 85,000 shares of Applied common stock at exercise
prices of $7.14 per share as to 60,000 shares and $5.15 per share as to 25,000
shares.
In August 1997, Applied completed a sale of 18,000 shares of
newly-created Series A Preferred Stock. In connection with the sale of the
preferred stock, Applied issued warrants, expiring on August 15, 2002, to the
placement agent entitling the placement agent to purchase 19,407 shares of
Applied's common stock at $5.80 per share. Net proceeds from this sale were
$1.6 million.
In October 1997, Applied completed sales of 700,000 shares of common
stock of Applied, from which Applied received aggregate net proceeds of $2.4
million. In connection with the private placements, Applied incurred
transaction costs of approximately $209 and issued warrants, expiring on
September 30, 2002, to the placement agent.
10
<PAGE> 11
In September and October 1997, four investors elected to convert a
portion of their Series D Preferred Stock (a total of 8,600 shares of Series D
Preferred Stock) into Applied common stock. Such conversion resulted in the
transfer by the Company of 41,599 shares and 230,605 shares, respectively, of
its Applied common stock to such investors. As a result of the conversion of
1,600 shares of the Company's Series D Preferred Stock into 41,599 shares of
Applied common stock in September 1997, and Applied's private placement of
700,000 of its shares of common stock and the conversion of 7,000 shares of the
Company's Series D Preferred Stock into 230,605 of Applied common stock in
October 1997, the Company's equity ownership in Applied decreased from 69.3
percent at June 30, 1997, to 65.9 percent in October 1997.
NOTE B - CONTINGENCIES
The Company 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 operations of the
Company.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
General
The current principal businesses of the Company are conducted through
its 65.9% owned subsidiary, Commodore Applied Technologies, Inc. ("Applied"),
and consist of the development of technologies for the destruction and
neutralization of hazardous waste and the separation of hazardous waste from
other materials. Applied owns technologies related to the separation and
destruction of polychlorinated biphenyls (PCBs) and chloroflourocarbons (CFCs).
Applied 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, Applied 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 the operations. However,
management believes the subsidiary's existing client relationships will allow
Applied to obtain new contracts in the future.
Commodore Separation Technologies, Inc. ("Separation") whose principal
business is to separate and extract various solubilized materials from liquid
and gaseous streams, is currently in the development stage and intends to
commercialize its separation and recovery system.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1997 Compared to Three and Nine
Months Ended September 30, 1996
Revenues were $5,738 and $15,717 for the three and nine months ended
September 30, 1997, compared to $28 and $194 for the three and nine months
ended September 30, 1996. Such revenues for 1997 were primarily due to
Applied's acquisition of ASI, effective October 1, 1996, and consisted of
engineering and scientific services performed for the United States government
under a variety of contracts, most of which provide for reimbursement of cost
plus fixed fees. Revenue under cost-reimbursements contracts is recorded under
the percentage of completion method as costs incurred and include estimated
fees in the proportion that costs to date bear to total estimated costs. Cost
of sales increased to $4,481 and $12,479, from $64 and $149 for the same
periods in 1996. Anticipated losses on contracts are provided for by a charge
to income during the period such losses are first identified.
For the three and nine months ended September 30, 1997, the Company
incurred research and development costs of $752 and $2,185, as compared to $977
and $2,139 for the three and nine months ended September 30, 1996. 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 or 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 three and nine months ended September 30, 1997, as compared to the three
and nine months ended September 30, 1996, primarily due to the continued use of
independent consultants in the development of SET(TM). Also, Applied hired
additional technical and operational personnel to develop the SET(TM) and
separation processes.
12
<PAGE> 13
General and administrative expenses for the three and nine months
ended September 30, 1997, were $4,160 and $11,032, as compared to $1,291 and
$2,384 for the three and nine months ended September 30, 1996. The increase was
primarily due to hiring executives and staff to support the increased
activities of Applied caused by its own and its subsidiary's change to "public"
status and efforts to commercialize its technology. Approximately $1,046 and
$2,693 of the increase relates to expenses incurred at the newly acquired ASI
subsidiary.
In April 1997, Separation completed a public offering of its equity
securities which reduced Applied's ownership percent from 100 percent to 87
percent. As a result, the financial statements report $201 as that portion of
the subsidiary's loss applicable to the minority interest. In addition, the
Company owns 65.9 percent of Applied and therefore the financial statements
report an additional $1,200 and $3,558 of minority interest for the three and
nine month periods ended September 30, 1997, respectively.
