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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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.
(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)
Registrant's telephone number, including area code: (212) 308-5800
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
Common Stock, par value $0.01 per share None
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
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 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. [ ]
Non-affiliates of the registrant held shares of Common Stock as of
March 26, 1998 with an aggregate market value of approximately $10,377,000
(based upon the average of the bid and asked prices of the Common Stock on
March 26, 1998 as quoted by the National Association of Securities Dealers,
Inc. OTC Bulletin Board).
As of March 26, 1998, 61,722,993 shares of the registrant's Common
Stock were outstanding.
----------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
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39
COMMODORE ENVIRONMENTAL SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PART I............................................................................................................1
ITEM 1. BUSINESS........................................................................................1
General.........................................................................................1
Environmental Treatment and Services............................................................2
Polymer Manufacturing and Sales................................................................10
Liability Insurance............................................................................11
Raw Materials..................................................................................14
Backlog........................................................................................15
Research and Development.......................................................................15
Patents and Trademarks.........................................................................15
Competition....................................................................................15
Environmental Regulation.......................................................................17
Employees......................................................................................19
ITEM 2. PROPERTIES.....................................................................................20
ITEM 3. LEGAL PROCEEDINGS..............................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................20
PART II..........................................................................................................21
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................21
Market Information.............................................................................21
Dividend Information...........................................................................21
Recent Sales of Unregistered Securities........................................................22
ITEM 6. SELECTED FINANCIAL DATA........................................................................25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........26
Overview.......................................................................................26
Results of Operations..........................................................................26
Liquidity and Capital Resources................................................................28
Net Operating Loss Carryforwards...............................................................29
Year 2000 Considerations.......................................................................30
Forward-Looking Statements.....................................................................30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................31
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........31
PART III.........................................................................................................32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................32
Executive Officers and Directors...............................................................32
Key Employees..................................................................................34
Board Committees...............................................................................34
Compensation of Directors......................................................................35
Compliance with Section 16(a) of the Exchange Act..............................................35
ITEM 11. EXECUTIVE COMPENSATION.........................................................................36
Summary Compensation...........................................................................36
Stock Options..................................................................................38
Employment Agreements..........................................................................39
Compensation Committee Interlocks and Insider Participation....................................40
Report of the Compensation Committee on Executive Compensation.................................40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..........................................................................45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................47
Organization and Capitalization of Applied.....................................................47
Services Agreement.............................................................................48
February 1998 Private Placement................................................................48
February 1998 Intercompany Note................................................................48
1997 Private Placement.........................................................................49
September 1997 Intercompany Convertible Note...................................................49
Transactions with Lanxide......................................................................50
License of SET Technology......................................................................51
CFC Technology and Support Agreement...........................................................51
Future Transactions............................................................................52
PART IV..........................................................................................................53
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................53
SIGNATURES.......................................................................................................57
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PART I
ITEM 1. BUSINESS.
GENERAL
Commodore Environmental Services, Inc. (the "Company") owns interests
in diverse environmental, chemical and other businesses with a focus on new
technologies that may be expected to have a significant impact upon their
markets. As of March 26, 1998, the Company owned approximately 43% of Commodore
Applied Technologies, Inc. ("Applied"), which, through its operating
subsidiaries, provides a range of technologies and services directed
principally at remediating contamination in soils and other materials,
protecting the integrity of our nation's water and air and disposing or reusing
certain waste by-products through development of inert and environmentally
sound technologies. The Company believes Applied provides, through its
wholly-owned subsidiary Commodore Solution Technologies, Inc. ("Solution"), the
only patented, non-thermal, portable and scalable process, known as SET(TM)
(solvated electron technology), for treating and decontaminating soils and
other materials containing PCBs, pesticides, dioxins and other toxic
contaminants. Through a 50/50 joint venture with a subsidiary of Allegheny
Teledyne, Inc., known as Teledyne--Commodore, LLC, Applied is jointly pursuing
the chemical weapons destruction and demilitarization market on a worldwide
basis utilizing the SET technology. Applied, through its publicly-traded
subsidiary Commodore Separation Technologies, Inc. ("Separation"), also
provides a system, known as SLiM(TM) (supported liquid membrane), that has been
proven in limited-scale tests to separate and recover chromium, cadmium,
silver, nickel, zinc, copper and other targeted substances from aqueous and
possibly gaseous waste streams. Applied, through Commodore Advanced Sciences,
Inc. ("Advanced Sciences"), also provides a full range of services related to
on-site waste containment, management of on-site and off-site remediation and
waste removal using environmentally safe methods and through the use of
Applied's technologies. The operations of Advanced Sciences, which account for
substantially all of Applied's current revenues, also include engineering and
technical services in connection with designing production processes to
minimize or eliminate the generation of hazardous wastes. Additionally,
Applied, through its wholly-owned subsidiary Commodore CFC Technologies, Inc.
("CFC Technologies"), is engaged in separating mixed refrigerants,
chlorofluorocarbons and hydrochlorofluorocarbons so that they may be returned
to productive use at purity levels meeting industry standards.
Demand for Applied's environmental technologies and services arises
principally from three sources:
o need for alternative environmental treatment and disposal methods for
toxic substances, such as the SET technology, which do not involve
safety risks with respect to air pollution and transportation of
hazardous materials, or result in large volumes of residual waste
that require further treatment prior to disposal;
o need for a low cost, on-site extraction/removal system, such as the
SLiM technology, which is capable of treating a wide variety of
elements and compounds in multiple industrial settings at great speed
and with a high degree of effectiveness, at various contaminant
concentrations and volumes; and
o stricter legislation and regulations mandating new or increased
levels of air and water pollution control and solid waste management.
Applied's overall strategy is to provide a broad range of
"state-of-the-art" environmental technologies and services to solve its
customers' increasingly complex pollution and waste disposal problems. The
Company believes that Applied's technological capabilities provide significant
marketing advantages to Applied and enable it to provide its customers greater
"value-added" services through the integration of its various disciplines.
In March 1998, the Company, through its wholly-owned subsidiary
Commodore Polymer Technologies, Inc. ("Polymer Technologies"), purchased the
business (consisting of customer, supplier and industry relationships) related
to the ceramic polymer known as CERASET(TM) from a subsidiary of Lanxide
Corporation ("Lanxide"), a
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company which specializes in the manufacture of ceramic bonding and refractory
materials. CERASET polymers are a unique family of low-viscosity liquid,
thermosettable ceramic-backboned, polyureasilazane-based polymers, which have
exceptional thermal stability, corrosion resistance and rigidity. In connection
with such purchase, Polymer Technologies also acquired a license, subject to
pre-existing and certain future licenses, to utilize the technologies related
to the CERASET polymers, and acquired the right to use the trademark "CERASET"
in connection with the marketing and sale of products containing CERASET
polymers, on a worldwide basis (excluding Japan). The CERASET materials and
processes provide additional performance advantages for reinforced metals and
reinforced ceramics, and extend the Company's business portfolio into the
rapidly expanding area of high-performance polymer composites, adhesives,
sealants and coatings. Lanxide is affiliated with the Company by significant
common beneficial ownership. See "--Polymer Manufacturing and Sales" and
"Certain Relationships and Related Transactions--Transactions with Lanxide."
To finance the working capital needs of Applied and to provide
resources to invest in its environmental markets, the Company raised a net
amount equal to approximately $5,450,000 from a private placement of shares of
Applied common stock, par value $0.001 per share ("Applied Common Stock"),
held by the Company and warrants to purchase Applied Common Stock held by the
Company in February 1998 (the "February 1998 Private Placement"), which
proceeds the Company loaned to Applied in February 1998. The Company also
raised approximately $7,800,000 from private placements of preferred stock
convertible into, and warrants exercisable for, Applied Common Stock held by
the Company in May and August 1997 (the "1997 Private Placement"), of which
proceeds the Company loaned $4,000,000 to Applied in September 1997. Prior to
the February 1998 Private Placement, the Company held a controlling equity
interest in Applied and its operating subsidiaries, including Solution,
Separation, Advanced Sciences and CFC Technologies. As a result of the 1997
Private Placement and the February 1998 Private Placement, the Company's
ownership interest in Applied decreased to approximately 43% as of March 26,
1998. See "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Certain Relationships and Related Transactions."
The Company was incorporated in Delaware in August 1988. As used in
this Annual Report, and except as the context otherwise requires, "Applied"
means Commodore Applied Technologies, Inc. and its subsidiaries, including
Solution, Separation, Advanced Sciences and CFC Technologies. The Company's
principal executive offices are located at 150 East 58th Street, Suite 3400,
New York, New York 10155, and its telephone number at that address is (212)
308-5800.
ENVIRONMENTAL TREATMENT AND SERVICES
Soil Decontamination
Applied, through Solution, has developed and is in the process of
commercializing its patented process known as SET. The SET technology is
directed principally at treating and decontaminating soils, as well as other
materials and surfaces, by destroying PCBs, pesticides, dioxins and other toxic
contaminants to an extent sufficient to satisfy current federal environmental
guidelines for non-contamination. The Company also believes that SET is capable
of neutralizing chemical weapons and warfare agents and concentrating certain
radioactive wastes for more effective disposal.
The SET Technology. The SET technology, which is based upon solvated
electron chemistry, 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 can achieve consistently high
levels of contaminant destruction when working with PCBs, dioxins and
pesticides. SET 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 contamination levels of less than one ppm. In
addition, SET has been successfully applied to other PCB-contaminated surfaces
such as concrete. The SET process can be used in conjunction with selected
post-treatment processes such that no hazardous or toxic residues will result
from the use of SET, nor will there be any toxic emissions into the air, water,
soils or other surfaces. For example, most contaminated soils treated with SET
can (subject, in some instances, to
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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 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 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.
Substantially all existing systems in use for the destruction of PCBs
and other halogenated compounds involve incineration or other thermal
processes, 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 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 is more effective than incineration and other destruction processes for
toxic substances in that:
o SET does not emit toxic fumes into the atmosphere, as is sometimes
the case with thermal or incineration methods;
o SET is portable and can be moved directly to the contaminated site,
thereby reducing the risk of off-site contamination;
o SET equipment can be customized and configured to address various
treatment applications;
o SET 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;
o SET's reaction time is substantially less than that of alternative
processes, such as thermal destruction and other forms of chemical
treatment;
o SET equipment can be installed and operated inside industrial plant
facilities to treat hazardous wastes on line as a continuation of the
manufacturing process; and
o SET, 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 is the only technology currently
available which possesses all of these features and is capable of treating a
wide variety of contaminants.
In more than 1,000 tests using SET, 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 these tests.
3
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PCB Level
----------------------------------------
Soil Type/Material Before Treatment After Treatment
- ------------------ ---------------- ---------------
High PCBs
---------
Clay 290 ppm less than 1 ppm
Organic 660 ppm less than 1 ppm
Sandy 6,200 ppm less than 1 ppm
Oil 250,000 ppm less than 1 ppm
Low PCBs
--------
Clay 29 ppm less than 1 ppm
Organic 83 ppm less than 1 ppm
Sandy 130 ppm less than 1 ppm
These tests were conducted on limited quantities of contaminated
material, and there can be no assurance that SET 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. Solution is continuing to test SET on chemical
weapons by-products, as well as on larger quantities of these chemical weapons
materials.
EPA Nationwide Permit. In order to treat PCBs within the United States
on all non-Superfund sites, a treating entity must obtain a permit from the
U.S. 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 was demonstrated to the EPA in order to obtain a Nationwide
Permit for PCB disposal (the "Nationwide Permit"), which was issued to Applied
in March 1996. The Nationwide Permit allows Applied to use SET on-site to treat
PCB-contaminated soil at any location in the United States. In addition to soil
treatment, the Nationwide Permit allows Applied to treat PCB-contaminated
metallic surfaces. The Nationwide Permit covers only the destruction of PCBs in
soils and on metallic surfaces.
Based on currently published lists of EPA national operating permits,
the Company believes that Applied 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 Applied 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.
Teledyne Environmental Joint Venture. In August 1996, Commodore
Government Environmental Technologies, Inc. ("Government Technologies"), a
wholly-owned subsidiary of Solution, entered into a joint venture agreement
with Teledyne Environmental, Inc. ("Teledyne Environmental"), a subsidiary of
Allegheny Teledyne, Inc., as the exclusive means by which each party (and their
affiliates) will pursue the chemical weapons destruction and demilitarization
market on a worldwide basis. Teledyne Environmental is a major provider of
contract services to the U.S. Department of Energy ("DOE") and Department of
Defense ("DOD"). 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, ordinance and residue (heel) neutralization and demilitarization,
disposal and reclamation through the use, application and commercialization of
the SET process.
4
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Each of Government Technologies and Teledyne Environmental owns 50% of
the equity, profit and losses of the joint venture company, has made capital
contributions of approximately $3.0 million as of March 26, 1998, and has
budgeted additional capital contributions of $500,000 for the remainder of
1998. Under the terms of the joint venture, Government Technologies' role
concentrates on engineering and site operations relating to the SET 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 process controls and monitoring instrumentation.
In consideration for Applied's interest in the joint venture, Applied
licensed SET and corresponding know-how to the joint venture. Applied also
licensed the SET process and corresponding know-how to Teledyne Brown
Engineering, Inc. ("TBE"), a subsidiary of Allegheny 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. Under the terms of such
license, Applied receives a royalty equal to 8% of TBE's net sales revenues
derived from the Small Burials Contract.
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 stop these plans.
As a result, the EPA, the Commonwealth of Massachusetts and the New
Bedford Citizens' Forum have been evaluating non-incineration technologies for
the extraction and destruction of the PCBs at the storage site. In August 1995,
Applied and RCC-Ionics submitted a proposal to conduct a feasibility study in
support of their respective technologies for the extraction (utilizing the RCC
technology) and destruction (utilizing the SET technology) phases of this $80.0
million project. By the end of 1997, the Citizens' Forum, working with the EPA
and the commonwealth, completed the evaluation of a number of competing
technologies and selected the SET technology as one of two destruction phase
technologies that will be recommended for further evaluation for the project.
The RCC technology was selected as one of two extraction phase technologies
that will be recommended for further evaluation for the project. The EPA is
expected to issue its final report in mid-1998 with respect to the technologies
recommended for the project, and the bidding and contracting process is
expected to be complete by the end of 1998.
ICF Kaiser Teaming Agreement. In March 1997, Advanced Sciences entered
into a teaming agreement with ICF Kaiser Engineers, Inc. ("ICF Kaiser"),
pursuant to which Applied's SET technology will be used in connection with the
remediation of mixed waste at Los Alamos National Laboratory ("LANL") in New
Mexico under ICF Kaiser's DOE contract. Under ICF Kaiser's primary contract
with the DOE, ICF Kaiser is investigating and cleaning-up soils at LANL and on
former LANL property that may contain hazardous and radioactive materials. The
teaming agreement specifies that Advanced Sciences will provide the SET
technology under a subcontractual arrangement along with environmental
engineering and other services, including remediation and safety services,
technical task support and health physics for implementation of tasks. Pursuant
to the terms of the teaming agreement, Advanced Sciences will be reimbursed for
time and materials expended on projects completed pursuant to the agreement and
will receive fees averaging 5.5% of its costs.
5
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Lockheed Martin Memorandum of Understanding. In December 1997,
Advanced Sciences also entered into a memorandum of understanding with Lockheed
Martin Advanced Environmental Systems, Inc. to jointly pursue environmental
remediation projects utilizing Applied's SET technology. Under the memorandum,
the companies have agreed, beginning in late January 1998, to employ the SET
technology at Lockheed Martin's laboratory in Las Vegas, Nevada to treat
certain mixed waste streams. Following completion of the Las Vegas project,
which is funded by Lockheed Martin up to $50,000, the companies have agreed to
pursue projects at the DOE's Oak Ridge Reservation and Portsmouth, Ohio
facilities for remediating mixed waste.
Liquid and Gas Waste Treatment
Applied, through Separation, has developed and is in the process of
commercializing its separation technology and recovery system known as SLiM.
Based on the results of more than 100 laboratory and field tests to date, the
Company believes that SLiM can separate and recover solubilized metals,
radionuclides, biochemicals and other targeted elements from aqueous and
possibly gaseous waste streams in degrees of concentration and purity which
permit both the reuse of such elements and the ability for the waste water or
gas to be disposed of as non-toxic effluent without any further treatment. SLiM
utilizes a process whereby a contaminated aqueous 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 SLiM'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 discharge.
The SLiM Technology. Although SLiM uses the same basic principles as
other membrane separation technologies, the Company believes that SLiM
represents a significant advance in membrane separation technology in the
treatment of solubilized feedstreams. SLiM acts by separating and extracting
the targeted materials 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 variety
of elements and compounds in a variety of industrial settings, and doing so at
great speed and with a high degree of effectiveness regardless of particle size
and volume requirements. The Company also believes that SLiM 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 SLiM 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.
SLiM involves passing a contaminated aqueous or gaseous feedstream
through a hollow, porous fiber membrane unit or module. This module is
previously loaded with chemicals whose composition varies depending on the
targeted substance in the feedstream. As the feedstream enters the module, the
metal or other substance to be extracted reacts with the proprietary chemical
combination in the module, 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 discharge, or discharge may need to be made in a
regulated manner. The Company believes that SLiM can be utilized in many
instances for the separation and recovery of solubilized metals (e.g.,
chromium, cadmium, silver, mercury, platinum, lead, zinc and nickel) and, with
refinement, radionuclides, gas, organics and biochemicals.
The typical SLiM module is cylindrical in shape. The module casing is
typically constructed of plastic and contains the fibers through which the
targeted element or compound is separated from the contaminated feedstream.
Pumps and pipes feed the contaminated feedstock from its point of origin (such
as a metal plating tank or bath) into the module. Additional pumps and pipes
recycle the strip solution which concentrates the contaminant that is being
deposited continuously by Separation's proprietary chemicals resident in the
membrane. Separation is exploring alternative design and sourcing of modules
that will perform equal to or better than those presently in service in order
to decrease the risk of supply interruptions. Separation formulates the
chemical mixture for the process in each customer application, and performs the
initial installation of the equipment at the customer site. The customer will
either operate the equipment itself using computer data links to Separation,
which will monitor the equipment and process while in
6
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operation, or Separation will enter into service contracts with the customer to
operate the equipment at the customer's site.
The most common alternative methods for metals separation from
solubilized process streams presently include ion exchange, reverse osmosis,
precipitation, ultrafiltration, nanofiltration 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 separating chrome and chromium
materials from wastewater streams, and precipitation results in the production
of sludge that requires dewatering, drying and disposal in a landfill. Certain
of these other technologies also entail long process times and are relatively
expensive. The Company believes that SLiM is a superior and cost-effective
alternative to other existing forms of membrane filtration technology in that
it:
o requires lower initial capital costs and lower operating costs;
o has the capability of treating a variety of elements and compounds in
industrial settings at greater speed and with a higher degree of
effectiveness, with varying contaminant concentrations and volume
requirements;
o is environmentally safe, in most instances producing no sludges or
other harmful by-products which would require additional
post-treatment prior to disposal;
o can selectively extract target substances while extracting
substantially fewer unwanted substances;
o can typically operate on-site and in less space than competing
technologies;
o can extract metals, organic chemicals and other elements and
compounds in degrees of concentration and purity which permit their
reuse; and
o has the capability of selectively removing more than one element from
a mixed process stream by incorporating SLiM systems in series.
In more than 100 laboratory and field tests to date, SLiM has
demonstrated the ability to successfully separate a variety of metals and other
substances from aqueous and possibly 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:
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Applicable
Material Before Treatment After Treatment Federal Guideline
- -------- ---------------- --------------- -----------------
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Metals:
Zinc 2,700 ppm Less than 2 ppm (after 30 Less than 2 ppm
minutes)
Nickel 1,500 ppm Less than 1.0 ppm (after 30 Less than 2 ppm
minutes)
Chromium (hexavalent) 400 ppm 0.05 ppm (field test) Less than 0.05 ppm
Aluminum 290 ppm Less than 20 ppm (after 15 Less than 30 ppm
minutes)
Cobalt 200 ppm Less than 1.1 ppm Less than 1.5 ppm
</TABLE>
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<CAPTION>
Applicable
Material Before Treatment After Treatment Federal Guideline
- -------- ---------------- --------------- -----------------
<S> <C> <C> <C>
Copper 4,500 ppm Less than 0.3 ppm Less than 1.0 ppm
Silver 3,150 ppm Less than 2 ppm Less than 2 ppm
Radionuclides:
Rhenium 5 ppm Less than 5 parts per billion Less than 10 ppb
(ppb)
</TABLE>
Some 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.
Port of Baltimore Contracts. In November 1997, Separation was awarded
its first commercial project by the State of Maryland and entered into a
multi-year, sole-source contract with Maryland Environmental Service ("MES")
for the removal of chromium-contaminated leachate at the Hawkins Point
Hazardous Waste Treatment Facility at the Port of Baltimore. The contract,
dated as of November 25, 1997 (the "Hawkins Point Contract"), provides that
Separation will lease a SLiM unit to MES for a one-time, lump-sum lease payment
of $250,000, and will license its proprietary SLiM technology to MES in
exchange for a royalty equal to one-half of any savings which MES realizes by
using the SLiM technology as opposed to conventional non-proprietary
remediation technology. Separation also reserved the right to market any
residual chromium captured by its SLiM technology and receive 50% of the
revenues generated from any commercial sales of such residual chromium.
The Hawkins Point Contract followed Separation's successful completion
of several on-site demonstrations of SLiM at the Port of Baltimore. During
Separation's first on-site demonstration in August 1996, a single SLiM unit, in
a single pass-through of feedstream, processed 90 gallons of water containing
more than 630 ppm of hexavalent chromium and reduced the hexavalent chromium
concentration level to 0.7 ppm. The results of this test were verified by
Artesian Laboratories, Inc., an independent testing laboratory. Separation was
invited to conduct an additional demonstration at the Port of Baltimore in
February 1997. During this demonstration, approximately 1,500 gallons from the
same source were 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 included the SLiM process as an
eligible technology in the bid documents to remediate chromium leachate at the
Port of Baltimore. Separation then engaged a professional engineering company
to design and build commercial-scale units capable of processing larger volumes
of contaminated water. A commercial unit was mobilized to the Port of Baltimore
and commenced operation in June 1997. The demonstration culminated with a
non-stop, 48-hour run in late August 1997. During this final test, the SLiM
equipment processed approximately 12,000 gallons of leachate and successfully
met the federal discharge standards for hexavalent chromium.
In February 1998, Separation was awarded its second commercial project
by the State of Maryland and entered into another multi-year, sole-source
contract with MES for the removal of chromium-contaminated leachate at Dundalk
Marine Terminal at the Port of Baltimore. The contract, dated as of February 5,
1998 (the "Dundalk Contract"), provides that Separation will lease a SLiM unit
to MES for a one-time, lump-sum lease payment of $350,000, and will license its
proprietary SLiM technology to MES in exchange for a royalty equal to one-half
of any savings which MES realizes by using the SLiM technology as opposed to
conventional non-proprietary remediation technology. As in the case of the
Hawkins Point Contract, the Dundalk Contract provides that Separation shall
have the right to market any residual chromium captured by its SLiM technology
and receive 50% of the revenues generated from any commercial sales of such
residual chromium.
Lockheed License Agreement. In January 1997, Separation entered into a
license agreement (the "Lockheed License Agreement") with Lockheed Martin
Energy Research Corporation, manager of the Oak Ridge National Laboratory, a
United States Department of Energy national laboratory ("Oak Ridge"). Under the
terms of the Lockheed
8
<PAGE>
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 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 filed jointly by Separation and three colleagues of Srinivas Kilambi,
Ph.D., Separation's former Senior 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 may remediate nuclear waste water 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. According to
DOE sources, there are approximately 100 million gallons of mixed radioactive
and hazardous chemical waste stored at these plants.
Environmental Management
Applied acquired Advanced Sciences in October 1996 for the purpose of
coordinating Applied's existing technologies and services, as well as
developing, acquiring and utilizing new technologies, for the treatment, reuse
and ultimate disposal of by-products generated as a result of industrial and
governmental activities. Advanced Sciences, to the extent possible, has sought
to utilize Applied's technologies in connection with its environmental,
remediation and technical services performed for industrial and governmental
customers (particularly the DOE and DOD), with a view to increasing the quality
and scope of services offered and providing Applied with a broader customer
base for its technologies. Advanced Sciences engages 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.
Environmental 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 customers 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.
Remediation Services. 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 customers' 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.
Technical Services. 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
9
<PAGE>
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.
Waste Isolation Pilot Plant Contract. Advanced Sciences is currently
in the third year of a $52.0 million contract to provide technical and
management support services to the DOE for the opening and operation of the
Waste Isolation Pilot Plant near Carlsbad, New Mexico (the "WIPP Contract"), of
which approximately $32.0 million in contract budgeted funds remains. Pursuant
to the WIPP Contract, Advanced Sciences manages the efforts of approximately 80
personnel who provide support covering functional areas such as regulatory
assurance, waste packaging and transportation, and facility operations. The
WIPP Contract is structured as a cost plus 5.25% fee agreement. Advanced
Sciences' billings under the WIPP Contract are approximately $900,000 per
month. The WIPP Contract provides for an initial three-year term, which expires
on September 30, 1998, and an option to extend the term of the contract for two
additional one-year terms which may be exercised, in whole or in part, by the
DOE at its discretion.
Rocky Flats Contract. Under a basic ordering agreement from
Kaiser-Hill Company, LLC, the site operating contractor, Advanced Sciences is
currently providing technical, engineering and scientific support for the
closedown and cleanup of the DOE facility at Rocky Flats, Colorado (the "Rocky
Flats Contract"). Pursuant to the Rocky Flats Contract, approximately 40
Advanced Sciences personnel are involved in activities such as environmental
monitoring, health monitoring, engineering design and documentation support
with respect to the facility. The Rocky Flats Contract, which extends through
1999, is structured as a time and materials contract that provides for a fee
averaging 5.5% of costs. Advanced Sciences' billings under the Rocky Flats
Contract are approximately $400,000 per month.
POLYMER MANUFACTURING AND SALES
In March 1998, the Company, through its wholly-owned subsidiary
Polymer Technologies, purchased the business (consisting of customer, supplier
and industry relationships) related to the ceramic polymer known as CERASET
(the "CERASET Business") from a subsidiary of Lanxide, a company which
specializes in the manufacture of ceramic bonding and refractory materials. In
connection with such purchase, Polymer Technologies also acquired a license,
subject to pre-existing and certain future licenses, to utilize the
technologies related to the CERASET polymers (the "CERASET License"), and
acquired the right to use the trademark "CERASET" in connection with the
marketing and sale of products containing CERASET polymers (the "CERASET
Trademark"), on a worldwide basis (excluding Japan). The CERASET materials and
processes provide additional performance advantages for reinforced metals and
reinforced ceramics, and extend the Company's business portfolio into the
rapidly expanding area of high-performance polymer composites, adhesives,
sealants and coatings. Lanxide is affiliated with the Company by significant
common beneficial ownership. See "Certain Relationships and Related
Transactions--Transactions with Lanxide" for a complete description of the
events and circumstances which led to the Company's acquisition of the CERASET
Business, CERASET License and CERASET Trademark.
10
<PAGE>
Pursuant to the terms of the CERASET License, Polymer Technologies has
agreed to pay a subsidiary of Lanxide a royalty equal to 4% of the net sales
price of all products sold by Polymer Technologies and any of its sublicensees,
which are manufactured using the CERASET technology until the aggregate royalty
payments equal $4.0 million. Thereafter, Lanxide's subsidiary will be entitled
to receive a royalty equal to 2% of the net sales price of all products sold by
Polymer Technologies and its sublicensees, which are manufactured using the
CERASET technology.
The CERASET Technology
CERASET polymers are a unique family of low-viscosity liquid,
thermosettable ceramic-backboned, polyureasilazane-based polymers, which have
exceptional thermal stability, corrosion resistance and rigidity. As
temperatures are increased from 400(0) C to 1400(0) C, the polymers
progressively condense and cross-link as polymers, ultimately converting to
ceramic compounds, such as silicon nitride, silicon carbide or aluminum
nitride, depending on the specific polymer and processing conditions. Certain
CERASET polymers, when applied as fluids and then thermoset, exhibit strong
adhesion to both metals and ceramic materials. This characteristic makes the
polymers especially well-suited for making polymer matrix composites or for
applications as binders for metal or ceramic particulate processing. The
polymers can be used to prepare parts that are both strong and rigid by mixing
a ceramic powder into the liquid polymer, forming the desired shape and then
thermosetting the shape to achieve required strength.
Certain CERASET polymers can also be combined with certain traditional
organic polymers (urethane, epoxies, acrylics, etc.) to produce CERASET hybrid
polymers, applicable to both composites and coatings. With only limited
additions of certain CERASET polymers, properties such as temperature
stability, corrosion resistance, moisture resistance, wear resistance,
strength, toughness and stiffness of the base polymers can be improved in many
instances, while retaining advantageous processing characteristics. The hybrid
polymeric materials can be reinforced with ceramic or metallic constituents,
further enhancing performance such as strength, rigidity, thermal conductivity,
flame retardancy and wear resistance. CERASET polymers can also be used to
fabricate monolithic ceramics or ceramic matrix composites to near-net shape,
to produce high-performance powders and fibers, and to act as adhesives for
both low- and high-temperature applications.
Polymer Technologies was incorporated in Delaware on March 3, 1998,
has commenced operations and has generated nominal revenues to date.
LIABILITY INSURANCE
In July 1987, the Company established Harvest American Insurance
Company ("Harvest"), a wholly-owned subsidiary of the Company, which is
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. Such funds were deposited into a
Harvest interest-bearing account.
As of September 30, 1997, Harvest had $1,141,000 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.
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<PAGE>
In October 1997, Harvest transferred 100% of its risk to two insurance
companies ("Assuming Insurers") for a total cost of $1,275,000, which was
acceptable to the Commissioner of the Department. The Company funded the
additional $134,000 required. The Commissioner, in accordance with the
Settlement Agreement, released all cash held for the benefit of Harvest to
Harvest and the Assuming Insurers. Also in October 1997, Harvest merged with
and into a new Delaware corporation, Harvest American Corp., with such Delaware
corporation surviving. Upon the complete assumption of Harvest's insurance
risks, the Department returned to Harvest the original stipulation to entry of
judgment and final judgment held in escrow and the Company Note held by the
Department.
MARKETS AND CUSTOMERS
Environmental Treatment and Services
For the year ended December 31, 1997, the Company's revenues were
generated solely by its then majority-owned subsidiary Applied. Applied markets
its services and technologies to governmental and industrial customers
throughout the United States. Applied also plans to target customers in markets
abroad, particularly in the Far East. A majority of Applied's sales are
technical in nature and involve senior technical and management professionals,
supported by Applied's marketing groups. During the year ended December 31,
1997, sales of approximately 5% of Applied's environmental management services
were to private sector customers and sales of approximately 95% were to
governmental customers.
Approximately 95% of Applied's sales during the year ended December
31, 1997 were derived from contracts with federal, state and municipal
governmental agencies which generally may be terminated at any time at the
option of the customer. In 1997, Advanced Sciences' WIPP Contract and Rocky
Flats Contract accounted for approximately 65% and 15%, respectively, of
Applied's sales. No other project accounted for more than 10% of Applied's
sales for such period. Applied benefits substantially from its long-term
relationships with many of its customers which result in a significant amount
of repeat business.
Soil Decontamination. The Company anticipates that the initial market
for commercial private sector applications of SET will be the hazardous and
non-hazardous waste and industrial by-products treatment and disposal market.
Currently, the most common methods of treatment and disposal of hazardous and
non-hazardous wastes and industrial by-products include landfilling, deep-well
injection, chemical and biological treatment and incineration. Most of the
current treatment and disposal methods entail air pollution and transportation
risks. In addition, they may not provide a permanent solution. Certain of these
treatment and disposal methods result in large volumes of residual waste which
may require further treatment prior to disposal. As a result, a number of these
methods are encountering increased public resistance and added regulatory
oversight.
As with any new technology or process, there has been initial
resistance to the use of SET on a large scale, especially in connection with a
strong vested interest on the part of the United States military (based on
substantial expenditures and commitments previously made) to use incineration
for the destruction of weapons. In addition, other prospective projects for
Applied have already been committed to other forms of destruction technology,
including incineration, plasma arc, vitrification, molten metal, molten salt,
chemical neutralization, biological treatment, catalytic electrochemical
oxidation and supercritical wet oxidation. Applied and its collaborative
partners have been attempting to overcome such competition by introducing SET
in smaller clean-up projects and through feasibility studies demonstrating its
applicability to larger projects, such as the clean-up of a portion of the New
Bedford, Massachusetts harbor.
It may also be anticipated that, over an extended period, the market
for decontamination of hazardous materials will continue to decline as past
environmental degradation is corrected, and as the private and public sectors
limit further pollution through the prohibition on the production and use of a
broad range of hazardous materials and through the modification and improved
efficiency of varied manufacturing processes.
Water and Gas Waste Treatment. During its initial commercialization
phase, Separation will be leasing 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 will supply
these modules at a reasonable mark-up
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<PAGE>
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 SLiM equipment, including periodic
replacement of the membrane component. In addition to leasing and selling its
equipment, Separation will 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 is focusing its initial marketing
efforts on domestic businesses, Separation is also prepared to pursue
international opportunities, which may arise from successful presentations to
multinational corporations or from overseas referrals by domestic entities.
Separation's initial marketing efforts are in the industrial sector,
in which the separation and recovery of metal-bearing aqueous 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 a limited number of partially
effective technologies are available to effect proper separation.
In September 1997, Separation installed a demonstration SLiM unit at a
metal plating company. The unit operated in a batch mode for one week, and,
based on operating data results, successfully separated and recovered nickel
and zinc effluent streams with concentrations of up to 2,800 ppm. An
independent testing laboratory verified the results.
Based on management studies and discussions with metals industry
executives, the Company believes that the major competitive technologies in
this area are precipitation and ion exchange. Precipitation generates a
metallic sludge by-product requiring further treatment prior to landfill
disposal. Ion exchange captures anions or cations, but offers no selectivity
within a group. Further, ion exchange is only approximately 90% efficient. By
contrast, SLiM does not generate harmful metallic sludges and, in some cases,
enables process water recycling while also enabling recovery of valuable raw
materials to approximately 99% efficiency. As costs of environmental compliance
continue to mount, the Company expects SLiM to become a preferred alternative
to some existing metals separation methods.
The Company believes that SLiM has significant potential for
application to environmental remediation and restoration. In November 1997 and
February 1998, Separation was awarded its first two commercial contracts for
the removal of chromium-contaminated leachate at the Baltimore Harbor. In the
case of a project such as the Baltimore Harbor project, it is expected that the
remediation technology will be applied continuously over a period of many
years, until the subject contamination (in the case of the Baltimore Harbor,
chromium leaching from underlying soil into the aquifer) has abated for a
significant period of time.
In contrast to other remediation technologies, the Company believes
that SLiM has the attributes of lower initial capital costs, lower operating
costs and the ability to recover heavy metals for reuse.
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.
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. SLiM may have capabilities in the separation of radionuclides such as
cesium, technetium and rhenium. 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. Separation anticipates
pursuing this market area in collaboration with established engineering and
environmental service organizations, who can provide technical and professional
expertise, market presence and credibility.
The SLiM equipment and technology can possibly be utilized to separate
and recover valuable gases 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.
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<PAGE>
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 disadvantages, which can include high energy usage, high pressure and
temperature requirements, and/or relatively low purity of the recovered gas.
The SLiM process may overcome these disadvantages by yielding relatively pure
nitrogen in a low-energy, lower capital cost process conducted at ambient
temperature and pressure. Separation has not developed a strategy or targeted a
market for commercialization of the gas separation application.
SLiM may have capabilities in the separation and recovery of
biochemicals, including phenylalanine (an amino acid). Separation 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 SLiM in its marketing
efforts.
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.
Environmental Management. 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 annual spending level for
environmental services to approximately $11.2 billion by 1999. The DOD and DOE
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
environmental services to the United States government.
Polymer Manufacturing and Sales
The Company believes that the market opportunities for CERASET
products extend broadly across the basic processing, automotive, aerospace and
defense, machine tool, cement and sporting equipment industries. The Company's
business strategy with respect to CERASET is to further develop and
commercialize the CERASET technology and products.
Polymer Technologies will compete in markets where both ceramic and
non-ceramic products are currently in use and where competitors have
established marketing capabilities. Commercial acceptance of CERASET products
depends in part on the ability of the marketing and sales force of the Company
and its affiliates to demonstrate effectively the advantages of CERASET
products over more traditional products.
RAW MATERIALS
While Applied has historically experienced no difficulty in obtaining
raw materials used in its operations and relies on a broad range of suppliers
for the components used in the SET process, Separation currently has a limited
number of outside sources of supply for some strategic components used in the
SLiM process, including chemicals, fibers and membrane casings. Business
disruptions or financial difficulties of such suppliers, or raw material
shortages or other causes beyond Separation's control, could adversely affect
Separation by increasing the cost of goods sold or reducing the availability of
such components. In its development to date, Separation has been able to obtain
adequate supplies of these strategic components. However, as it develops its
commercial activities, Separation may experience a rapid and substantial
increase in its requirements for these components. If Separation were unable to
obtain a sufficient supply of required components, it could experience
significant delays in the manufacture of SLiM equipment, which could result in
the loss of orders and customers and could have a material adverse affect on
Separation's business, financial condition and results of operations. In
addition, if the cost of raw materials or finished components were to increase,
there can be no assurance that Separation would be able to pass such increase
to its customers. The use of outside suppliers also entails risks of quality
control and disclosure of proprietary information.
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<PAGE>
BACKLOG
At December 31, 1997, the Company's total backlog represented the total
backlog of Applied, its then majority-owned subsidiary. At December 31, 1997,
total backlog for Applied was approximately $109,250,000, as compared with
approximately $130,000,000 as of December 31, 1996. Approximately $56,250,000 of
the total backlog represents work for which Applied has entered into a signed
agreement or purchase order with respect thereto or has received an order to
proceed with work up to a specified dollar amount. The remaining backlog of
approximately $53,000,000 represents Applied's current estimate of work for
which Applied has been notified that it has been chosen for a project but where
a contract has not yet been finalized. Applied estimates that approximately
$21,625,000 of the total backlog represents work which will be completed in the
next 12 months. Backlog amounts have historically resulted in revenue; however,
no assurance can be given that all amounts included in backlog will ultimately
be realized by Applied, even if covered by written contracts or work orders.
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 affiliates. All such activities are company-sponsored. Research and
development expenditures for the Company and its affiliates were $3,074,000 and
$2,997,000 for the year ended December 31, 1997 and 1996, respectively.
INTELLECTUAL PROPERTY
Solution has fifteen United States patents which were issued between
1987 and 1998, and which relate to SET, electrochemistry of halogenated organic
compounds, separation and destruction of CFCs and decontamination of soils
containing mercury and radioactive metals. Solution also has one Canadian and
one Japanese patent relating to its SET technology. Applied has filed
additional United States patent applications relating to SET and removal of
heavy metals from soil. In 1997, Applied filed a patent application relating to
the destruction of chemical warfare agents and explosives.
In September 1997, Separation filed two U.S. continuation-in-part
("CIP") provisional patent applications and one international patent application
covering the principal features of its SLiM technology. One of the CIP
provisional patent applications covers the joint inventions of Srinivas Kilambi,
Ph.D., Separation's former Senior Vice President--Technology, and Lockheed
Martin. The other CIP provisional patent application and the international
patent application cover the sole inventions of Dr. Kilambi.
CFC Technologies has one patent and one patent filing, and CFC
Technologies is licensed to utilize SET for CFC applications. Applied is
pursuing foreign patent protection where it deems appropriate.
COMPETITION
Soil Decontamination
The Company anticipates that the initial market for commercial private
sector applications of SET 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 have substantially greater financial and
other resources than Applied. Although the Company believes that Applied
possesses the only Nationwide Permit for destroying PCBs, any one or more of
Applied's competitors or other enterprises not presently known may develop
technologies which are superior to the technologies utilized by Applied. To the
extent that Applied's competitors are able to offer comparable services at
lower prices or of higher quality, or more cost-effective remediation
alternatives, Applied'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
15
<PAGE>
in decontaminating chemical weapons and warfare agents, concentration of
nuclear wastes and the decontamination 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
Applied. In addition, many prospective users of SET 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.
The Company believes that Applied's ability to compete in both the
commercial private and governmental public sectors is dependent upon SET being
a superior, more cost-effective method to achieve decontamination of a variety
of materials.
Water and Gas Waste Treatment
The most common alternative methods for metals separation from
solubilized process streams presently include ion exchange, reverse osmosis,
precipitation, ultrafiltration, nanofiltration 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 separating chromium 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, SLiM is capable of handling a broad range of compounds in
a faster and relatively inexpensive manner. Furthermore, the by-products of the
SLiM 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 Separation. Although
the Company believes that SLiM has substantial advantages over many other known
separation technologies, any one or more of Separation's competitors, or other
enterprises not presently known, may develop technologies which are superior to
SLiM. To the extent Separation's competitors are able to offer comparable
services at lower prices or of higher quality, or more cost-effective
alternatives, Separation's ability to compete effectively could be materially
adversely affected. The Company believes that Separation's ability to compete
in both the commercial and governmental sectors is dependent upon SLiM 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
Separation is unable to demonstrate that SLiM is a technologically superior and
cost-effective alternative to other separation technologies on a commercial
scale, Separation may not be able to compete successfully.
Environmental Management
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
environmental services to the United States government.