Interest income was $368 and $828 for the three and nine months ended
September 30, 1997, as compared to $265 and $265 for the three and nine months
ended September 30, 1996. The increase resulted from the investment of the
proceeds of Applied and its subsidiary's initial public offerings.
Interest expense for the three and nine months ended September 30,
1997, was $265 and $874, as compared to $145 and $394 for the three and nine
months ended September 30, 1996. Interest expense increased in 1997 due to the
debt assumed in connection with the acquisition of ASI.
Equity in losses of unconsolidated subsidiary for the three and nine
months ended September 30, 1997 was $512 and $1,466, as compared to $0 for the
three and nine months ended September 30, 1996. Applied's Teledyne-Commodore,
LLC joint venture commenced operations in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
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 $30,551. In connection with the initial public offering, Applied
incurred transaction costs of approximately $649. Applied allocated
approximately $12.0 million of the net proceeds for the funding of proposed
collaborative joint ventures, $2.0 million of which was allocated to
Teledyne-Commodore, LLC.
In July 1996, Applied utilized a portion of the net proceeds from its
initial offering to repay an outstanding line of credit of $2.0 million, as
well as a $5,925 promissory note to its principal stockholder. Applied set
aside $1.0 million cash collateral to support a loan made by a commercial bank
to Applied's principal stockholder in December 1993. In September 1996, such
cash collateral was released by the bank.
At June 30, 1997 and December 31, 1996, the Applied had a $1,309 and
$7,042 outstanding balance on a revolving line of credit, respectively. This
decrease in debt was attributable to the line of credit resulting from
collections on accounts receivable balances and a $2.8 million paydown on a
$9,250 revolving line of credit due September 30, 1997. Applied refinanced that
portion of the line of credit secured by receivables which is now due March 31,
1998. In addition, Applied is pursuing various options to finance its
anticipated capital expenditures for 1997 and 1998, and to refinance its line of
credit secured by receivables.
For the three and nine months ended September 30, 1997, the Company
incurred net losses of $3,153 and $8,704, respectively. At September 30, 1997,
and December 31, 1996, the Company had working capital of $18,723 and $13,181,
respectively.
13
<PAGE> 14
Effective as of December 1, 1996, Applied transferred certain of its
operating assets related to its SET(TM) technology to Commodore Advanced
Sciences, Inc. ("CAS"), subject to certain liabilities related to such assets,
in exchange for 100 shares of common stock, par value $.01 per share, of CAS,
representing all of the issued and outstanding shares of capital stock of CAS.
CAS agreed to assume all of the net assets of Applied relating to its SET(TM)
technology at December 1, 1996, which assets had an aggregate value of
approximately $4.0 million at such date, and all known or all unknown
contingent or unliquidated liabilities of and claims against Applied and its
subsidiaries to the extent they relate to or arise out of the transferred
assets. Applied retained, among other things, (a) all temporary cash
investments of Applied at December 1, 1996, aggregating approximately $14.1
million, and (b) the executive offices and related assets of Applied located in
Virginia.
Effective as of December 2, 1996, Applied acquired (i) all of the
outstanding capital stock of Separation and (ii) all of the outstanding capital
stock of Commodore CFC Technologies, Inc. ("Refrigerant") from the Company, 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 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 issued 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.
In April 1997, Separation successfully completed an initial public
offering of its equity securities, from which it received net proceeds of
approximately $11.1 million. Such funds will be used primarily to finance
Separation's operations through 1997. This offering reduced Applied's equity
ownership in Separation from 100 percent to 87 percent.
In May and August 1997, the Company sold $8.8 million of 7 percent
Series D redeemable convertible preferred stock, par value $.01 per share
("Series D Preferred Stock"), and warrants to purchase 1,260,000 shares of
Applied common stock currently held by the Company. Net proceeds from the
offering were $7.8 million. In September and October 1997, four investors
elected to convert a total of 8,600 shares of their Series D Preferred Stock
into Applied common stock. Such conversion resulted in the transfer by the
Company of 41,599 shares and 230,605 shares, respectively, of its Applied
common stock to such investors.
In October 1997, Applied completed sales of 700,000 shares of its
common stock, from which it received an aggregate net proceeds of $2.4 million.
As a result of the conversion of 1,600 shares of the Company's Series D
Preferred Stock into 41,599 of Applied common stock in September 1997, and
Applied's private placement of 700,000 shares of its common stock and the
conversion of 7,000 shares of the Company's Series D Preferred Stock into
230,605 of Applied common stock in October 1997, the Company's equity ownership
in Applied decreased from 69.3 percent at June 30, 1997, to 65.9 percent in
October 1997.