16
<PAGE>
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 its ability to continue to attract
and retain qualified technical and professional staff with quality project
performance records and 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 U.S. government and private sector
industrial customers. The Company believes that Advanced Sciences' competitive
position with the U.S. government is enhanced by the physical proximity of
Advanced Sciences' plants to DOE and DOD sites, its skilled professional staff,
prior project experience with the U.S. government, numerous existing multi-year
contracts with the U.S. government, integrated services, and high quality
performance.
Polymer Manufacturing and Sales
The materials industry has been characterized by extensive research
and development efforts and new developments in advanced materials technology
are expected to continue at a rapid pace. The markets to which the CERASET
technology and products apply are diverse in character. Competition varies from
market to market, both in terms of competing entities and competing technology.
Furthermore, the time and resources necessary to penetrate any market segment
vary widely. Polymer Technologies' long-term success will depend, in part, upon
its ability to maintain a competitive position for the CERASET technology and
products. A number of domestic and foreign companies are actively engaged in
the research and development of advanced materials technology and many of these
companies have substantially greater financial resources and production and
marketing capabilities than the Company. In most of its target markets, Polymer
Technologies will encounter competition from metal, plastic, ceramic and other
materials producers, as well as from the manufacturers of components made of
these materials.
ENVIRONMENTAL REGULATION
The environmental legislation and policies which the Company believes
are applicable to SET 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.
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
17
<PAGE>
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, 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 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. Applied's
plans to own and operate SET at on-site installations expose Applied 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 Applied for final disposition of residues from SET are targeted for
investigation and clean-up under CERCLA, Applied 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, Applied has designed the SET
technology to minimize the potential for release of hazardous substances into
the environment. In addition, Applied 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. Applied 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 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.
In April 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. 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, as well as
assistance to certify and publish the on-site test results of such
demonstrations.
In March 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 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.
18
<PAGE>
The Company possesses a Nationwide Permit issued by the EPA under the
Alternative Destruction Technology Program that allows it to use SET 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 Solution 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, the Company 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 Applied and its operations.
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 Applied's business, financial condition and results of operations.
Separation maintains environmental liability insurance with limits of
$1.0 million per occurrence and $2.0 million in the aggregate. Applied, on
behalf of itself and its subsidiaries, also maintains contractor's pollution
insurance with limits of $15.0 million per occurrence and $15.0 million in the
aggregate. 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 an insurance policy) for amounts substantially in excess of applicable
policy limits. Any such event could have a material adverse effect on Applied's
business, financial condition and results of operations.
EMPLOYEES
As of March 26, 1998, the Company (including all of its direct and
indirect subsidiaries) had a total of eight full-time employees, of which
approximately seven are engineers, scientists and other professionals. None of
such employees are covered by collective bargaining agreements, and the
Company's relations with its employees are believed to be good.
19
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal 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 principal stockholder of the Company and a director of
Applied, Solution, Separation, Advanced Sciences and certain other affiliates
of the Company. Such space also serves as the principal executive offices of
Applied and certain other affiliates of the Company. The lease for the New York
City space expires in December 1998. The Company pays an allocable portion of
the rent per year under such lease.
The Company maintains financial offices located in approximately 2,000
square feet of space in Great Neck, New York under a lease expiring on
September 30, 1998. The Company pays approximately $6,400 per month under such
lease.
The Company maintains marketing offices located in approximately 2,200
square feet of office space in McLean, Virginia under a lease expiring in May
2002. Such space also serves as marketing offices of Applied. The Company pays
an allocable portion of the rent per year under such lease.
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 $37,500 and $9,375 in the
venture in 1992 and 1993, 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 $10,971 and $76,639, respectively, in 1997, and $12,627 and
$57,220, respectively, in 1996. The Blum Family Trust also participated in this
acquisition.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in 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 fiscal quarter of the year ended December 31, 1997.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's common stock, par value $0.01 per share (the "Common
Stock"), traded publicly on the Nasdaq System ("Nasdaq") under the symbol COES
from January 1, 1988 to December 26, 1989. On December 26, 1989, the Common
Stock ceased to be quoted on Nasdaq and began trading in the over-the-counter
market in the so-called "pink sheets" of the National Quotation Bureau, Inc. and
the OTC Bulletin Board of the National Association of Securities Dealers, Inc.
(the "OTC Bulletin Board"), where it is currently traded under the symbol COES.
On March 26, 1998, there were approximately 2,100 holders of record of Common
Stock.
The following table sets forth, for the fiscal years shown, the high
and low bid prices (rounded to the nearest cent) for the Common Stock as quoted
by the OTC Bulletin Board. Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
High Low
---- ---
Fiscal 1996
First Quarter........... $1.06 $0.34
Second Quarter.......... 1.00 0.38
Third Quarter........... 2.00 0.75
Fourth Quarter.......... 1.91 0.94
Fiscal 1997
First Quarter........... 2.06 0.81
Second Quarter.......... 1.38 0.63
Third Quarter........... 1.06 0.56
Fourth Quarter.......... 1.03 0.31
DIVIDEND INFORMATION
The holders of the Company's 10% Series AA Convertible Redeemable
Preferred Stock, par value $0.01 per share (the "Series AA Preferred Stock"),
are entitled to receive if, when and as declared by the Board of Directors,
dividends at the rate of $0.10 per share per annum, payable quarterly in cash.
Dividends on the Series AA Preferred Stock are not cumulative and are payable
out of funds legally available for the payment of such dividends. The Company
paid an aggregate of $288,668 in dividends with respect to the Series AA
Preferred Stock in 1997. While the Company currently intends to retain most of
its earnings to finance the growth and development of its business and to repay
outstanding indebtedness, it does anticipate that it will continue to pay
similar cash dividends on its Series AA Preferred Stock in the foreseeable
future.
In each year commencing from and after January 1, 1998, the holders of
the Company's 8% Series B Convertible Redeemable Preferred Stock, par value
$0.01 per share (the "Series B Preferred Stock"), are entitled to receive if,
when and as declared by the Board of Directors, dividends at the rate of $0.08
per share per annum, payable quarterly in arrears commencing March 31, 1998.
Dividends on the Series B Preferred Stock are not cumulative and are only
payable out of the net profits of the Company legally available for the payment
of such dividends, after there shall have been paid in full any dividends
declared and payable on the Series AA Preferred Stock. The Company does not
anticipate that it will pay cash dividends on the Series B Preferred Stock in
the foreseeable future.
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<PAGE>
The holders of the Company's 7% Series D Convertible Redeemable
Preferred Stock, par value $0.01 per share (the "Series D Preferred Stock"),
are entitled to receive if, when and as declared by the Board of Directors out
of funds legally available therefor, cumulative dividends at the rate of $7.00
per share per annum, payable at the time of conversion, either in cash or, at
the election of the Company, by delivery of shares of Applied Common Stock held
by the Company at the conversion price then in effect. As of March 26, 1998,
the Company had transferred 83,782 shares of its Applied Common Stock as
dividends in kind with respect to the Series D Preferred Stock, the total
dollar value of which is approximately $189,547. See "--Recent Sales of
Unregistered Securities--1997 Private Placement." The Company anticipates that
it will continue to transfer Applied Common Stock as dividends in kind upon
conversion of the remaining shares of Series D Preferred Stock.
The Company has not, for the last two fiscal years, paid cash
dividends in respect of its Common Stock and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future.
Any future determination as to the payment of cash dividends on the
capital stock of the Company will depend on the ability of the Company to
service its outstanding indebtedness and future earnings, capital requirements,
the financial condition of the Company and such other factors as the Company's
Board of Directors may consider.
RECENT SALES OF UNREGISTERED SECURITIES
February 1998 Private Placement
In February 1998, the Company sold (i) 1,381,692 shares of Applied
Common Stock held in its account and (ii) three-year warrants to purchase an
aggregate of 150,000 shares of Applied Common Stock held in its account at an
exercise price equal to $6.00 per share, for an aggregate purchase price of $6.0
million (the "First Tranche Sale") in the February 1998 Private Placement to
certain "accredited investors" as defined in Rule 501 of the Securities Act of
1933, as amended (the "Securities Act"). After deduction of fees and transaction
costs associated with the First Tranche Sale totaling approximately $550,000,
the Company received aggregate net proceeds of approximately $5,450,000 from the
First Tranche Sale. Immediately prior to the First Tranche Sale, the Company
owned approximately 52% of the outstanding shares of Applied Common Stock. As of
March 26, 1998, the Company owned approximately 43% of the outstanding shares of
Applied Common Stock.
Pursuant to the terms of the February 1998 Private Placement, the
Company may be required to issue up to a maximum of 1,618,308 additional shares
of Applied Common Stock to the investors, for no additional consideration, in
the event that 90% of the average closing bid price of Applied Common Stock for
a certain period of time is less than the $4.3425 per share purchase price of
the Applied Common Stock sold in the First Tranche Sale. The Company will, for
a certain period of time, have the right and option (but not the obligation) to
require the investors to purchase (i) an aggregate amount of additional shares
of Applied Common Stock equal to 4,000,000 divided by 90% of the average
closing price per share of Applied Common Stock for the five trading days
immediately prior to the closing date of such sale and (ii) warrants to
purchase an aggregate of 100,000 shares of Applied Common Stock at an exercise
price per share equal to the greater of $6.00 or 125% of the per share purchase
price of the shares of Applied Common Stock sold pursuant to (i) above, for an
aggregate purchase price of $4.0 million (the "Second Tranche Sale"). As in the
case of the First Tranche Sale, the Company may be required to transfer
additional shares of Applied Common Stock to the investors in connection with
the Second Tranche Sale, for no additional consideration, in the event that 90%
of the average closing bid price of Applied Common Stock for a certain period
of time is less than the per share purchase price of the Applied Common Stock
sold in the Second Tranche Sale.
Pursuant to the terms of the February 1998 Private Placement, if
during a certain period of time the Company sells, or Applied issues, any
shares of Applied Common Stock ("First Future Shares") at a price per share
that is less than the per share purchase price of the Applied Common Stock sold
in the First Tranche Sale or the Company sells, or Applied issues, any shares
of Applied Common Stock ("Second Future Shares") at a price per share that is
less than the per share purchase price of the Applied Common Stock sold in the
Second Tranche Sale,
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the Company will issue to the investors, for no additional consideration, a
number of additional shares of Applied Common Stock equal to (a) with respect
to First Future Shares, an amount equal to the difference between (i) 6,000,000
divided by the price at which the First Future Shares were sold or issued and
(ii) 1,381,692, and (b) with respect to Second Future Shares, an amount equal
to the difference between (i) 4,000,000 divided by the price at which the
Second Future Shares were sold or issued and (ii) the amount equal to the
number of shares of Applied Common Stock sold in the Second Tranche Sale.
Notwithstanding the foregoing, the terms "First Future Shares" and "Second
Future Shares" do not include any shares of Applied Common Stock which may be
issued in the future upon conversion or exercise of, or pursuant to the terms
of any agreement entered into by the Company or Applied in respect of,
securities of the Company and/or Applied which have been issued prior to
February 9, 1998.
Avalon Group, Inc. ("Avalon") was retained by the Company as a finder
in connection with the February 1998 Private Placement and has, as of March 26,
1998, received fees of approximately $510,000 in connection therewith.
Applied has agreed to file registration statements (the "Registration
Statements") on Form S-3, or other applicable form of registration statement,
under the Securities Act covering all of the shares of Applied Common Stock
issued and to be issued to the investors in the February 1998 Private Placement
and to keep such Registration Statements continuously effective under the
Securities Act for a period of two years after their respective effective dates
or such earlier date when all shares covered by the Registration Statements
have been sold or may be sold without volume restrictions under the Securities
Act (the "Effective Period").
1997 Private Placement
In May and August 1997, the Company sold an aggregate of 88,000 shares
of its Series D Preferred Stock in the 1997 Private Placement to certain
"accredited investors" as defined in Rule 501 of the Securities Act. After
deduction of fees and transaction costs associated with the 1997 Private
Placement totaling approximately $968,000, the Company received aggregate net
proceeds of approximately $7.8 million from the 1997 Private Placement. The
Series D Preferred Stock is convertible into shares of Applied Common Stock
held by the Company, at a conversion price equal to 85% of the lower of (a) the
average of the low prices, or (b) the average of the closing bid prices of
Applied Common Stock for the previous five business days ending on the day
prior to conversion (the "Average Closing Bid Price"). The conversion price of
the Series D Preferred Stock will be equal to certain amounts set forth in the
Certificate of Designation, Rights and Preferences for the Series D Preferred
Stock if the Average Closing Bid Price of Applied Common Stock for any
consecutive 30 days is equal to or less than $2.00, provided that in no event
will the conversion price of the Series D Preferred Stock be less than $1.50.
The purchasers of the Series D Preferred Stock also received five-year
warrants to purchase an aggregate of 1,175,000 shares of Applied Common Stock
held by the Company at exercise prices ranging from $5.15 per share to $7.14
per share. Such exercise prices are (in addition to customary anti-dilution
adjustments) subject to reset on August 18, 1998 to an exercise price equal to
the lesser of (i) the exercise price in effect immediately prior to August 18,
1998, or (ii) 110% of the closing bid price of Applied common stock on August
17, 1998. In addition, if Applied Common Stock trades at less than 50% of the
August 17, 1998 closing bid price for any 10 consecutive trading days, the
exercise price is subject to further reset (on one occasion only) to 50% of
such August 17, 1998 closing bid price.
As of March 26, 1998, an aggregate of 3,794,669 shares of Applied
Common Stock have been transferred from the Company's account to certain
investors as a result of their conversion of shares of Series D Preferred
Stock. Such shares of Applied Common Stock were transferred based upon
conversion prices ranging from $1.50 per share to $3.98 per share. An aggregate
of 52,113 shares of Applied Common Stock are currently transferable by the
Company to certain investors as accrued dividends on certain of their converted
shares of Series D Preferred Stock. Approximately 267,500 shares of Applied
Common Stock will be transferable by the Company upon conversion of the
remaining 5,000 shares of Series D Preferred Stock. Such number of shares of
Applied Common Stock is an estimate that assumes a conversion price of $2.00 per
share, which is subject to adjustment, and also includes an estimate of the
number of shares of Applied Common Stock which may be transferred by the Company
as accrued dividends for one year on the Series D Preferred Stock. The actual
number of shares of Applied Common Stock to be received by the investors upon
conversion of the remaining shares of Series D Preferred Stock could be
materially less or more than such estimated amount depending upon factors
23
<PAGE>
which cannot be predicted at this time, including, among others, the actual
conversion prices of the Series D Preferred Stock.
Avalon was retained by the Company as a finder in connection with the
1997 Private Placement and received fees aggregating $792,000 in connection
therewith. In addition, affiliates of Avalon received warrants to purchase an
aggregate of 85,000 shares of Applied Common Stock held by the Company at
exercise prices ranging from $5.15 per share to $7.14 per share.
Applied has an effective registration statement on file with the
Securities and Exchange Commission (the "Commission") covering the shares of
Applied Common Stock into which the shares of Series D Preferred Stock are
convertible, as well as the 1,260,000 shares of Applied Common Stock
transferable upon exercise of the warrants issued in the 1997 Private
Placement.
The above transactions were deemed exempt from the registration
requirements of the Securities Act in reliance on Section 4(2) thereof as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate restrictive legends were affixed
to the warrants and the certificates representing the shares issued in such
transactions. The Company and Applied made available to all recipients of
securities written information about the Company and Applied in accordance with
Rule 502 of the Securities Act and advised such recipients of the limitations on
resale of such securities. In addition, all recipients were offered the
opportunity, prior to purchasing any securities, to ask questions of, and
receive answers from, the Company and Applied concerning the terms and
conditions of the transactions and to obtain additional relevant information
about the Company and Applied.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected financial data of the Company,
as of December 31, 1997, for the fiscal years ended December 31, 1993, 1994,
1995, 1996 and 1997. The following selected historical data is derived from the
Company's Financial Statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto included
elsewhere in this Annual Report.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenue............................ $ 803,000 $ 1,801,000 $ 1,044,000 $ 5,253,000 $ 19,493,000
Net (loss)......................... (2,463,000) (3,767,000) (2,969,000) (8,311,000) (13,507,000)
Net (loss) per share -- basic and
diluted.......................... (.05) (.07) (.06) (.15) (.27)
Dividends per common share......... - - - - -
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets...................... $15,129,000 $10,776,000 $5,321,000 $41,113,000 $35,016,000
Long-term obligations (including
current portion............... 8,243,000 5,735,000 4,994,000 8,333,000 6,952,000
Redeemable preferred stock........ 567,000 0 0 0 3,557,000
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
From the Company's acquisition of Applied's predecessor (Commodore
Laboratories, Inc. (formerly A.L. Sandpiper Corporation)) in December 1993 to
the February 1998 Private Placement, the Company owned a controlling equity
interest in Applied and its subsidiaries, including Solution, Separation,
Advanced Sciences (which accounts for substantially all of Applied's revenues)
and CFC Technologies. During such period the Company had not generated material
revenues, except from the operations of Advanced Sciences, or any profits. As a
result of the 1997 Private Placement and the February 1998 Private Placement,
the Company's ownership interest in Applied decreased to approximately 43% as of
March 26, 1998. While the Company's financial condition for the year ended
December 31, 1997 consolidates that of Applied and its operating subsidiaries,
including Advanced Sciences, beginning with the first fiscal quarter of 1998 and
as long as the Company's equity interest in Applied is less than 50%, the
Company will no longer consolidate the financial condition of Applied and its
subsidiaries. Prior to Applied's acquisition of Advanced Sciences, the Company
was considered to be a development-stage company. See "Market for Registrant's
Common Equity and Related Stockholder Matters -- Recent Sales of Unregistered
Securities" and "Certain Relationships and Related Transactions."
RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to Year ended December 31, 1996
Revenues were $19,493,000 for the year ended December 31, 1997,
compared to $5,253,000 for the year ended December 31, 1996. Such revenues for
1997 were primarily due to Applied's acquisition of Advanced Sciences in
October 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
$16,325,000 from $4,291,000 for the same period in 1996. Anticipated losses on
contracts are provided for by a charge to income during the period such losses
are first identified.
For the year ended December 31, 1997, the Company incurred research
and development costs of $3,074,000, as compared to $2,997,000 for the year
ended December 31, 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 year ended December 31, 1997, as
compared to the year ended December 31, 1996, primarily due to the continued
use of independent consultants in the development of SET. In addition, the
Company hired additional technical and operational personnel to develop the SET
and SLiM processes.
General and administrative expenses for the year ended December 31,
1997 were $17,058,000, as compared to $6,064,000 for the year ended December
31, 1996. The increase was primarily due to hiring executives and staff to
support the increased activities of the Company caused by Applied's and
Separation's change to "public" status and efforts to commercialize their
technologies. Approximately $5,696,000 of the increase relates to expenses
incurred by Advanced Sciences and Separation, and approximately $3,088,000 of
the increase relates to expenses incurred by Applied. In April 1997, Separation
completed an initial public offering of its equity securities (the "Separation
IPO") which reduced the Company's indirect beneficial ownership from 100% to
87%. Included in general and administrative expenses for 1997 is an $800,000
valuation reserve for the LPM Note receivable at Applied. In addition, the
Company provided a valuation reserve of $2,229,000 against its investment in
and advances to Lanxide and its subsidiaries.
Interest income was $1,004,000 for the year ended December 31, 1997,
as compared to $621,000 for the year ended December 31, 1996. The increase
resulted from the investment of the proceeds of Applied's initial public
offering (the "Applied IPO") and the Separation IPO.
26
<PAGE>
Interest expense for the year ended December 31, 1997 was $1,052,000,
as compared to $808,000 for the year ended December 31, 1996. The increase in
interest expense in 1997 was due to borrowings by Advanced Sciences under its
line of credit. Advanced Sciences was acquired by Applied in October 1996.
In 1997, the Company recorded a gain of $1,896,000 on the sale of
Applied Common Stock held by it during the year. Such Applied Common Stock was
sold upon conversion of the Company's Series D Preferred Stock. The amount of
recorded gain represents the difference between the carrying value of the
Applied Common Stock sold and the conversion price of the Series D Preferred
Stock.
Equity in losses of unconsolidated subsidiary for the year ended
December 31, 1997 was $1,827,000, as compared to $495,000 for the year ended
December 31, 1996. Applied's Teledyne-Commodore, LLC joint venture commenced
operations in October 1996.
Minority interest income for 1997 relates to the losses of the minority
ownership of the Applied subsidiary. As of December 31, 1997, the Company owned
55.8% of Applied and therefore adjusts its consolidated results to reflect the
portion of Applied's losses which it does not own.
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 $1,044,000 for the year ended December 31, 1995. Cost of sales
increased to $4,291,000 from $0 for the same periods. These increases were
primarily due to Applied's acquisition of Advanced Sciences in October 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 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. Also, the Company hired additional
technical and operational personnel to develop the SET process.
General and administrative expenses for the year ended December 31,
1996 were $6,064,000, 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 approximately $316,000 of expenses
relate to the closing of the Ohio facilities and relocation of its employees
and equipment to Houston, Texas. The Company recorded an additional $281,000 of
insurance loss reserve relating to its wholly owned captive insurance company
for which it obtained reinsurance in 1997. 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 Applied IPO 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.
27
<PAGE>
Equity in losses of unconsolidated subsidiary for the year ended
December 31, 1996 was $495,000, as compared to none 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 allocation of
Applied's losses to its minority stockholders. As of December 31, 1996, the
Company owned 69.3% of Applied and therefore adjusts its consolidated results
to reflect the portion Applied's losses which it does not own.
LIQUIDITY AND CAPITAL RESOURCES
In May and August 1997, the Company sold shares of its Series D
Preferred Stock and warrants in the 1997 Private Placement from which it
received net proceeds of approximately $7.8 million. In connection with the
1997 Private Placement, the Company incurred transaction costs of approximately
$968,000 and issued to affiliates of the finder warrants to purchase an
aggregate of 85,000 shares of Applied Common Stock held by the Company at
prices ranging from $5.15 per share to $7.14 per share. See "Market for
Registrant's Common Equity and Related Stockholder Matters--Recent Sales of
Unregistered Securities--1997 Private Placement" and "Certain Relationships and
Related Transactions--1997 Private Placement."
In September 1997, the Company provided Applied with a $4.0 million
unsecured loan, evidenced by Applied's 8% convertible subordinated note due
August 31, 2002. In connecton with the loan, Applied issued warrants to purchase
1,000,000 shares of Applied Common Stock to the Company valued at $660,000 and
provided a beneficial conversion privilege with an intrinsic value of $750,000
as of the date of the transaction. See "Certain Relationships and Related
Transactions--September 1997 Intercompany Convertible Note."
In February 1998, the Company completed the First Tranche Sale in
connection with the February 1998 Private Placement from which it received net
proceeds of approximately $5,450,000. In connection with the First Tranche Sale,
the Company incurred transaction costs of approximately $550,000. Upon receipt
of such net proceeds, the Company provided Applied with a $5,450,000 unsecured
loan, evidenced by Applied's 8% non-convertible note due on the earlier to occur
of (a) December 31, 1999, or (b) consummation of any public offering or private
placement of securities of Applied with net proceeds aggregating in excess of
$6.0 million, other than in respect of working capital financing or secured
financing of assets received by Applied in the ordinary course of business from
any bank or other lending institution, subject to certain conditions. Applied
will use the net proceeds of the loan solely for working capital and general
corporate purposes and not for the satisfaction of any portion of Applied debt
or to redeem any Applied equity or equity-equivalent securities. See "Market for
Registrant's Common Equity and Related Stockholder Matters--Recent Sales of
Unregistered Securities--February 1998 Private Placement," "Certain
Relationships and Related Transactions--February 1998 Private Placement" and
"--February 1998 Intercompany Note."
For the year ended December 31, 1997, the Company incurred net losses
of $13,507,000. At December 31, 1997 and 1996, the Company had working capital
of $13,208,000 and $12,842,000 respectively.
In November 1996, the Company loaned $3.0 million to Lanxide
Performance Materials, Inc. ("LPM"), a wholly owned subsidiary of Lanxide,
which specializes in the manufacture of ceramic bonding and refractory
materials. Lanxide is affiliated with the Company by significant common
beneficial ownership. The loan was evidenced by a promissory note, dated
November 13, 1996, in the principal amount of $3.0 million (the "LPM Note"),
which was collateralized by the assets of LPM and guaranteed by Lanxide. The
LPM Note became due on February 28, 1998. In March 1998, Applied transferred to
the Company a promissory note in the principal amount of $1.5 million, together
with $500,000 in cash, as partial prepayment of the $4.0 million unsecured loan
from the Company to Applied in September 1997. Upon receipt of such prepayment,
the Company cancelled the LPM Note and paid Lanxide an additional $500,000 in
cash, among other things, in exchange for the CERASET Business,
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<PAGE>
CERASET License and CERASET Trademark. See "Certain Relationships and Related
Transactions--September 1997 Intercompany Convertible Note" and "--Transactions
with Lanxide."
In December 1996, the Company sold all of the outstanding capital stock
of Separation and CFC Technologies to Applied, its then 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 contributed to the equity of Separation. In
consideration for the transfer of all of the outstanding capital stock of
Separation and CFC Technologies to Applied, Applied paid the Company $3.0
million in cash and issued 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. Such warrant was subsequently amended to,
among other things, reduce the exercise price thereof to $10.00 per share. See
"Certain Relationships and Related Transactions--Organization and Capitalization
of Applied" and "--February 1998 Intercompany Note."
In April 1997, Separation completed the Separation IPO, from which it
received net proceeds of approximately $11,100,000. Such funds were used
primarily to finance Separation's operations through 1997.
The Company anticipates that it will need additional financing during
1998 to satisfy its current operating requirements. The Company believes that it
may be able to obtain such financing through the sale of its Applied Common
Stock in one or more private placement transactions during 1998. For instance,
pursuant to the terms of the February 1998 Private Placement, the Company will,
for a certain period of time, have the right and option (but not the obligation)
to sell additional shares of its Applied Common Stock and warrants to purchase
Applied Common Stock for an aggregate purchase price of approximately $4.0
million in the Second Tranche Sale. See "Market for Registrant's Common Equity
and Related Stockholder Matters--Recent Sales of Unregistered Securities--
February 1998 Private Placement.
Harvest American Insurance Company
In July 1987, the Company established Harvest, a wholly-owned
subsidiary of the Company, which was licensed by the State of Vermont as a
"captive" insurance company. Harvest issued "occurrence" based insurance
policies to each of the Company's former asbestos abatement subsidiaries, but
not to any other persons or entities. An occurrence-based policy insures
against claims arising at any time in the future based upon events which
occurred while the policy was in effect. The policies were in effect from July
1987 through January 1989. The operating subsidiaries of the Company paid
premiums to Harvest based upon a percentage of sales and had coverage through
January 1989. Beginning in January 1989, in response to greater availability of
"occurrence type" insurance, the subsidiaries obtained asbestos
abatement-related general liability insurance from unrelated insurance
companies. Harvest no longer issues new policies. The maximum exposure under
the outstanding policies is $5,000,000 in the aggregate.
In December 1994, the Department and the Company entered into 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. Such funds were deposited into a Harvest
interest-bearing account.
As of September 30, 1997, Harvest had $1,141,000 in an
interest-bearing account and the $4,238,000 Company Note made to the order of
Harvest by the Company.
In October 1997, Harvest transferred 100% of its risk to the Assuming
Insurers for a total cost of $1,275,000, acceptable to the Commissioner of the
Department. The Company funded the additional $134,000 required. The
Commissioner, in accordance with the Settlement Agreement, released all cash
held for the benefit of Harvest to Harvest and the Assuming Insurers. Also in
October 1997, Harvest merged with and into a new Delaware corporation, Harvest
American Corp., with such Delaware corporation surviving. Upon completion of
the complete assumption of Harvest's insurance risks, the Department returned
to Harvest the original stipulation to entry of judgment and final judgment
held in escrow and the Company Note held by the Department.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carry forwards of approximately
$40,900,000 which expire in the years 1998 through 2012. 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 $19,429,000 has been established to
offset any benefit from the net operating loss carry forwards. It cannot be
determined when or if the Company will be able to utilize the net operating
losses.
29
<PAGE>
YEAR 2000 CONSIDERATIONS
Many existing computer programs use only two digits to identify a year
in the date datum field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If uncorrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
The Company is currently evaluating Year 2000 issues and their
potential impact on its information systems and computer technologies. All
evaluation costs will be expensed as incurred. The Company does not expect that
the cost of addressing any Year 2000 issue will be a material event or
uncertainty that would cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition, or that the costs or consequences of incomplete or untimely
resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results,
or cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These forward-looking statements
can generally be identified as such because the context of the statement will
include words such as the Company "believes," "anticipates," "expects" or words
of similar import. Similarly, statements that describe the Company's future
plans, objectives or goals are also forward-looking statements. Such statements
may address future events and conditions concerning, among other things, the
Company's results of operations and financial condition; the consummation of
acquisition and financing transactions and the effect thereof on the Company's
business; capital expenditures; litigation; regulatory matters; and the
Company's plans and objectives for future operations and expansion. Any such
forward-looking statements would be subject to the risks and uncertainties that
could cause actual results of operations, financial condition, acquisitions,
financing transactions, operations, expenditures, expansion and other events to
differ materially from those expressed or implied in such forward-looking
statements. Any such forward-looking statements would be subject to a number of
assumptions regarding, among other things, future economic, competitive and
market conditions generally. Such assumptions would be based on facts and
conditions as they exist at the time such statements are made as well as
predictions as to future facts and conditions, the accurate prediction of which
may be difficult and involve the assessment of events beyond the Company's
control. Further, the Company's business is subject to a number of risks that
would affect any such forward-looking statements. These risks and uncertainties
include, but are not limited to, the ability of the Company to commercialize
its technology; product demand and industry pricing; the ability of the Company
to obtain patent protection for its technology; developments in environmental
legislation and regulation; the ability of the company to obtain future
financing on favorable terms; and other circumstances affecting anticipated
revenues and costs. These risks and uncertainties could cause actual results of
the Company to differ materially from those projected or implied by such
forward-looking statements.
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<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Pursuant to the General Instructions to Item 305 of Regulation S-K,
the Company is not required to comply with the disclosure provisions of Item
305 of Regulation S-K because the Company's market capitalization was less than
$2.5 billion at January 28, 1997, and this Annual Report does not contain
financial statements for fiscal years ended after June 15, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company are included on
pages F-1 through F-24 of this Annual Report and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 11, 1996, the Company and its former auditors, Tanner +
Co. ("Tanner"), mutually agreed to terminate the client-auditor relationship
between the Company and Tanner effective as of such date. Additionally, as of
December 19, 1996, the Company retained Price Waterhouse LLP to serve as
independent accountants. The decision to terminate the Company's client-auditor
relationship with Tanner and to retain Price Waterhouse LLP was recommended by
the Audit Committee of the Board of Directors and unanimously approved by the
Board of Directors of the Company.
During the Company's fiscal year ended December 31, 1995, Tanner's
report on the Company's financial statements neither contained any adverse
opinion or disclaimer of opinion, nor was qualified or modified as to any
uncertainty, audit scope or accounting principles, except that Tanner's
auditors report on the Company's consolidated financial statements for the year
ended December 31, 1995 contained an additional paragraph relating to the
Company continuing as a going concern, due to significant losses and a deficit
in working capital.
During the Company's fiscal year ended December 31, 1995, there were
no disagreements between the Company and Tanner on any matters 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 Tanner to make reference to the subject matter of the
disagreements in connection with its report.
No "reportable events" as described under Item 304(a)(1)(v) of
Regulation S-K occurred during the Company's fiscal year ended December 31,
1995.
Prior to engaging Price Waterhouse LLP, the Company did not consult
Price Waterhouse LLP regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the executive officers and directors of the
Company, and their positions with the Company, as of March 26, 1998, are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Paul E. Hannesson 57 Chairman of the Board, President and Chief Executive Officer
Michael D. Fullwood 51 Senior Vice President, Chief Financial and Administrative
Officer, Secretary and General Counsel
Bentley J. Blum 56 Director
Herbert A. Cohen 62 Director
David L. Mitchell 75 Director
Kenneth L. Adelman, Ph.D. 49 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 from
February 1993 to July 1996 and was re-appointed President in May 1997. Mr.
Hannesson has also served as a director of Applied since March 1996 and was
appointed its Chairman of the Board in November 1996. Mr. Hannesson also served
as Chief Executive Officer of Applied from March to October 1996 and as
President from March to September 1996, and was re-appointed Chief Executive
Officer in November 1996 and President in May 1997. Mr. Hannesson also
currently serves as the Chairman of the Board and Chief Executive Officer of
Separation, Solution and CFC Technologies. 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 served as
Chairman of the Board of Lanxide, a research and development company developing
metal and ceramic materials, from 1983 to February 1998. Mr. Hannesson is the
brother-in-law of Bentley J. Blum, a director and principal stockholder of the
Company.
Michael D. Fullwood was appointed Senior Vice President, Chief
Financial and Administrative Officer, Secretary and General Counsel of the
Company, Applied, Solution, Separation and CFC Technologies in May 1997. Mr.
Fullwood served as a director and the Senior Vice President, Chief Financial
and Administrative Officer and General Counsel of Lanxide from July 1997 to
February 1998. From 1987 to August 1996, Mr. Fullwood held numerous positions
ranging from Senior Attorney to Executive Vice President and Chief Financial
Officer of Witco Corporation, a worldwide specialty chemicals company. From
1983 to 1987, Mr. Fullwood served as Senior Attorney at Scallop Corporation
(Royal Dutch/Shell Group), where he specialized in corporate matters, mass tort
litigation and international law. Mr. Fullwood also previously served as Senior
Attorney of Caltex Petroleum and Arabian American Oil Company, handling
corporate, contractual and transnational matters. Mr. Fullwood holds a law
degree from Harvard Law School.
Bentley J. Blum has served as a director of the Company since 1984 and
served as the Chairman of the Board from 1984 to November 1996. Mr. Blum has
served as a director of Applied since March 1996 and served as its Chairman of
the Board from March to November 1996. Mr. Blum also currently serves as a
director of Separation, Solution and CFC Technologies. 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 a director of Lanxide; Federal
32
<PAGE>
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 a
principal stockholder of the Company and is the brother-in-law of Paul E.
Hannesson, the Chairman of the Board, President and Chief Executive Officer of
the Company.
Herbert A. Cohen has served as a director of the Company and Applied
since July 1996 and joined the Board of Directors of Separation in March 1998.
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.
David L. Mitchell has served as a director of the Company and Applied
since July 1996 and as a director of Separation since April 1997. Mr. Mitchell
has also served as a consultant to Applied since July 1997. 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 Inc. 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.
Kenneth L. Adelman, Ph.D. joined the Board of Directors of the Company
and Applied in July 1996 and was appointed Executive Vice President--Marketing
and International Development of Applied in May 1997. Dr. Adelman was appointed
President and Chief Operating Officer of Solution in November 1997. Dr. Adelman
also joined the Board of Directors of Separation in April 1997. 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 President 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.
Each director is elected to serve for a term of one year or until his
or her successor is duly elected and qualified. The Company's officers are
elected by, and serve at the pleasure of, the Board of Directors, subject to
the terms of any employment agreements. Messrs. Hannesson and Blum are
brothers-in-law. No family relationship exists among any other directors or
executive officers of the Company.
33
<PAGE>
KEY EMPLOYEES
The names and ages of the key employees of the Company, and their
positions with the Company, as of March 26, 1998, are as follows:
Name Age Position
---- --- --------
Andrew P. Oddi 36 Vice President and Treasurer
William E. Ingram 52 Vice President and Controller
Jerry Karlik 44 Vice President
- ----------------------
Andrew P. Oddi was appointed Vice President and Treasurer of the
Company, Applied, Separation, Solution and CFC Technologies in June 1997. Mr.
Oddi also served as Vice President of Finance & Administration and Chief
Financial Officer of the Company from 1987 to May 1997 and as a director of the
Company from December 1990 to July 1996. Mr. Oddi also served as the Vice
President of Finance, Chief Financial Officer and Secretary of Applied from
March to November 1996, and as the Vice President--Finance of Separation from
September 1996 to May 1997. Mr. Oddi has also served as a director of Specialty
Retail Services, Inc., a former distributor of professional beauty products,
since December 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.
William E. Ingram was appointed Vice President and Controller of the
Company, Separation, Solution and CFC Technologies in June 1997. Mr. Ingram
also served as Applied's Vice President and Controller from October 1996 to
March 1997, as its Vice President--Finance from March to May 1997, and was
re-appointed its Vice President and Controller in June 1997. Prior to that Mr.
Ingram was Chief Financial Officer of HydroChem Industrial Services, Inc., a
privately owned, $160 million company providing high pressure water and
chemical cleaning services primarily to the petrochemical industry from January
1995 to September 1996. Mr. Ingram was Vice President and Region Controller for
Chemical Waste Management, Inc. (CWM) from September 1983 to December 1994.
CWM, a subsidiary of Waste Management, Inc., provides hazardous waste treatment
and disposal services to a wide range of government and industrial customers.
Mr. Ingram also spent two years with the solid waste operations of Waste
Management, Inc. Mr. Ingram is a Certified Public Accountant and has an M.B.A.
from the University of Florida and a B.S. in Accounting from Florida Southern
College.
Jerry Karlik has served as Vice President of the Company since 1986.
Mr. Karlik also served as the Company's Treasurer from 1986 to 1997.
BOARD COMMITTEES
The Company's Board of Directors has (i) an Audit Committee, (ii) a
Compensation, Stock Option and Benefits Committee and (iii) an Executive and
Finance Committee. The responsibilities of the Audit Committee, which, as of
March 26, 1998, was composed of Herbert A. Cohen (Chairman) and David L.
Mitchell, 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,
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, supervising
the Company's policies relating to business conduct and dealing with conflicts
of interest relating to officers and directors of the Company. The
Compensation, Stock Option and Benefits Committee, which, as of March 26, 1998,
was composed of David L. Mitchell (Chairman) and Herbert A. Cohen, has
responsibility for establishing and reviewing employee and consultant/advisor
compensation, bonuses and incentive compensation awards, administering and
interpreting the Company's 1997 Stock Option Plan, and determining the
recipients, amounts and other terms (subject to the requirements of the 1997
Stock Option Plan) of options which may be granted under the
34
<PAGE>
1997 Stock Option Plan from time to time and providing guidance to management
in connection with establishing additional benefit plans. The Executive and
Finance Committee was composed of Paul E. Hannesson, Bentley J. Blum and David
L. Mitchell as of March 26, 1998, and has the authority and responsibility of
the full Board of Directors to supervise and oversee the financial practices
and policies of the Company, to oversee the adoption of significant accounting
policies, and to manage the Company between meetings of the Board of Directors,
subject to certain limitations. The Executive and Finance Committee also has
the authority and responsibility for making recommendations to the Board of
Directors regarding nominees to serve as directors of the Company.
COMPENSATION OF DIRECTORS
Non-management directors of the Company receive director's 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 separately compensate employees for serving as directors.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of the outstanding shares
of the Company's Common Stock, to file initial reports of beneficial ownership
and reports of changes in beneficial ownership of shares of Common Stock with
the Commission. Such persons are required by Commission regulations to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the year ended December 31, 1997, and upon a
review of Forms 5 and amendments thereto furnished to the Company with respect
to the year ended December 31, 1997, or upon written representations received
by the Company from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that no director, executive officer or
holder of more than 10% of the outstanding shares of Common Stock failed to
file on a timely basis the reports required by Section 16(a) of the Exchange
Act during, or with respect to, the year ended December 31, 1997, except the
following: (i) Edwin L. Harper, Ph.D., a former director of the Company, who
inadvertently failed to timely file a Form 5 with respect to a transaction that
occurred in May 1997 (such transaction was reported on a Form 5 filed late with
the Commission on February 18, 1998); and (ii) Kenneth L. Adelman, Ph.D., a
director of the Company, who inadvertently failed to timely file a Form 5 with
respect to a transaction that occurred in May 1997 (such transaction was
reported on a Form 5 filed late with the Commission on February 18, 1998).
35
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY 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 1997, 1996, and 1995 to the person serving as
the Company's current Chief Executive Officer, to each of the Company's most
highly compensated executive officers other than the Chief Executive Offer
whose total salary and bonus compensation exceeded $100,000 during any such
year, and to one additional individual who served as an executive officer of
the Company during 1997, but not at December 31, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
---------------------------------------------- -------------------------------------
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying LTIP Compen-
Name and Principal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------ ---- --------- ---------- ------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul E. Hannesson 1997 15,302(1) 3,874(2) 930(3) -0- 3,450,000(4) -0- -0-
Chief Executive 1996 44,791(1) 150,000(2) -0- -0- 500,000(4) -0- -0-
Officer 1995 -0- -0- -0- -0- -0- -0- -0-
Michael D. 1997 7,775(5) 4,358(6) -0- -0- 500,000 -0- -0-
Fullwood 1996 -0- -0- -0- -0- -0- -0- -0-
Senior Vice 1995 -0- -0- -0- -0- -0- -0- -0-
President
Edwin L. Harper(7) 1997 15,730(8) 6,479(9) -0- -0- 750,000(10) -0- -0-
Former Vice 1996 14,583 100,000 -0- -0- 560,000 -0- -0-
Chairman, 1995 -0- -0- -0- -0- -0- -0- -0-
President and
Chief
Operating Officer
</TABLE>
- --------
(1) Represents the amount of Mr. Hannesson's base salary allocated to the
Company. Mr. Hannesson's total base salary for 1996 and 1997 was
$310,627 and $395,000, respectively. Certain portions of such base
salaries were also allocated to Applied and Separation. See "Certain
Relationships and Related Transactions--Services Agreement."