The Company established a captive insurance subsidiary, Harvest
American Insurance Company ("Harvest") in July 1987 for the purpose of
providing liability insurance coverage to the environmental services
subsidiaries of the Company for asbestos abatement site work for the period
July 1987 through January 1989. As a result, less than seven years of its own
information upon which to base reserves for losses and loss adjustment expenses
is available. Accordingly, the actual incurred losses and loss adjustment
expenses may differ significantly from the estimated amounts included in the
accompanying financial statements. The Company's management believes its
reserves for losses and loss adjustment reserves are reasonable.
14
<PAGE> 15
Although the balance of the insurance loss reserve is recorded as a
current liability, it is not possible to determine whether that balance or any
additional cash funds will be required to be paid during 1997.
NET OPERATING LOSSES
The Company has net operating loss carry forwards 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 limited by the applicable tax laws which are
in effect at the time such carry forward can be utilized. A valuation
allowance has been established to offset any benefit from the net operating
loss carry forwards as it cannot be determined when or if the Company will be
able to utilize the net operating losses.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements are based largely on the Company's expectations and are subject to a
number of risks and uncertainties, certain of which are beyond the Company's
control. Actual results could differ materially from these forward-looking
statements as a result of, among other factors, competitive conditions in the
industries in which the Company operates, failure to commercialize one or more
of the technologies of the Company and general economic conditions that are
less favorable than expected. In light of these risks and uncertainties, there
can be no assurance that the forward-looking information contained in this
respect will in fact occur.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material legal proceedings to which the Company is
a party which have not been disclosed in previous filings with the Securities
and Exchange Commission. There are no material developments to be reported in
any previously reported legal proceedings.
ITEM 2. CHANGE IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS AMONG SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 12, 1997, the Company conducted its 1997 Annual Meeting of
Stockholders (the "Annual Meeting"). As of the record date of August 6, 1997,
there were 57,887,519 shares of Company Common Stock eligible to vote. Of these
shares, 51,877,237, (89.6%) were represented either in person or by proxy at
the Annual Meeting. The following matters were submitted to a vote at the
Annual Meeting with the following results:
(a) Election of Directors: Each of the following nominees for election
to the Board of Directors of the Company were elected by an affirmative
vote of 51,815,601 shares, or 89.5% of all eligible shares: Paul E.
Hannesson, Bentley J. Blum, Edwin L. Harper, Ph.D., Kenneth L. Adelman,
Ph.D., Herbert A. Cohen, and David L. Mitchell. 59,336 shares were
"withheld" with respect to each of the foregoing nominees, and no shares
were represented as "broker non-votes."
(b) Ratification of Adoption of 1997 Stock Option Plan: By an
affirmative vote of 45,686,969 shares, or 78.9% of all eligible shares, the
stockholders of the Company ratified the adoption of the 1997 Stock Option
Plan. 221,831 shares were voted "against" adoption of the 1997 Stock
Option Plan; 282,460 shares "abstained;" and no shares were represented as
"broker non-votes."
(c) Ratification of Independent Auditors: By an affirmative vote of
51,818,425 shares, or 89.5% of all eligible shares, the stockholders of the
Company ratified the appointment of Price Waterhouse, LLP as the Company's
independent auditors for the fiscal year ending December 31, 1997. 39,360
shares were voted "against" approval of this proposal; 19,452 shares
"abstained;" and no shares were represented as "broker non-votes."
ITEM 5. OTHER EVENTS
Not applicable.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none
(b) Reports on Form 8-K -
The Company filed a Current Report on Form 8-K dated, May 20,
1997, regarding the sale of 7 percent Series D Convertible
Preferred Stock of the Company and Warrants to purchase 600,000
shares of common stock of Applied.
The Company filed a Current Report on Form 8-K dated, July 3,
1997, regarding the Company obtaining effective control of
Lanxide Corporation.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: NOVEMBER 13, 1997 COMMODORE ENVIRONMENTAL SERVICES, INC.
(REGISTRANT)
BY /s/ MICHAEL D. FULLWOOD
----------------------------------------
MICHAEL D. FULLWOOD - SENIOR VICE PRESIDENT,
CHIEF FINANCIAL AND ADMINISTRATIVE OFFICER,
SECRETARY, AND GENERAL COUNSEL (AS BOTH A
DULY AUTHORIZED OFFICER OF THE REGISTRANT
AND THE PRINCIPAL FINANCIAL OFFICER OR CHIEF
ACCOUNTING OFFICER OF THE REGISTRANT)
18
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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<SECURITIES> 14,297
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8,682
<COMMON> 588
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