(2) Represents the amount of Mr. Hannesson's annual incentive bonus
allocated to the Company. Mr. Hannesson's total annual incentive bonus
for 1996 and 1997 was $200,000 and $100,000, respectively. Certain
portions of such annual incentive bonuses were also allocated to
Applied and Separation.
(3) Represents the amount of Mr. Hannesson's automobile allowance
allocated to the Company. Mr. Hannesson's total automobile allowance
for 1997 was $24,000, certain portions of which were also allocated to
Applied and Separation.
(4) In November 1996, Mr. Hannesson was granted options to purchase
3,450,000 shares of Company Common Stock, which options were rescinded
and re-issued in June 1997.
(5) Represents the amount of Mr. Fullwood's base salary allocated to the
Company. Mr. Fullwood's total base salary for 1997 was $133,805.
Certain portions of such base salary were also allocated to Applied
and Separation.
(6) Represents the amount of Mr. Fullwood's annual incentive bonus
allocated to the Company. Mr. Fullwood's total annual incentive bonus
for 1997 was $75,000. Certain portions of such annual incentive bonus
were also allocated to Applied and Separation.
36
<PAGE>
(7) Dr. Harper served as a director of the Company and Applied from
November 1996 to March 1998, as the President and Chief Operating
Officer of both the Company and Applied from November 1996 to April
1997, and as Vice Chairman of the Company and Applied from April to
December 1997. Dr. Harper also served as Chairman of the Board and
Chief Executive Officer of Separation, Solution and CFC Technologies
from January to April 1997, and as a private consultant to the Company
and certain of its affiliates from May to December 1997.
(8) Represents the amount of Dr. Harper's base salary allocated to the
Company. Dr. Harper's total base salary for 1997 was $354,076. Of such
base salary, $257,512 was paid to Dr. Harper in his capacity as a
consultant to the Company and its affiliates. Certain portions of such
base salary were also allocated to Applied and Separation.
(9) Represents the amount of Dr. Harper's annual incentive bonus allocated
to the Company. Dr. Harper's total annual incentive bonus for 1997 was
$145,833. Of such annual incentive bonus, $106,064 was paid to Dr.
Harper in his capacity as a consultant to the Company and its
affiliates. Certain portions of such annual incentive bonus were also
allocated to Applied and Separation.
(10) Represents shares of the Company's Common Stock underlying stock
options granted to Dr. Harper by the Company in his capacity as a
consultant to the Company and its affiliates.
37
<PAGE>
STOCK OPTIONS
The following table sets forth certain information concerning options
granted during the year ended December 31, 1997 to the individuals listed in
the Summary Compensation Table pursuant to the Company's 1997 Stock Option Plan
(the "Plan") and otherwise. The Company has no outstanding stock appreciation
rights and granted no stock appreciation rights during the year ended December
31, 1997.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
---------------------------------------------------------------------
Percent of Potential Realizable Value at
Number of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation for
Underlying Granted Exercise of Option Term
Options To Employees Base Price Expiration ------------------------------
Name Granted (#) In Fiscal Year(4) ($/Sh) Date 5% ($) 10% ($)
- ------------------- ----------- ----------------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul E. Hannesson 3,450,000(1) 56.1% 0.84 11/30/06 414,000 2,139,000
Michael D. Fullwood 500,000(2) 8.1% 0.84 05/31/07 85,000 385,000
Edwin L. Harper 750,000(3) 12.2% 0.29 05/31/07 540,000 990,000
</TABLE>
- -------------------------
(1) Options were originally granted to Mr. Hannesson in November 1996 and
are exercisable at the rate of 20% in each of calendar year 1996
through 2000, inclusive, beginning in November 1996 and, unless
exercised, expire on November 30, 2006 (subject to prior termination
in accordance with the applicable stock option agreements). Upon
announcement of a Change in Control (pursuant to and as defined in the
Plan), such options will become immediately exercisable. Upon
consummation of a Change in Control, all unexercised options will
terminate. Such options were rescinded and re-issued to Mr. Hannesson
in June 1997.
(2) Options were granted to Mr. Fullwood in May 1997 pursuant to the Plan
and are exercisable at the rate of 20% in each of calendar year 1997
through 2001, inclusive, beginning in May 1997 and, unless exercised,
expire on May 31, 2007 (subject to prior termination in accordance
with the applicable stock option agreements). Upon announcement of a
Change in Control (pursuant to and as defined in the Plan), such
options will become immediately exercisable. Upon consummation of a
Change in Control, all unexercised options will terminate.
(3) Options were granted to Dr. Harper in May 1997 in his capacity as a
consultant to the Company and its affiliates. Such options were not
granted pursuant to the Plan, and all of such options vested
immediately upon grant in May 1997.
(4) Percentages based on 6,155,000 stock options granted during the year
ended December 31, 1997.
38
<PAGE>
The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the Plan
and otherwise at December 31, 1997 by the individuals listed in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
Number Of Value Of
Securities Unexercised
Underlying In-The-Money
Unexercised Options
Options At Fiscal Year-
Shares Value At Fiscal Year-End(#) End($)
Acquired On Realized Exercisable/ Exercisable/
Name Exercise (#) ($)(1) Unexercisable Unexercisable(2)
- ----------------------- ------------ ----------- ---------------------- ----------------
<S> <C> <C> <C> <C>
Paul E. Hannesson -0- -0- 2,450,000/1,500,000 45,000/-0-
Michael D. Fullwood -0- -0- 100,000/400,000 -0-/-0-
Edwin L. Harper -0- -0- 1,310,000/-0- 247,500/-0-
</TABLE>
- ---------
(1) Represents the difference between the exercise price and the closing price
on the date of exercise, multiplied by the number of shares acquired.
(2) Represents the difference between the last reported sale price of the
Common Stock on December 31, 1997, and the exercise price of the option
multiplied by the applicable number of options exercised.
EMPLOYMENT AGREEMENTS
Paul E. Hannesson, the Company's Chairman of the Board, President and
Chief Executive Officer, entered into an employment agreement with the Company
on November 18, 1996 for a term expiring on December 31, 1999. Pursuant to such
employment agreement, Mr. Hannesson agreed to devote his business and
professional time and efforts to the business of the Company as a senior
executive officer, and to serve in senior executive positions with one or more
of the Company's subsidiaries at the time, including Applied and Separation.
The employment agreement provides that Mr. Hannesson shall receive, among other
things, a base salary at an annual rate of $395,000 through December 31, 1997,
and will receive not less than $434,500 through December 31, 1998 and not less
than $477,950 through December 31, 1999, for services rendered to the Company
and certain of its affiliates, including Applied and Separation. Pursuant to
the employment agreement, Mr. Hannesson received, among other things: (i) a
signing bonus of (a) $150,000 cash and (b) options to purchase 950,000 shares
of Common Stock of the Company, which options vested on the date of his
employment agreement; and (ii) options to purchase an aggregate of 2,500,000
shares of Company Common Stock, exercisable in installments over a period of
five years commencing on the date of his employment agreement. Mr. Hannesson
also received options to purchase common stock of Applied and Separation in the
amount of 1.0% of each company's total outstanding shares of common stock on
the date of grant, and is eligible to receive incentive compensation of up to
$225,000 per year for achieving certain goals.
Michael D. Fullwood, the Company's Senior Vice President, Chief
Financial and Administrative Officer, Secretary and General Counsel, entered
into an employment agreement with the Company on May 7, 1997 for an initial
term expiring on April 30, 1999. Pursuant to such employment agreement, Mr.
Fullwood agreed to devote his business and professional time and efforts to the
business of the Company as its Senior Vice President, Chief Financial and
Administrative Officer, Secretary and General Counsel, and to serve as a senior
executive officer of
39
<PAGE>
certain of the Company's subsidiaries at the time, including Applied and
Separation. The employment agreement provides that Mr. Fullwood shall receive,
among other things, a base salary at an annual rate of $225,000 for services
rendered to the Company and certain of its affiliates, including Applied and
Separation, which base salary shall be increased by not less than 5% per year
during the term of his agreement. Pursuant to the employment agreement, Mr.
Fullwood received options to purchase an aggregate of 500,000 shares of Company
Common Stock, exercisable in installments over a period of five years
commencing on the date of his employment agreement. Mr. Fullwood also received
options to purchase 125,000 shares of Applied Common Stock and 67,500 shares of
Separation common stock, exercisable in installments over a period of five
years commencing on the date of his employment agreement. Mr. Fullwood is also
eligible to receive incentive compensation of up to $75,000 per year for
achieving certain goals, which incentive compensation shall be increased by 5%
per year during the term of his agreement.
Each of the foregoing employment agreements require 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 and one year thereafter, (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. See "Certain Relationships and Related Transactions--Services
Agreement."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The individuals who served as members of the Compensation, Stock
Option and Benefits Committee (the "Compensation Committee") during the year
ended December 31, 1997 were David L. Mitchell (Chairman), Herbert A Cohen, and
Edwin L. Harper, Ph.D. Dr. Harper was appointed to the Compensation Committee
on December 16, 1997. Messrs. Mitchell, Cohen and Harper also constituted the
Compensation, Stock Option and Benefits Committee of Applied, and Messrs.
Mitchell and Harper also constituted two-thirds of the Compensation, Stock
Option and Benefits Committee of Separation at December 31, 1997. Dr. Harper
served as the President and Chief Operating Officer of the Company and Applied
from November 1996 to April 1997, as Vice Chairman of the Company and Applied
from April to December 1997, and as the Chairman of the Board and Chief
Executive Officer of Solution, Separation and CFC Technologies from January to
April 1997. Dr. Harper also served as a consultant to the Company and its
affiliates from May to December 1997. Dr. Harper resigned as an executive
officer of, and as a consultant to, the Company and each of its subsidiaries
and affiliates effective upon his appointment to the Compensation Committee on
December 16, 1997, and resigned as a director of the Company and each of its
affiliates on March 13, 1998. Mr. Mitchell has served as a consultant to
Applied since July 15, 1997 and receives compensation in the amount of $10,000
per month for services rendered to Applied in such capacity.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee was established in July 1996 and is
responsible for, among other things, establishing the compensation policies
applicable to executive officers of the Company. The Compensation Committee was
composed of David L. Mitchell (Chairman), Herbert A. Cohen and Edwin L. Harper,
Ph.D. at December 31, 1997, all of whom were non-employee directors of the
Company. Messrs. Mitchell, Cohen and Harper also constituted the Compensation,
Stock Option and Benefits Committee of Applied, and Messrs. Mitchell and Harper
also constituted two-thirds of the Compensation, Stock Option and Benefits
Committee of Separation at December 31, 1997. Decisions on compensation of the
executives officers of Applied and Separation were made by such individuals in
their capacities as members of the Compensation, Stock Option and Benefits
Committees of such companies. All decisions of the Compensation Committee
relating to the compensation of the Company's executive officers are reviewed
by, and are subject to the final approval of, the full Board of Directors of
the Company. Set forth below is a report prepared by Messrs. Mitchell, Cohen
and Harper, in their capacities as members of the Compensation Committee at
December 31, 1997, addressing the Company's compensation policies for 1997 as
they affected the Company's executive officers.
40
<PAGE>
Overview and Philosophy
The Company's executive compensation program is designed to be linked
to corporate performance and returns to stockholders. Of particular importance
to the Company is its ability to grow and enhance its competitiveness for the
rest of the decade and beyond. Shorter-term performance, although scrutinized
by the Compensation Committee, stands behind the issue of furthering the
Company's strategic goals. To this end, the Company has developed an overall
compensation strategy and specific compensation plans that tie a significant
portion of executive compensation to the Company's success in meeting specified
performance goals.
The objectives of the Company's executive compensation program are to:
o attract, motivate and retain the highest quality executives;
o motivate them to achieve tactical and strategic objectives in a
manner consistent with the Company's corporate values; and
o link executive and stockholder interest through equity-based plans
and provide a compensation package that recognizes individual
contributions as well as overall business results.
To achieve these objectives, the Company's executive compensation
program is designed to:
o focus participants on high priority goals to increase stockholder
value;
o encourage behavior that exemplifies the Company's values relating to
customers, quality of performance, employees, integrity, teamwork and
good citizenship;
o assess performance based on results and pre-set goals that link the
business activities of each individual to the goals of the Company;
and
o increase stock ownership to promote a proprietary interest in the
success of the Company.
Executive Officer Compensation
Each year the Compensation Committee conducts a full review of the
Company's executive compensation program. This review includes a comprehensive
evaluation of the competitiveness of the Company's compensation program and a
comparison of the Company's executive compensation to certain other public
companies which, in the view of the Compensation Committee, represent the
Company's most direct competitors for executive talent. It is the Compensation
Committee's policy to target overall compensation for executive officers of the
Company taking into account the levels of compensation paid for such positions
by such other public companies. A variety of other factors, however, including
position and time in position, experience, and both Company performance and
individual performance, will have an impact on individual compensation amounts.
The key elements of the Company's executive compensation program in
1997 consisted of base salary, annual incentive compensation and long-term
incentive compensation in the form of stock options. The Compensation
Committee's policies with respect to each of these elements, including the
basis for the compensation awarded to the Company's Chief Executive Officer,
are discussed below.
Base Salaries. Base salaries for executive officers are established by
evaluating, on an annual basis, the performance of such individuals (which
evaluation involves management's consideration of such factors as
responsibilities of the positions held, contribution toward achievement of the
Company's strategic plans, attainment of specific individual objectives and
interpersonal managerial skills), and by reference to the marketplace for
executive talent, including a comparison to base salaries for comparable
positions at other similar public companies.
41
<PAGE>
In 1997, total compensation was paid to executives primarily based
upon the terms of their employment agreements with the Company, if any, and
upon individual performance and the extent to which the business plans for
their areas of responsibility were achieved or exceeded. On balance,
performance goals were substantially met or exceeded and therefore compensation
was paid accordingly.
Mr. Hannesson, the Chairman of the Board, President and Chief
Executive Officer of the Company and Applied, and the Chairman of the Board and
Chief Executive Officer of Solution, Separation and CFC Technologies, receives
annual compensation based upon, among other things, the terms of his employment
agreement with the Company. Pursuant to the terms of his employment agreement,
Mr. Hannesson is entitled to receive a base salary at an annual rate of not
less than $395,000 through December 31, 1997, not less than $434,500 through
December 31, 1998 and not less than $477,950 through December 31, 1999 for
services rendered to the Company and certain of its affiliates, including
Applied and Separation.
The amount actually received by Mr. Hannesson each year as base salary
for services rendered to the Company and its affiliates is established by the
members of the Compensation Committee who, as set forth above, also constituted
the Compensation, Stock Option and Benefits Committee of Applied at December
31, 1997. In establishing Mr. Hannesson's base salary for 1997, the
Compensation Committee took into account the salaries of chief executive
officers at other similar public companies, future objectives and challenges,
and Mr. Hannesson's individual performance, contributions and leadership. The
Compensation Committee reviewed in detail Mr. Hannesson's achievement of his
1996 goals and his individual contributions to the Company and its affiliates.
The Compensation Committee concluded that he had achieved his 1996 goals and
had provided a leadership role in achieving the Company's and its affiliates'
strategic priorities for 1996. The Compensation Committee also considered Mr.
Hannesson's decisive management of operational and strategic issues, his drive
to reinforce a culture of innovation and his ability and dedication to enhance
the long-term value of the Company and its affiliates for their respective
stockholders. In making its salary decisions with respect to Mr. Hannesson, the
Compensation Committee exercised its discretion and judgement based on the
above factors, and no specific formula was applied to determine the weight of
each factor.
Mr. Hannesson's base salary increased from $310,627 for 1996 to
$395,000 for 1997, representing an increase of approximately 27%. Such base
salary was allocated among the Company, Applied and Separation based upon the
amount of time and effort devoted by Mr. Hannesson to the respective businesses
of such companies. Consequently, the Company, Applied and Separation paid
$15,302, $250,256 and $129,442, respectively, of such salary.
Annual Incentive Bonus. Annual incentive bonuses for executive
officers are intended to reflect the Compensation Committee's belief that a
significant portion of the annual compensation of each executive officer should
be contingent upon the performance of the Company.
For 1997, annual incentive bonuses were paid to the individuals named
in the Summary Compensation Table and certain other officers and employees of
the Company in part based upon recommendations of senior executive officers of
the Company as to appropriate levels of incentive compensation. The
Compensation Committee exercised its discretion to determine the final value of
each 1997 incentive award, which values were then reviewed and approved by the
full Board of Directors. The Compensation Committee assessed performance
against goals and leadership performance, with each of these two categories
weighted equally. The goal category included an evaluation of performance areas
such as increase in stockholder value, operations development and employee
satisfaction. The leadership category was evaluated based upon the Compensation
Committee's judgment of leadership performance, including factors such as
innovation, strategic vision, marketplace orientation, customer focus,
collaboration and managing change.
Pursuant to his employment agreement with the Company, Mr. Hannesson
is eligible to receive incentive compensation of up to $225,000 per year for
achieving certain of the performance goals set forth above. For 1997, Mr.
Hannesson was awarded an incentive bonus of $100,000. Such bonus was allocated
among the Company, Applied and Separation based upon the amount of time and
effort devoted by Mr. Hannesson to the respective
42
<PAGE>
businesses of such companies. Consequently, the Company, Applied and Separation
paid $3,874, $63,356 and $32,770, respectively, of such bonus.
Stock Options. The Compensation Committee has the power to grant stock
options under the Plan. With respect to executive officers, it has been the
Compensation Committee's practice to grant, on an annual basis, stock options
that vest at the rate of 20% upon grant and 20% in each calendar year
thereafter for four years, and that are exercisable over a ten-year period at
exercise prices per share set at the fair market value per share on the date of
grant. Generally, the executives must be employed by the Company at the time
the options vest in order to exercise the options and, upon announcement of a
Change in Control (pursuant to and as defined in the Plan), such options become
immediately exercisable. The Compensation Committee believes that stock option
grants provide an incentive that focuses the executives' attention on managing
the Company from the perspective of an owner with an equity stake in the
business. The Company's stock options are tied to the future performance of the
Company's stock and will provide value to the recipient only when the price of
the Company's stock increases above the option grant price.
A total of 6,155,000 stock options were granted in 1997, of which
3,450,000 were granted to Mr. Hannesson and 1,250,000 of which were granted (in
the aggregate) to the two other individuals named in the Summary Compensation
Table. The number of stock options granted in 1997 were determined by reference
to the long-term compensation for comparable positions at other similar public
companies and based upon an assessment of individual performance.
Impact of Section 162(m) of the Internal Revenue Code
The Compensation Committee's policy is to structure compensation
awards for executive officers that will be consistent with the requirements of
Section 162(m) of the U.S. Internal Revenue Code of 1986 (the "Code"). Section
162(m) limits the Company's tax deduction to $1.0 million per year for certain
compensation paid in a given year to the Chief Executive Officer and the four
highest compensated executives other than the Chief Executive Officer named in
the Summary Compensation Table. According to the Code and corresponding
regulations, compensation that is based on attainment of pre-established,
objective performance goals and complies with certain other requirements will
be excluded from the $1.0 million deduction limitation. The Company's policy is
to structure compensation awards for covered executives that will be fully
deductible where doing so will further the purposes of the Company's executive
compensation program. However, the Compensation Committee also considers it
important to retain flexibility to design compensation programs that recognize
a full range of performance criteria important to the Company's success, even
where compensation payable under such programs may not be fully deductible. The
Company expects that all compensation payments in 1997 to the individuals
listed in the Summary Compensation Table will be fully deductible by the
Company.
43
<PAGE>
Conclusion
The Compensation Committee believes that the quality of executive
leadership significantly affects the long-term performance of the Company and
that it is in the best interest of the stockholders to compensate fairly
executive leadership for achievement meeting or exceeding the high standards
set by the Compensation Committee, so long as there is a corresponding risk
when performance falls short of such standards. A primary goal of the
Compensation Committee is to relate compensation to corporate performance.
Based on the Company's performance in 1997, the Compensation Committee believes
that the Company's current executive compensation program meets such standards
and has contributed, and will continue to contribute, to the Company's and its
stockholders' long-term success.
COMPENSATION, STOCK OPTION AND BENEFITS COMMITTEE
David L. Mitchell (Chairman)
Herbert A. Cohen
Edwin L. Harper
The Report of the Compensation Committee on Executive Compensation
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Annual Report into any filing under the
Securities Act, or under the Exchange Act, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such acts.
44
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 26,
1998, with respect to the beneficial ownership of Company Common Stock by each
person know to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock of the Company, each director, each
individual listed in the Summary Compensation Table and all executive officers
and directors of the Company as a group, as reported by such persons. Unless
otherwise indicated, the owners have sole voting and investment power with
respect to their respective shares.
<TABLE>
<CAPTION>
Number of Shares Percentage of Outstanding
of Common Stock Common Stock
Name and Address of Beneficial Owner(1) Beneficially Owned(2) Beneficially Owned
- --------------------------------------- ---------------------- -----------------------------
<S> <C> <C>
Bentley J. Blum............................. 30,479,737(3) 49.4%
Paul E. Hannesson........................... 7,750,000(4) 12.1%
Credit Agricole Deux Sevres................. 6,000,000(5) 9.4%
Michael D. Fullwood......................... 200,000(6) *
Kenneth L. Adelman.......................... 385,000(7) *
Herbert A. Cohen............................ 105,000(8) *
David L. Mitchell........................... 105,000(8) *
All executive officers
and directors as
a group (6 persons)....................... 39,024,737 60.1%
</TABLE>
- -----------------------------------
Percentage ownership is less than 1%.
(1) The addresses of each of Bentley J. Blum, Paul E. Hannesson, Michael D.
Fullwood, Kenneth L. Adelman, Herbert A. Cohen and David L. Mitchell is
150 East 58th Street, Suite 3400, New York, New York 10155. 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 Exchange Act 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 28,479,737 shares and his
spouse's ownership of 2,000,000 shares of Common Stock of the Company,
representing together 49.4% of the outstanding shares of Company Common
Stock at March 26, 1998. Does not include 450,400 shares of Common Stock
owned by Simone Blum, the mother of Mr. Blum, and 385,000 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.
(4) Consists of an aggregate of: (i) 2,650,000 shares of Company Common Stock
owned by Suzanne Hannesson, the spouse of Mr. Hannesson; (ii) 2,650,000
shares of Company 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 1,950,000 shares of Company Common Stock at $0.53
per share and $0.84 per share, respectively, representing collectively
12.1% of the outstanding shares of Company Common
45
<PAGE>
Stock. Does not include 1,000,000 shares of Company Common Stock
owned by each of Jon Paul and Krista Hannesson, the adult children of
Mr. Hannesson, and additional stock options to purchase 1,500,000
shares of Company Common Stock at $0.84 per share, which vest and
become exercisable ratably on November 18 of each of 1998 through
2000. Mr. Hannesson disclaims any beneficial interest in the shares
of Company Common Stock owned by or for the benefit of his spouse and
children.
(5) Consists of: (i) the number of shares of Company 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 Company
Common Stock which could be acquired at any time upon the exercise of
outstanding warrants to acquire 1,500,000 shares of Company Common Stock
at $0.10 per share.
(6) Represents shares of Company Common Stock underlying currently
exercisable stock options granted to Mr. Fullwood by the Company under
the Plan.
(7) Consists of: (i) 105,000 shares of Company Common Stock underlying
currently exercisable stock options granted to Dr. Adelman by the Company
under the Plan in his capacity as a director of the Company; and (ii)
280,000 shares of Company Common Stock underlying currently exercisable
stock options granted to Dr. Adelman by the Company in his capacity as an
executive officer of Applied.
(8) Represents 105,000 shares of Company Common Stock underlying currently
exercisable stock options granted to each of Messrs. Mitchell and Cohen
by the Company.
46
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORGANIZATION AND CAPITALIZATION OF APPLIED
Since its acquisition of the capital stock of Commodore Laboratories,
Inc. (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, 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 Company Funding Note. Kraft Capital Corporation
("Kraft"), a corporation wholly owned by Bentley J. Blum, a principal
stockholder of the Company and a director of the Company, Applied, Separation,
Solution and CFC Technologies, provided approximately $656,000 of such
financing to the Company. The Company provided additional advances to Applied
of $978,896 for the first fiscal quarter of 1996, which were repaid by Applied
subsequent to its obtaining a line of credit from a commercial bank in April
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Liquidity and Capital Resources."
In March 1996, Applied was formed as a wholly-owned subsidiary of the
Company. Prior to the Applied IPO, in exchange for the issuance of 15,000,000
shares of Applied Common Stock (representing 100% of the outstanding shares of
Applied Common Stock at the time), 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
and the exploitation of the SET technology and processes in all commercial and
governmental applications; (ii) all of the outstanding shares of the capital
stock of each of Commodore Laboratories, 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 Laboratories, which at the time was held by
Albert E. Abel); and (iii) a portion of the Company 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 utilized $2.0 million
of the net proceeds of the Applied IPO to repay the line of credit, and Mr.
Blum's guarantee was released at such time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Upon completion of the Applied IPO in June 1996, the Company acquired
from Albert E. Abel the remaining 9.95% of the outstanding shares of common
stock of Commodore Laboratories, Inc. and contributed such shares to Applied
for no additional consideration. To acquire the remaining shares of Commodore
Laboratories, 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 the net payment to Mr. Abel
arising therefrom approximated $120,000. Applied paid such amount to Mr. Abel
from the proceeds of the Applied IPO.
In December 1996, as part of a corporate restructuring to consolidate
all of its current environmental technology businesses within Applied, the
Company transferred to Applied all of the capital stock of Separation and CFC
Technologies. 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 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. Such warrant
was subsequently amended to, among other things, reduce the exercise price
thereof from $15.00 per share to $10.00 per share. See "--February 1998
Intercompany Note" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
47
<PAGE>
SERVICES AGREMENT
In September 1997, the Company, Applied, Separation, Advanced
Sciences, and certain other affiliates of the Company (the "Affiliated
Parties") entered into a services agreement, dated as of September 1, 1997 (the
"Services Agreement"), whereby the Company and the Affiliated Parties agreed to
cooperate in sharing, where appropriate, costs related to accounting services,
financial management, human resources and personnel management and
administration, information systems, executive management, sales and marketing,
research and development, engineering, technical assistance, patenting, and
other areas of service as are appropriately and necessarily required in the
operations of the Company and the Affiliated Parties (collectively, the
"Services"). Pursuant to the Services Agreement, services provided by
professional employees of the Company and the Affiliated Parties to one another
are charged on the basis of time actually worked as a percentage of salary
(including cost of benefits) attributable to that professional. In addition,
charges for rent, utilities, office services and other routine charges
regularly incurred in the normal course of business are apportioned to the
professionals working in the office on the basis of salary, and then charged to
any party in respect of whom the professional devoted such time based upon time
actually worked. Furthermore, charges from third parties, including, without
limitation, consultants, attorneys and accountants, are levied against the
party actually receiving the benefit of such services. Pursuant to the Services
Agreement, Applied acts as the coordinator of billings and payments for
Services on behalf of itself, the Company and the other Affiliated Parties.
FEBRUARY 1998 PRIVATE PLACEMENT
In February 1998, the Company completed the First Tranche Sale in the
February 1998 Private Placement. After deduction of fees and transaction costs
associated with the First Tranche Sale totaling approximately $550,000, the
Company received aggregate net proceeds of approximately $5,450,000 from the
First Tranche Sale. The shares of Applied Common Stock that have been and may be
acquired by the investors in connection with the February 1998 Private Placement
have been and will be transferred from the Company's account which, immediately
prior to the First Tranche Sale, held approximately 52% of the outstanding
shares of Applied Common Stock. As of March 26, 1998, the Company owned
approximately 43% of the outstanding shares of Applied Common Stock.
Applied has agreed to file Registration Statements on Form S-3, or
other applicable form of registration statement, under the Securities Act
covering all of the shares of Applied Common Stock issued and to be issued to
the investors in the February 1998 Private Placement and to keep such
Registration Statements continuously effective under the Securities Act for the
Effective Period. See "Market for Registrant's Common Equity and Related
Stockholder Matters--Recent Sales of Unregistered Securities--February 1998
Private Placement."
FEBRUARY 1998 INTERCOMPANY NOTE
Upon receipt of the net proceeds from the February 1998 Private
Placement, the Company provided a $5,450,000 unsecured loan to Applied,
evidenced by Applied's 8% non-convertible note (the "Intercompany Note").
Pursuant to the terms of the Intercompany Note, interest on the unpaid
principal balance of the Intercompany Note is payable at the rate of 8% per
annum semiannually in cash. The unpaid principal amount of the Intercompany
Note is due and payable, together with accrued and unpaid interest, on the
earlier to occur of (a) December 31, 1999, or (b) consummation of any public
offering or private placement of securities of Applied with net proceeds
aggregating in excess of $6.0 million, other than in respect of working capital
financing or secured financing of assets received by Applied in the ordinary
course of business from any bank or other lending institution, provided that if
such funds are raised in a private placement during the period commencing on
February 9, 1998 and ending on the last day of the Effective Period, then the
Intercompany Note will not be payable unless a Registration Statement has been
effective for 75 consecutive days and is effective on the date of such
repayment. Applied will use the net proceeds of the loan solely for working
capital and general corporate purposes and not for the satisfaction of any
portion of Applied debt or to redeem any Applied equity or equity-equivalent
securities. See "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities--February 1998 Private
Placement" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
48
<PAGE>
In connection with the loan, Applied amended and restated in its
entirety a five-year warrant to purchase 7,500,000 shares of Applied Common
Stock issued to the Company on December 2, 1996 to, among other things, reduce
the exercise price of the warrant from $15.00 per share to $10.00 per share. In
addition, Applied issued to the Company an additional five-year warrant to
purchase 1,500,000 shares of Applied Common Stock at an exercise price of
$10.00 per share. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
1997 PRIVATE PLACEMENT
In May and August 1997, the Company sold an aggregate of 88,000 shares
of its Series D Preferred Stock and five-year warrants to purchase an aggregate
of 1,175,000 shares of Applied Common Stock held by the Company in the 1997
Private Placement. After deduction of fees and transaction costs associated
with the 1997 Private Placement totaling approximately $968,000, the Company
received aggregate net proceeds of approximately $7.8 million from the 1997
Private Placement. Affiliates of the finder received warrants to purchase an
aggregate of 85,000 shares of Applied Common Stock held by the Company. The
Series D Preferred Stock is convertible into shares of Applied Common Stock
held by the Company, at a conversion price equal to 85% of the lower of (a) the
average of the low prices, or (b) the Average Closing Bid Price. The conversion
price of the Series D Preferred Stock will be equal to certain amounts set
forth in the Certificate of Designation, Rights and Preferences for the Series
D Preferred Stock if the Average Closing Bid Price of Applied Common Stock for
any consecutive 30 days is equal to or less than $2.00, provided that in no
event will the conversion price of the Series D Preferred Stock be less than
$1.50.
Applied has an effective registration statement on file with the
Commission covering the shares of Applied Common Stock into which the shares of
Series D Preferred Stock are convertible, as well as the 1,260,000 shares of
Applied Common Stock transferable upon exercise of the warrants issued in the
1997 Private Placement. See "Market for Registrant's Common Equity and Related
Stockholder Matters--Recent Sales of Unregistered Securities--1997 Private
Placement."
SEPTEMBER 1997 INTERCOMPANY CONVERTIBLE NOTE
In September 1997, the Company provided a $4.0 million unsecured loan
to Applied, evidenced by Applied's 8% convertible subordinated note (the
"Convertible Note"). Pursuant to the terms of the Convertible Note, Applied is
obligated to pay the Company interest only at the rate of 8% per annum, payable
quarterly. Unless converted into Applied Common Stock at any time, the unpaid
principal amount of the Convertible Note is due and payable, together with
accrued and unpaid interest, on August 31, 2002. Payments of principal and
accrued interest under the Convertible Note is subordinated to all other
indebtedness for money borrowed of Applied. The Company has the right to
convert the Convertible Note into shares of Applied Common Stock at a
conversion price of $3.89 per share. Such conversion price was fixed at
approximately 85% of the five day average closing bid price of Applied Common
Stock ($4.575 per share) prior to August 22, 1997, the date that the executive
committees of the respective Boards of Directors of the Company and Applied
authorized such loan. In connection with the $4.0 million loan, Applied issued
the Company a five-year warrant to purchase 1,000,000 shares of Applied Common
Stock at an exercise price of $5.0325 per share (approximately 110% of the
$4.575 five day average closing bid price of Applied Common Stock prior to
August 22, 1997).
In March 1998, Applied prepaid $2.0 million of the Convertible Note by
(i) paying the Company the sum of $500,000 in cash and (ii) transferring to the
Company a promissory note, dated August 30, 1996, in the principal amount of
$1.5 million, which evidenced a $1.5 million loan from Applied to LPM, a
wholly-owned subsidiary of Lanxide. To induce the Company to accept Applied's
prepayment of $2.0 million of the Convertible Note (and thereby give up the
right to convert $2.0 million of the Convertible Note into Applied Common
Stock), Applied issued to the Company an additional warrant to purchase up to
514,000 shares of Applied Common Stock at an exercise price of $4.50 per share.
Such exercise price was fixed at approximately 110% of the closing sale price of
Applied Common Stock on February 20, 1998, the trading day immediately prior to
the date the Board of Directors of the Company approved such prepayment. The
estimated fair value of such warrant is approximately $340,000. See
"--Transactions with Lanxide" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
49
<PAGE>
TRANSACTIONS WITH LANXIDE
In November 1996, the Company loaned $3.0 million to LPM, a
wholly-owned subsidiary of Lanxide. Lanxide is affiliated with the Company by
significant common beneficial ownership. The loan was evidenced by the LPM
Note, which was collateralized by the assets of LPM and guaranteed by Lanxide.
The LPM Note became due on February 28, 1998.
In July 1997, the Company obtained effective control of Lanxide
pursuant to a voting agreement (the "Voting Agreement") among Lanxide, certain
of its stockholders, Bentley J. Blum, a director and principal stockholder of
the Company, Paul E. Hannesson, the Chairman of the Board, President and Chief
Executive Officer of the Company, and David L. Mitchell, Herbert A. Cohen and
Kenneth L. Adelman, each of whom are directors of the Company (Messrs. Blum,
Hannesson, Mitchell, Cohen and Adelman are collectively referred to as the
"Proxy Holders"), which was executed in connection with the transactions
contemplated by the Securities Purchase Agreement, dated July 3, 1997, between
the Company and Lanxide (the "Securities Purchase Agreement"). Pursuant to the
Voting Agreement, stockholders of Lanxide owning 50.1% of the outstanding
shares of Lanxide common stock (which included Messrs. Blum and Hannesson and
certain of their family members) granted proxies to the Proxy Holders to vote
all shares of Lanxide common stock held by each such stockholder until December
31, 1998.
Pursuant to the Securities Purchase Agreement, the Company purchased
20,000 shares of Lanxide Series G Preferred Stock for $2.0 million. In
addition, pursuant to the Securities Purchase Agreement, Lanxide issued to the
Company a warrant to purchase up to 250,000 shares of Lanxide Series F
Preferred Stock at an exercise price of $100 per share (the "Series F
Warrant"). The Series F Warrant was exercisable, in part, by the exchange of
the 20,000 shares of Lanxide Series G Preferred Stock for a like number of
shares of Lanxide Series F Preferred Stock. The Securities Purchase Agreement
further provided that if prior to August 27, 1997, the Company received $10.5
million in financing, the Company would purchase an additional 85,000 shares of
Lanxide Series G Preferred Stock for an aggregate purchase price of $8.5
million comprised of (i) $4.0 million in cash and (ii) the cancellation of
LPM's outstanding indebtedness to the Company and Applied in the aggregate
amount of $4.5 million. On August 27, 1997, the Company informed Lanxide that
it had not completed the required financing and that it would not purchase the
additional 85,000 shares of Lanxide Series G Preferred Stock.
The Lanxide Series G Preferred Stock was not convertible and was not
entitled to vote or to receive dividends. The Lanxide Series G Preferred Stock
was redeemable by Lanxide after December 31, 1998 to the extent such shares
were not used to exercise the Series F Warrant. The terms of the Lanxide Series
F Preferred Stock included, among other things: (i) the right to convert the
Lanxide Series F Preferred Stock into shares of Lanxide common stock at a rate,
subject to adjustment, of 13.5 shares of Lanxide common stock for each share of
Lanxide Series F Preferred Stock; (ii) a mandatory conversion by the holders
upon certain events, including the sale by Lanxide of at least $10.0 million of
Lanxide securities in a private placement prior to the time that the Company
exercised at least $10.0 million of the Series F Warrant; and (iii) the right
to elect four of the seven members of the Lanxide board of directors.
In March 1998, as partial prepayment of the Convertible Note, Applied
paid the Company $500,000 in cash and transferred to the Company the promissory
note evidencing the $1.5 million loan from Applied to LPM in August 1996. See
"--1997 Intercompany Convertible Note." Upon receipt thereof, the Company and
Lanxide entered into a series of transactions pursuant to which, among other
things, the Company paid to a subsidiary of Lanxide the $500,000 in cash it
received from Applied and cancelled the $3.0 million LPM Note and the $1.5
million indebtedness of LPM to Applied (which was guaranteed by Lanxide) in
exchange for the CERASET Business, CERASET License and CERASET Trademark. See
"Business--Polymer Manufacturing and Sales."
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<PAGE>
Pursuant to the terms of the CERASET License, Polymer Technologies has
agreed to pay a subsidiary of Lanxide a royalty equal to 4% of the net sales
price of all products sold by Polymer Technologies and any of its sublicensees,
which are manufactured using the CERASET technology until the aggregate royalty
payments equal $4.0 million. Thereafter, Lanxide's subsidiary will be entitled
to receive a royalty equal to 2% of the net sales price of all products sold by
Polymer Technologies and its sublicensees, which are manufactured using the
CERASET technology. See "Business--Polymer Manufacturing and Sales."
In connection with the Company's acquisition of the CERASET Business,
CERASET License and CERASET Trademark, the Company and Lanxide amended the
Securities Purchase Agreement, pursuant to which, among other things, (i) the
Company and Lanxide each agreed to exchange all of the issued and outstanding
shares of Lanxide Series G Preferred Stock held by the Company for an equal
number of Lanxide Series H Preferred Stock, (ii) the Company's right to
purchase additional shares of Lanxide Series G Preferred Stock pursuant to the
Securities Purchase Agreement was cancelled, (iii) Lanxide issued a warrant to
the Company for the purchase of up to 270,000 shares of Lanxide common stock,
at an exercise price of $7.41 per share, which exercise price may be paid by
the tender of shares of Lanxide Series H Preferred Stock (the "Lanxide
Warrant"), and (iv) the Company's right to purchase 250,000 shares of Lanxide
Series F Preferred Stock pursuant to the Series F Warrant was cancelled. The
Lanxide Series H Preferred Stock is not convertible and is not entitled to vote
or to receive dividends. The Lanxide Series H Preferred Stock is redeemable by
Lanxide after December 31, 1998 to the extent such shares are not used to
exercise the Lanxide Warrant.
In addition, the Company, Applied, Lanxide and LPM entered into a
settlement and release agreement pursuant to which, among other things, the
parties acknowledged and agreed that the Voting Agreement was terminated on
February 5, 1998, and the parties released each other from any and all claims
arising out of the $3.0 million loan from the Company to LPM, the $1.5 million
loan from Applied to LPM, the Securities Purchase Agreement, and the Voting
Agreement.
LICENSE OF SET TECHNOLOGY
As a result of its acquisitions of the capital stock of Commodore
Laboratories, Applied acquired all patents, discoveries, technology and other
intellectual property in connection with the SET process which it later
transferred to Solution in December 1996. The Company licenses from Solution 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 all patents
now or hereafter owned by Solution, the SET 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 Solution's patents and technologies
to the CFC Business.
CFC TECHNOLOGY AND SUPPORT AGREEMENT
The Company has entered into a five-year technology and technical
support agreement with Applied 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 Technologies 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 the Applied be required to expend
in excess of 25% of their business and professional time in any 90-day period
in rendering services to the Company or CFC Technologies, without the majority
approval or consent of Herbert A. Cohen and David L. Mitchell, or such other
members of the Board of Directors of the Company not otherwise affiliated with
or employed by the Company, Applied or any of their respective subsidiaries.
51
<PAGE>
FUTURE TRANSACTIONS
In June 1996, the Company's Board of Directors adopted a policy
whereby any future transactions between the Company and any of its
subsidiaries, affiliates, officers, directors and principal stockholders, or
any affiliates of the foregoing, be on terms no less favorable to the Company
than could reasonably be obtained in "arm's-length" transactions with
independent third parties, and any such transactions also be approved by a
majority of the Company's disinterested non-management directors.
52
<PAGE>
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>
Financial Statements.
Report of Independent Accountants................................................. F-1
Independent Auditor's Report...................................................... F-1A
Consolidated Balance Sheet as of December 31, 1996 and 1997....................... F-2
Consolidated Statement of Operations for the years ended
December 31, 1995, 1996 and 1997......................................... F-3
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997................................... F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1996 and 1997......................................... F-5
Notes to Consolidated Financial Statements........................................ F-6
</TABLE>
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.
Exhibits.
<TABLE>
<CAPTION>
Exhibits No. Description
- ------------ -----------
<S> <C>
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 Gas Corporation with respect to
Oklahoma Oil & Gas Field. (3)
10.3 Operating Agreement, dated March 22, 1991 with Ameritech Oil and Gas Corporation with respect
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)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Exhibits No. Description
- ------------ -----------
<S> <C>
10.6 Option Agreement, dated March 15, 1993, by and among Commodore Environmental Services, Inc.
and Paul Hannesson. (4)
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)
10.27 Employment Agreement, dated June 1, 1995, by and between Commodore Environmental Services,
Inc. and Neil Drobny. (7)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Exhibits No. Description
- ------------ -----------
<S> <C>
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)
*10.40 Warrant, dated March 5, 1998, issued by Lanxide Corporation to the Company.
*10.41 Settlement and Release Agreement, dated March 5, 1998, by and among Lanxide Corporation,
Lanxide Performance Materials, Inc., Marc S. Newkirk, the Company and Applied.
*10.42 Amendment to Securities Purchase Agreement, dated March 5,
1998, by and between the Company and Lanxide Corporation.
*10.43 License Agreement, dated as of March 5, 1998, by and among Commodore Polymer Technologies,
Inc., Lanxide Corporation and Lanxide Technology Company L.P.
*21.1 Subsidiaries of the registrant.
*27.1 Financial Data Schedule.
</TABLE>
- -------------------
* Filed herewith.
(1) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated April 14, 1988.
(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.
55
<PAGE>
(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 Registrant'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 3, 1997, the Company filed with the Securities and Exchange
Commission Amendment No. 1 on Form 8-K/A to the Company's Current Report on Form
8-K, dated May 20, 1997, with respect to the 1997 Private Placement, and its
$4.0 million loan to Applied in September 1997. Such transactions were reported
under Item 5 of Form 8-K and no financial statements were included in such
report.
56
<PAGE>
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.
Dated: April 6, 1998 COMMODORE ENVIRONMENTAL SERVICES, INC.
By: /s/ Paul E. Hannesson
-------------------------------------
Paul E. Hannesson
Chairman of the Board,
President and Chief Executive Officer
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>
<CAPTION>
<S> <C> <C>
/s/ Paul E. Hannesson Chairman of the Board, President and April 6, 1998
- ------------------------ Chief Executive Officer (principal
Paul E. Hannesson executive officer)
/s/ Michael D. Fullwood Senior Vice President, Chief Financial April 6, 1998
- ------------------------ and Administrative Officer, Secretary and
Michael D. Fullwood General Counsel (principal financial and
accounting officer)
/s/ Paul E. Hannesson Chairman of the Board April 6, 1998
- ------------------------
Paul E. Hannesson
/s/ Kenneth L. Adelman Director April 6, 1998
- ------------------------
Kenneth L. Adelman
/s/ Bentley J. Blum Director April 6, 1998
- ------------------------
Bentley J. Blum
/s/ Herbert A. Cohen Director April 6, 1998
- ------------------------
Herbert A. Cohen
/s/ David L. Mitchell Director April 6, 1998
- ------------------------
David L. Mitchell
</TABLE>
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
Financial Statements
- --------------------
Report of Independent Accountants................................ F-1
Independent Auditor's Report..................................... F-1A
Consolidated Balance Sheet as of December 31, 1996 and 1997...... F-2
Consolidated Statement of Operations for the years ended
December 31, 1995, 1996 and 1997.............................. F-3
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997.............................. F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.............................. F-5
Notes to Consolidated Financial Statements....................... F-6
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.
<PAGE>
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,
1997 and 1996, and the results of their operations and their cash flows for the
years then ended 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 audits. We conducted our audits 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 audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
March 30, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Commodore Environmental Services, Inc.
We have audited the accompanying statements of operations and
stockholders' equity and cash flows for the year ended December 31, 1995 of
Commodore Environmental Services, Inc. and subsidiaries. These consolidated
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 audit.
We conducted our audit 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 statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Commodore Environmental Services, Inc. and subsidiaries for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
TANNER + CO.
Salt Lake City, Utah
February 6, 1996
F-1A
<PAGE>
Commodore Environmental Services, Inc.
and Subsidiaries
Consolidated Balance Sheet
December 31, 1997 and 1996
(Dollars in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2) $13,542 $15,280
Accounts receivable, net (Note 2 and 5) 3,064 7,149
Notes and advances to related parties 3,866 3,034
Restricted cash and certificates of deposit (Note 2) 310 670
Inventory 360 -
Prepaid assets and other current receivables 402 582
------- -------
Total current assets 21,544 26,715
Certificates of deposit and restricted cash (Note 2) - 1,145
Other receivables (Note 5) 516 384
Investments and advances (Note 7) 911 1,015
Property and equipment, net (Notes 2 and 8) 2,498 2,044
Non-performing notes receivable (Note 6) 912 912
Other assets (Notes 2):
Deferred financing costs, net of accumulated amortization of $384 and $288, respectively 96 192
Patents and completed technology, net of accumulated amortization of
$238 and $140, respectively 1,150 1,004
Goodwill, net of accumulated amortization of $320 and $113, respectively 7,353 7,560
Other 36 142
------- -------
8,635 8,898
------- -------
Total Assets $35,016 $41,113
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payables $ 2,150 $ 3,801
Line of credit and current portion of long-term debt (Notes 10 and 11) 1,226 7,131
Other accrued liabilities (Note 9) 4,960 2,941
------- -------
Total current liabilities 8,336 13,873
Insurance loss reserve (Notes 2 and 17) - 1,275
Bonds payable and other long-term debt (Note 11) 4,019 4,029
Deferred gain 656 690
Promissory note to related party (Note 4) 2,250 2,250
------- -------
Total Liabilities 15,261 22,117
Minority interests in consolidated subsidiaries 12,558 6,165
Commitments and contingencies (Note 17) - -
Redeemable Preferred Stock (Note 13)
Series D Preferred Stock, par value $0.01 per share, 7% annual cumulative dividends
46,800 shares outstanding 3,557 -
Stockholders' equity (Note 14):
Preferred Stock, par value $0.01 per share, authorized 10,000,000 shares,
issued and outstanding 4,309,577 shares and 4,649,917 shares 43 46
Common Stock, par value $0.01 per share, authorized 100,000,000 shares,
issued 59,233,583 shares and 57,924,368 shares 592 579
Additional paid-in capital 46,074 41,768
Accumulated deficit (43,044) (29,537)
------- -------
3,665 12,856
Less 506,329 common shares of treasury stock, at cost (25) (25)
------- -------
Total Stockholders' Equity 3,640 12,831
------- -------
Total Liabilities and Stockholders' Equity $35,016 $41,113
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
Commodore Environmental Services, Inc.
and Subsidiaries
Consolidated Statement of Operations
Years Ended December 31, 1997, 1996 and 1995
(Dollars in Thousands, Except Per Share Data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Contract revenues (Note 2) $ 19,493 $ 5,123 $ -
Income from commercial real estate activities (Notes 2 and 6) - - 1,041
Other operating income - 130 3
-------- ------- -------
Total revenues 19,493 5,253 1,044
Costs and expenses:
Cost of sales 16,325 4,291 -
Research and development (Note 2) 3,074 2,997 1,990
General and administrative 17,058 6,064 1,518
Depreciation and amortization (Note 2) 1,282 561 -
In-process technology acquired - 78 -
-------- ------- -------
Total costs and expenses 37,739 13,991 3,508
-------- ------- -------
Loss before interest, taxes and equity in affiliate
losses and minority interests (18,246) (8,738) (2,464)
Interest income 1,004 621 45
Gain on sale of subsidiary stock 1,896 - -
Interest expense (1,052) (808) (550)
Income tax expense (Note 12) - - -
-------- ------- -------
Net loss before affiliate losses (16,398) (8,925) (2,969)
Equity in losses of unconsolidated affiliate (1,827) (495) -
-------- ------- -------
Loss before minority interests (18,225) (9,420) (2,969)
Minority interests in consolidated subsidiaries 4,718 1,109 -
-------- ------- -------
Net loss $(13,507) $(8,311) $(2,969)
======== ======= =======
Net loss per share - basic and diluted (Note 3) $ (0.27) $ (0.15) $ (0.06)
======== ======= =======
Number of weighted average shares outstanding (in thousands) 58,482 57,454 56,212
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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 31, 1995 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)
Sale 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
Sale of Series C Preferred Stock 115,208 1 - - 105 - -
Dividend on Preferred Stock - - - - (300) - -
Equity gains on changes of interest
in consolidated subsidiaries - - - - 22,543 - -
Net loss - - - - - (8,311) -
--------- ---- ---------- ---- ------- -------- ----
BALANCE, DECEMBER 31, 1996 4,649,917 46 57,924,368 579 41,768 (29,537) (25)
Issuance of Common Stock for services - - 500,000 5 308 - -
Issuance of Common Stock - exercise
of options and warrants - - 512,435 5 44 - -
Issuance of Common Stock -
conversion of Preferred Stock (340,340) (3) 296,780 3 - - -
Issuance of stock options for services - - - - 650 - -
Dividends on Preferred Stock - - - - (1,766) - -
Equity gains on changes of interest
in consolidated subsidiaries - - - - 3,517 - -
Beneficial conversion feature on
Series D Preferred Stock - - - - 1,553 - -
Net loss - - - - - (13,507) -
--------- ---- ---------- ---- ------- -------- ----
BALANCE, DECEMBER 31, 1997 4,309,577 $43 59,233,583 $592 $46,074 $(43,044) $(25)
========= ==== ========== ==== ======= ======== ====
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,507) $(8,311) $(2,969)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interests in losses of subsidiaries (4,718) (1,109) --
Depreciation and amortization 1,282 561 106
Equity in losses of unconsolidated subsidiary 1,827 495 --
Provision for (recovery of) related party bad debt 1,043 -- (573)
Provision for investment in related party 2,000 -- --
Gain on sale of subsidiary stock (1,896) -- --
Issuance of Common Stock and stock options for services 936 59 --
Other non-cash charges 197 150 96
Changes in assets and liabilities, net of acquisition:
Accounts receivable 4,085 (2,326) --
Other receivables (132) (81) --
Patents (401) (213) (137)
Inventory (360) -- --
Restricted cash 1,505 179 (1,501)
Prepaid and other assets 180 (225) (78)
Other assets 106 (108) --
Accounts payables (1,651) 567 --
Insurance loss reserve (1,275) 281 --
Other accrued liabilities (196) 154 (369)
-------- ------- -------
Net cash used in operating activities (10,975) (9,927) (5,425)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivables -- -- 3,242
Increase in related party receivables (1,875) (2,902) 1
Purchase of property and equipment (1,409) (881) (387)
Increase in investments and advances (1,723) (1,153) --
Investment in related party (2,000) -- --
Cash acquired in subsidiary's acquisition -- 199 --
Purchase of minority interest in subsidiary -- (750) --
-------- ------- -------
Net cash provided by (used in) investing activities (7,007) (5,487) 2,856
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subsidiaries' sale of common and preferred stock 15,097 30,551 --
Proceeds from exercise of options and warrants 49 95 24
Proceeds from the sale of redeemable preferred stock 7,612 106 100
Borrowings under (repayments on) line of credit (5,843) 1,361 --
Payments on long-term debt (72) (255) (24)
Preferred stock cash dividends (289) (300) (297)
Preferred stock dividends paid by subsidiary (438) -- --
Borrowings from (repayments to) related parties 128 (900) (209)
-------- ------- -------
Net cash provided by (used in) financing activities 16,244 30,658 (406)
-------- ------- -------
Increase (decrease) in cash (1,738) 15,244 (2,975)
Cash, beginning of period 15,280 36 3,011
-------- ------- -------
Cash, end of period $ 13,542 $15,280 $ 36
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 972 $ 169 $ 454
-------- ------- -------
Taxes paid $ -- $ 53 $ 81
-------- ------- -------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-5
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
(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
destruction and neutralization 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 development effects, licensing arrangements
and joint ventures. Through Commodore 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 ASI'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.
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.
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).
Contracts. Substantially all of Commodore's revenues are derived from ASI,
consisting 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
using the percentage of completion
F-6
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
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 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.
Direct and indirect contract costs are subject to audit by the Defense
Contract Audit Agency ("DCAA"). Management does not expect these amounts
to materially affect the financial statements and has established
appropriate allowances 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, 1995. 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.
Commodore had revenues from one significant contract representing 65% of
total contract revenues for the year ended December 31, 1997. This
contract is scheduled to end on September 30, 1998, but has two one-year
renewal options.
Cash and Cash Equivalents
Commodore considers cash and highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Commodore's
investments in cash equivalents are diversified among securities with high
ratings in accordance with Commodore's investment policy.
Restricted Cash and Certificates of Deposit
Restricted cash at December 31, 1997 and 1996 consisted of $260 and $670,
respectively, held in an interest bearing deposit accounts as collateral
for the line of credit, as collateral for a performance bond, and as
deposits on certain leased property. At December 31, 1996, the Company held
certificates of deposit totalling $1,095 pursuant to the Harvest American
Insurance Company settlement agreement (see Note 17). In addition,
Commodore maintained $50 in certificates of deposit as security on a line
of credit at December 31, 1997 and 1996, respectively. Restricted cash and
certificates of deposit are classified according to the term of their
restriction.
Concentration of Credit Risk
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.
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.
F-7
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
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, which range from 2-10 years.
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 4). 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 consolidated subsidiaries. Completed technology
and patents are being amortized on a straight-line basis over their
estimated 7 and 17 year lives, respectively. Commodore annually evaluates
the existence of impairment on the basis of whether the goodwill, 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.
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. Provision is
made to reduce deferred tax assets to their estimated net realizable
value.
Research and Development
Research and development expenditures are charged to operations as
incurred.
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, accounts receivable, notes receivables, long-term debt
and line of credit 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, 1997 and 1996.
Segment Reporting
Commodore currently has one principal business line in environmental
technologies. In 1995 and prior, Commodore's principal activity was real
estate. Commodore and its subsidiaries operate primarily in the United
States.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-8
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued its
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
on Comprehensive Income," effective for fiscal years beginning after
December 15, 1997. SFAS 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital on the
balance sheet.
Also in June 1997, the FASB issued SFAS 131, "Disclosures About Segments
of an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997.
Commodore is currently analyzing the effect these standards will have upon
the disclosure in the financial statements and notes thereto.
In 1997, the FASB also issued SFAS 128, "Earnings Per Share" and SFAS 129,
"Disclosure of Information About Capital Structure." Both statements are
effective for periods ending after December 15, 1997 and neither has had a
material impact on the financial position or results of operations of
Commodore.
3. Earnings Per Share
All earnings per share amounts reflect the implementation of SFAS 128.
SFAS 128 established new standards for computing and presenting earnings
per share and requires all prior period earnings per share data be
restated to conform with the provisions of the statement. Basic earnings
per share are computed by dividing net income available to common
shareholders, by the weighted average number of shares outstanding during
the period, as restated for shares issued in business combinations
accounted for as poolings-of-interests and stock dividends. Diluted
earnings per share are computed using the weighted average number of
shares determined for the basic computations plus the number of shares of
Common Stock that would be issued assuming all contingently issuable
shares having a dilutive effect on earnings per share were outstanding for
the period.
F-9
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
(Dollars in thousands, except per share data)
Net loss $ (13,507) $ (8,311) $ (2,969)
Preferred stock dividends (1,766) (300) (297)
Dividends on Series D preferred stock (not declared) (232) -- --
------------ ------------ ------------
Net loss applicable to shareholders $ (15,505) $ (8,611) $ (3,266)
============ ============ ============
Weighted average common shares outstanding (basic) 58,482,000 57,454,000 56,212,000
Employee stock options (Note 15) (*) (*) (*)
Series AA convertible preferred stock (Note 14) (*) (*) (*)
Series B convertible preferred stock (Note 14) (*) (*) (*)
Series C convertible preferred stock (Note 14) (*) (*) --
Warrants issued in connection with various transactions (Note 15) (*) (*) (*)
------------ ------------ ------------
Weighted average common shares outstanding (diluted) 58,482,000 57,454,000 56,212,000
Loss per share (basic) $ (0.27) $ (0.15) $ (0.06)
------------ ------------ ------------
Loss per share (diluted) $ (0.27) $ (0.15) $ (0.06)
------------ ------------ ------------
</TABLE>
(*) Due to Commodore's loss from continuing operations in 1997, 1996 and 1995,
the incremental shares issuable in connection with these instruments are
anti-dilutive and accordingly not considered in the calculation.
4. Consolidated Subsidiaries
Commodore Applied Technologies, Inc.
At December 31, 1997 and 1996, Commodore owned 56% and 69%, respectively,
of the Common stock outstanding of its consolidated subsidiary, Commodore
Applied Technologies, Inc. ("Applied"). Commodore capitalized Applied in
March 1996 by exchanging the capital stock of other consolidated
subsidiaries; rights, titles, assets and properties related to certain
proprietary technology; and a promissory note for all 15,000,000 newly
issued shares of Applied.
In June 1996, Applied made a public offering of 5,750,000 shares of its
$.001 par value Common Stock for $6.00 per share. Along with each share
was one detachable warrant valued at $.10, which entitles its owner to
purchase one share of Applied 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 $18.00 per
share. Net proceeds from the offering were $30,551. Commodore's $21,641
gain on this transaction was recorded as a direct increase in Commodore's
paid-in capital because of Applied's early stage of development.
F-10
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
In July 1996, Commodore acquired the remaining minority interests in
another consolidated subsidiary and contributed its investment to Applied.
The excess of Commodore'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.
In August 1997, Applied sold 18,000 shares of its Series A Preferred Stock
for an aggregate purchase price of $1,800. The Series A Preferred Stock
has a liquidation preference of $100 per share plus accumulated and unpaid
dividends and pays a 7% annual cumulative dividend. The Series A Preferred
Stock is convertible at the option of investors into Applied Common Stock
and also contains certain mandatory redemption features.
In December 1997, stockholders owning 8,400 shares of Applied's Series A
Preferred Stock elected to convert their shares to Applied Common Stock.
Commodore's $376 gain on these conversions was recorded as a direct
increase in paid-in capital. No cash dividends were paid on the Applied
Series A Preferred Stock in 1997.
In September 1997, Commodore provided a $4,000, 8% convertible unsecured
loan to Applied. Unless converted into Common Stock, interest on the
convertible loan is payable quarterly and the unpaid principal is payable
on August 31, 2002. Commodore has the right to convert the loan into shares
of Applied Common Stock at a conversion price of $3.89 per share, a 16%
discount from the market price at the date of closing, subject to
adjustment based on a number of factors. As of December 31, 1997, the
conversion price on the convertible loan remained $3.89 per share. In
connection with the $4,000 loan, Applied issued Commodore a five-year
warrant to purchase 1,000,000 shares of Common Stock at an exercise price
of $5.03 per share, 109% of the market price on the date of closing.
In October 1997, Applied sold 700,000 shares of Common Stock for net
proceeds of approximately $2,344. Commodore's $420 gain on this
transaction was recorded as a direct increase in paid-in capital. The
sales agreement related to these shares specified certain price reset
provisions. At December 31, 1997, the aggregate price reset amount was
$1,198 which has been accrued by Applied as a liability.
Commodore Separation Technologies, Inc.
On December 2, 1996 Applied purchased three wholly-owned subsidiaries of
Commodore, including Commodore Separation Technologies Inc.
("Separation"), 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. These
warrants were amended in February 1998 (see Note 18). The acquisition was
accounted for as a transaction between entities under common control
(carryover basis).
In April 1997, Separation completed an initial public offering of its
Common and Preferred equity securities from which it received net proceeds
of approximately $6,109 and $4,978, respectively. This offering reduced
Applied's equity ownership in Separation from 100 percent to 87 percent.
F-11
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
Commodore's $2,721 gain on this transaction was recorded as a
direct increase in Commodore's paid-in capital because Separation is a
development stage company.
Minority interests in Separation at December 31, 1997 consist of the
Separation Preferred Stock and warrants to purchase Separation Common
Stock, both of which were sold in Separation's initial public offering. By
December 31, 1997, all other minority interests in Separation's Common
Equity had been reduced to zero, resulting in 100% of the losses of
Separation being absorbed by Commodore. The face value and liquidation
value of the Separation Preferred Stock is $6,000. The non-cumulative
dividend rate on the Separation Preferred Stock is 10%. For the year ended
December 31, 1997, Separation paid dividends to its Preferred shareholders
of $438.
Advanced Sciences, Inc.
On October 1, 1996, Applied acquired all of the outstanding voting common
stock of ASI and A.S. Environmental, Inc. ("ASE"). The acquisition was
recorded using the purchase method of accounting. Accordingly, the results
of operations of ASI have been included in the consolidated results of
Commodore 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.
The fair value of the underlying net liabilities of ASI totaled $5,423,
resulting in $7,673 of goodwill associated with the acquisition.
Commodore's $902 gain on this transaction was recorded as a direct
increase in paid-in capital.
The unaudited pro forma combined results of operations of Commodore for
the year ended December 31, 1996, as if the acquisition had occurred on
January 1, 1996, are as follows:
1996
----
Revenues $ 26,779
Net loss (12,529)
Net loss per share (0.22)
Minority Interests in Consolidated Subsidiaries
Minority interests in Applied at December 31, 1997 consist of the minority
interests in Separation previously discussed, Applied Redeemable Preferred
Stock, warrants outstanding to purchase shares of Applied Common Stock, and
minority shareholders of Applied Common Stock. See Note 18 regarding
changes in ownership interests subsequent to December 31, 1997.
F-12
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
5. Receivables
The components of Commodore's trade receivable are as follows as at
December 31, 1997 and 1996:
December 31,
--------------------
1997 1996
---- ----
Contract receivables:
Amount billed $ 3,285 $ 7,060
Retainages 168 128
Unrecovered costs and estimated profits
subject to future negoitiation
- not billed (52) 71
------- -------
3,401 7,259
Less: Allowance for doubtful accounts
and potential disallowances (416) (300)
------- -------
Contract receivables - net 2,985 6,959
Other receivables, net of allowance
of $45 and $306, respectively 79 190
------- -------
Total receivables - net $ 3,064 $ 7,149
======= =======
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 trade receivables are pledged to secure the ASI line of
credit (see Note 10).
Commodore was the holder of certain notes receivable and other related
receivables at December 31, 1997, 1996 and 1995, 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.
Receivables comprise the following:
December 31,
------------------
1997 1996
---- ----
Note receivable, with interest at 10%,
in various installments through 2002, unsecured $240 $261
Other receivables 276 123
----- -----
Total notes and other receivables
net of realization allowance $516 $384
==== ====
F-13
<PAGE>
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 $2,715
and $2,514 at December 31, 1997 and 1996, respectively. Because the note
and receivables are non-performing according to their terms, Commodore has
recorded realization allowances of $1,803 and $1,602 at December 31, 1997
and 1996, 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, 1997 and 1996, respectively.
F-14
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
7. Other Investments
In 1994, Commodore obtained an interest in an oil and gas field located in
Louisiana. 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,
aggregating $357, 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, Applied and Teledyne Environmental, Inc. formed a joint
venture named Teledyne-Commodore, LLC ("the LLC") and signed a licensing
agreement for one of Applied's patented remediation technologies. The LLC
was funded by a capital contribution of $1,000 in cash from each Teledyne
and Applied on October 1, 1996. Further capital contributions are required
only when the Board of Members determines additional contributions are
necessary or advisable. In February 1997 and pursuant to the agreement,
Applied contributed an additional $1,000 to 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, 1997 and 1996:
1997 1996
---- ----
Revenues $ 510 $ 16
Expenses 4,163 1,006
------- -------
Net loss (3,653) (990)
------- -------
Applied equity in net loss (50%) $(1,827) $ (495)
======= =======
Investment in and advances to LLC:
Opening balance $ 658 $ --
Capital contribution 1,000 1,000
Advances to LLC 723 153
Equity in net loss (1,827) (495)
------- -------
Net amount $ 554 $ 658
======= =======
F-15
<PAGE>
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 consist of the following:
Average December 31,
Useful Life 1997 1996
----------- ---- ----
Machinery and equipment 10 $2,438 $1,772
Furniture and fixtures 5 277 427
Computer equipment 4 503 210
Leasehold improvements 5 258 43
------ ------
3,476 2,452
Less: accumulated depreciation and
amortization 978 408
------ ------
Total property and equipment $2,498 $2,044
====== ======
9. Other Accrued Liabilities
Other accrued liabilities consist of the following:
1997 1996
------ ------
Price reset feature of Applied Common Stock (Note 4) $1,198 $ --
Warrant for purchase of Applied Common Stock (Note 13) 923 --
State taxes 94 308
Compensation and employee benefits 1,897 1,183
Other 848 1,450
------ ------
$4,960 $2,941
====== ======
10. Line of Credit
At December 31, 1997 and 1996, ASI had a $1,199 and $7,042 outstanding
balance, respectively, on a revolving line of credit with a current limit
of $6,000, due March 31, 1998 with interest payable monthly at prime plus
1 percent (9.5 percent as of December 31, 1997). The credit line is
secured by $153 of restricted cash and the receivables of ASI and contains
certain financial covenants and restrictions. 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.
ASI was in compliance with the covenants at December 31, 1997.
11. Long-Term Debt
Bonds Payable
In 1993 and 1994, Commodore issued $4,000 of convertible bonds which carry
an interest rate of
F-16
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
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 15). 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 15).
Capital Lease Obligations
Commodore has capital lease obligations of $46, net of imputed interest at
rates ranging from 8 to 12 percent of which $27 is recorded as a current
liability and $19 is due through 1999.
12. 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 1997, 1996 and 1995 and the
amount presented in the financial statements is due to the increase in the
tax valuation allowance which offsets the income tax benefit of the
operating loss. The components of the net deferred income tax as of
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Components of current deferred taxes, net:
Reserve for uncollectible receivables and potential disallowances $ 2,104 $ 1,689 $ 3,376
Insurance loss reserve - 540 412
In-process technology 969 969 969
Net operating loss carryforward 16,356 10,079 5,471
-------- -------- --------
Total 19,429 13,277 10,228
Less: Valuation allowance (19,429) (13,277) (10,228)
-------- -------- --------
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
1997 and 1996, Commodore has established a valuation allowance for the
entire amount of net deferred tax assets.
F-17
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
Commodore has net operating loss ("NOL") carryforwards at December 31,
1997 of approximately $40,900 which expire in the years 1998 through 2012.
Of the total amount of NOL carryforwards at December 31, 1997,
approximately $28,000 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.
13. Redeemable Preferred Stock
In May and August 1997, Commodore sold an aggregate of 88,000 shares of
its Series D Preferred Stock for net proceeds of $7,612 after transaction
costs of $968. The Series D Preferred Stock is convertible into shares of
Applied Common Stock held by Commodore at a conversion price equal to
approximately 85% of the Applied Common Stock market price, subject to
certain floors.
Because the redeemable Preferred Stock had a conversion rate less than the
market price of Applied Common Stock on the date of issue (a beneficial
conversion feature), the intrinsic value of the difference, $1,553, was
recorded as a direct increase in paid-in capital. This amount was to be
recorded as a non-cash Preferred dividend over the earliest possible
conversion period (five months). Because of the early conversions discussed
in the following paragraphs, only $1,477 of the total amount was required
to be recorded as a preferred dividend.
The purchasers of the Series D Preferred Stock also received five-year
warrants to purchase an aggregate of 1,175,000 shares of Applied Common
Stock held by Commodore at exercise prices ranging from $5.15 per share to
$7.14 per share. Such exercise prices are subject to reset on August 18,
1998 to an exercise price equal to approximately 110% of the market price
of Applied Common Stock on August 17, 1998, if such price is less than the
original exercise price. In addition, if Applied Common Stock trades at
less than 50% of the August 17, 1998 closing bid price for any 10
consecutive trading days, the exercise price is subject to further reset
(on one occasion only) to 50% of such August 17, 1998 closing bid price.
The warrants were valued at $850 and were recorded as a liability until
such time as the warrants are either exercised or expire. Affiliates of
the placement agent received warrants to purchase an aggregate of 85,000
shares of Applied Common Stock held by Commodore at exercise prices
ranging from $5.15 per share to $7.14 per share, valued at $73. The
placement agent warrants were also recorded as a liability at the time of
issuance.
As of December 31, 1997, 41,200 shares of Series D Preferred Stock have
been converted into an aggregate of 2,294,960 shares of Applied Common
Stock, based upon conversion prices ranging from $1.50 per share to $2.60
per share. These conversions resulted in a net gain of $1,896 during the
year ended December 31, 1997.
Because the Series D Preferred Stock is convertible into a security other
than Common Stock of Commodore, the Series D Preferred Stock is classified
as Redeemable Preferred Stock, excluded from stockholder's equity. As of
December 31, 1997, the 46,800 shares of Series D Preferred Stock have an
aggregate liquidation value (upon which the conversion ratio is based) of
approximately $4,912.
F-18
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
14. Stockholders' Equity
Common Stock
Commodore has authorized 100,000,000 shares of Common Stock, of which
59,233,583 and 57,924,368 shares were issued at December 31, 1997 and
1996, respectively. Of the total shares issued, 506,329 were held in
treasury at December 31, 1997 and 1996.
In 1996, Commodore issued 200,000 shares of Common Stock valued at $68 in
order to purchase technologies related to the separation and remediation
process. In 1997, Commodore issued 500,000 shares of Common Stock valued
at $313 in exchange for services. Common Stock issued through the exercise
of options and warrants is described in Note 15.
Preferred Stock
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
annual dividends from current earnings of $.10 per share and has a
liquidation value of $1.00 per share. The Series AA Preferred Stock is
redeemable by Commodore for $1.00 per share at any time the bid price of
Commodore's Common Stock equals or exceeds $1.25 per share and is
convertible into shares of Commodore Common Stock at a 1 to 1 ratio. In
1997, 275,000 shares of Series AA Preferred Stock were converted into
275,000 shares of Commodore Common Stock. 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 15). At December 31,
1997, 2,725,000 shares of Series AA Preferred Stock remained outstanding.
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
annual dividends from current earnings of $.08 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 Stock to 1 share of Common Stock.
In 1997, 65,340 shares of Series B Preferred Stock were converted into
21,780 shares of Commodore Common Stock. At December 31, 1997, 1,469,369
shares of Series B Preferred Stock remained outstanding.
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. In 1996, Commodore issued 115,208 shares of Series C Preferred
Stock. In January, 1998, the Series C Preferred Stock was converted into
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 Stock
of $1.00 per share. The market value used in this conversion was
approximately $.51 per share. The total amount of Commodore's Common Stock
issued in connection with this conversion was 2,244,361 shares.
15. Stock Options and Stock Warrants
Commodore has adopted the intrinsic value method of accounting for stock
options and warrants under
F-19
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
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 1997,
1996 and 1995 consistent with the provisions of FAS 123, Commodore's net
loss per share would have been increased to the pro forma amounts indicated
below:
December 31, 1997 1996 1995
------------ ---- ---- ----
Net loss - as reported $(13,507) $(8,311) $(2,969)
Net loss - pro forma $(17,733) $(9,858) $(3,538)
Loss per share - as reported $ (.27) $ (.15) $ (.06)
Loss per share - pro forma $ (.34) $ (.18) $ (.07)
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 60-65 percent, the expected life of the options is
equal to their term, and the expected risk-free rate of return is
calculated as the rate offered on U.S. Government securities with the same
term as the expected life of the options.
Compensation expense under APB 25 of $650 and $59 has been recognized for
the stock options issued to employees and directors 1997 and in 1996,
respectively.
Stock Options
The following table presents the outstanding options (vested and non
vested) at December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding - beginning of year 8,585,000 $0.86 2,200,000 $0.18 1,720,000 $0.09
Granted 6,155,000 0.85 7,005,000 1.00 480,000 0.50
Exercised (190,000) 0.10 (320,000) 0.14 -
Forfeited (240,000) 0.50 (300,000) 0.10 -
Rescinded (5,645,000) 1.07 - -
---------- --------- ---------
Options outstanding - end of year 8,665,000 $0.78 8,585,000 $0.86 2,200,000 $0.18
========== ========= =========
Options exercisable - end of year 5,400,000 2,745,000 1,010,000
Weighted average fair value of options ========== ========= =========
granted during the period $0.70 $0.58 $0.26
</TABLE>
F-20
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
The following table summarizes information about employee stock options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------ ----------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
$.10-$ .29 1,750,000 4.38 years $ .18 1,550,000 $ .19
$.37-$ .60 1,505,000 5.00 years $ .52 1,060,000 $ .54
$.84-$1.12 5,410,000 8.93 years $ .87 2,790,000 $ .90
- ------------------------------------------------------------------------------------------------------
Total $.10-$1.12 8,665,000 7.33 years $ .78 5,400,000 $ .62
- ------------------------------------------------------------------------------------------------------
</TABLE>
Stock Warrants
In 1997 and 1996, warrants for the purchase of 322,435 and 635,415 shares
of Common Stock were exercised resulting in net proceeds to Commodore of
$31 and $30, respectively.
Outstanding warrants at December 31, 1997 and 1996 are as follows:
Number of Number of
Warrants Warrants Exercise Expiration
1997 1996 Price Date
---- ---- ----- ----
2,639,884 2,662,319 .05 July 1998
1,000,000 1,000,000 1.00 September 1998
8,983,332 9,283,332 .10 December 1998
200,000 200,000 .14 October 1999
2,000,000 2,000,000 .68 December 2000
---------- ----------
14,823,216 15,145,651
========== ==========
As of December 31, 1997, all stock warrants were currently exercisable.
16. Related Party Transactions
Commodore was allocated rental charges of $104, $89 and $58 for the years
ended December 31, 1997, 1996 and 1995, respectively by an entity owned by
Commodore's principal shareholder and chairman.
At December 31, 1997 Commodore and Applied held notes receivable of $3,000
and $1,500, respectively, from Lanxide Performance Materials, Inc.
("LPM"), a wholly-owned subsidiary of Lanxide Corp. Lanxide is related to
Commodore by significant common ownership and by the transactions
described below. The notes became due on February 28, 1998. In 1997,
F-21
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
a reserve in the amount of $669 was recorded, reducing the net carrying
amount of Commodore's aggregate receivable to $3,831. The notes were
collateralized by the assets of LPM and guaranteed by Lanxide Corp. on
behalf of its subsidiary.
In March 1998, Applied transferred their note receivable from LPM and $500
cash to Commodore as a payment on amounts due under the September 1997
intercompany note (see Note 4). Also in March 1998, Commodore exchanged
its notes receivable from LPM, including the note recently acquired from
Applied, along with $500 cash for a license and trademark to a technology
called CERASET(TM) owned by Lanxide. Commodore recorded the license at the
carrying value of the notes receivable plus the cash exchanged.
In July 1997, Commodore obtained effective control of Lanxide pursuant to
a voting agreement (the "Voting Agreement") among certain Lanxide
stockholders. Pursuant to the Voting Agreement, stockholders of Lanxide
owning 50.1% of the outstanding shares of the Lanxide Common Stock granted
proxies to members of Commodore's Board of Directors to vote all shares of
Lanxide Common Stock held by each such stockholder until December 31,
1998. Also in July 1997, Commodore purchased 20,000 shares of Lanxide
Series G Preferred Stock for $2,000. The terms of this transaction would
have allowed Commodore to make additional investments in Lanxide,
effectively acquiring a majority ownership of Lanxide. On August 27, 1997,
Commodore informed Lanxide that it would not make additional investments in
Lanxide. As of December 31, 1997, Commodore had provided a reserve against
its entire $2,000 investment in Lanxide. In January 1998, the Voting
Agreement was rescinded.
In connection with the transactions with Lanxide, Commodore and its
subsidiaries advanced a total of $374 to Lanxide related to certain fees
and expenses incurred by Lanxide. At December 31, 1997, a $374 reserve had
been established against these receivables.
17. 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:
1998 $ 566
1999 485
2000 339
2001 248
2002 15
------
$1,653
======
Rent expense approximated $847, $318, and $127 in 1997, 1996 and 1995,
respectively.
F-22
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
Employment Agreements
Commodore and its subsidiaries have employment agreements with 10
executives and key personnel. Aggregate minimum payments under the
employment agreements for the following five years are as follows:
1998 $2,128
1999 1,806
2000 279
2001 85
------
Total $4,298
======
Commodore and its subsidiaries accrued $678 of executive bonuses in 1997.
These bonuses were paid in 1998.
Self Insurance
Harvest American. In July 1987, Commodore established Harvest American
Insurance Company, a wholly-owned licensed "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.
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 September 30, 1997, Harvest had capital of $1,141 in an
interest bearing account and a $4,238 intercompany demand note from
Commodore.
An independent actuary determined that the loss reserve required in
connection with the policies issued by Harvest as of December 31, 1994 was
$994. In October 1997, Harvest transferred 100% of its risk to two
insurance companies ("Assuming Insurers") for a total cost of $1,275,
acceptable to the appropriate regulatory agencies. Commodore funded the
additional $134 required. The insurance commissioner, in accordance with
the settlement agreement, released all cash to Harvest for payment to the
Assuming Insurers.
Benefit Plan. During 1996 and 1997, Commodore 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 Commodore's maximum liability are insured by a health insurance
carrier. Effective April 1, 1997, Commodore became fully insured through
an outside health insurance carrier.
F-23
<PAGE>
Commodore Environmental Services, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands except per share data)
- -------------------------------------------------------------------------------
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.
18. Subsequent Events
In February 1998, Commodore sold (i) 1,381,692 shares of Applied Common
Stock and (ii) three-year warrants to purchase an aggregate of 150,000
shares of Applied Common Stock at an exercise price equal to $6.00 per
share, for an aggregate purchase price of $6,000. As a result of this
transaction, Commodore owned approximately 43% of the outstanding shares
of Applied Common Stock. Pursuant to the terms of this transaction,
Commodore may be required to issue up to a maximum of 1,618,308 additional
shares of Applied Common Stock to the investors for no additional
consideration, based upon the market price of Applied Common Stock.
Commodore will, for a certain period of time, have the right and option
(but not the obligation) to require the investors to purchase additional
shares of Applied Common Stock and Commodore may be required to transfer
additional shares of Applied Common Stock to the investors for no
additional consideration as a part of this transaction. The Applied Common
Stock sold in the February 1998 transaction as well as those that may be
sold under the second transaction have certain price reset features in
effect for a specified period of time.
In February 1998, Commodore provided a $5,450 unsecured loan to Applied,
evidenced by Applied's 8% non-convertible note. In connection with the
loan, Applied amended and restated in its entirety a five-year warrant to
purchase 7,500,000 shares of Applied Common Stock issued to Commodore on
December 2, 1996 to, among other things, reduce the exercise price of the
warrant from $15.00 per share to $10.00 per share. In addition, Applied
issued to Commodore an additional five-year warrant to purchase 1,500,000
shares of Applied Common Stock at an exercise price of $10.00 per share.
In January 1998, and pursuant to agreement by the Board of Members,
Applied advanced an additional $1,000 payment to the Teledyne - Commodore
joint venture (see Note 7).
F-24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits No. Description
- ------------ -----------
<S> <C>
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 Gas Corporation with respect to
Oklahoma Oil & Gas Field. (3)
10.3 Operating Agreement, dated March 22, 1991 with Ameritech Oil and Gas Corporation with respect
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)
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)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibits No. Description
- ------------ -----------
<S> <C>
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)
*10.40 Warrant, dated March 5, 1998, issued by Lanxide Corporation to the Company.
*10.41 Settlement and Release Agreement, dated March 5, 1998, by and among Lanxide Corporation,
Lanxide Performance Materials, Inc., Marc S. Newkirk, the Company and Applied.
*10.42 Amendment to Securities Purchase Agreement, dated March 5,
1998, by and between the Company and Lanxide Corporation.
*10.43 License Agreement, dated as of March 5, 1998, by and among Commodore Polymer Technologies,
Inc., Lanxide Corporation and Lanxide Technology Company L.P.
*21.1 Subsidiaries of the registrant.
*27.1 Financial Data Schedule.
</TABLE>
- -------------------
* Filed herewith.
(1) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K
dated April 14, 1988.
(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 Registrant'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>
EXHIBIT "A"
NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR
THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
NEITHER THE WARRANTS NOR SUCH SHARES MAY BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT, OR AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT.
LANXIDE CORPORATION
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No.
-----
270,000 Shares
THIS CERTIFIES that, for value received, Commodore Environmental Services,
Inc. (the "Holder"), is entitled to subscribe for and purchase from Lanxide
Corporation, a Delaware corporation (the "Company"), upon the terms and
conditions set forth herein, at any time and from time to time after December
31, 1998 and before 5:00 P.M. (New York City time) on March 1, 2001, New York
time (the "Exercise Period"), Two Hundred and Seventy Thousand (270,000) shares
of common stock, par value .01 per share, of the Company (the "Common Stock"),
at an exercise price of $7.41 per share (the "Exercise Price"). This Warrant is
issued in connection with the sale to the Holder of 20,000 shares of the
Company's non-voting, nonconvertible Series G Preferred Stock, $.01 par value
per share, of the Company (the "Series G Preferred Stock") pursuant to a
Securities Purchase Agreement, dated July 3, 1997 (the "Securities Purchase
Agreement"), as amended by an Amendment to Securities Purchase Agreement dated
March 5, 1998 (the "Amendment"), by and between the Holder and the Company,
the sale of which has already occurred. In accordance with the Amendment, the
Company and the Holder have exchanged all of the shares of Series G Preferred
Stock purchased by the Holder pursuant to the Securities Purchase Agreement for
a like number of shares of the Company's Preferred Stock, Series H (the "Series
H Preferred Stock"). This Warrant is issued in substitution of the Warrant
issued on July 3, 1997 which July 3, 1997 Warrant has been cancelled. As used
herein the term "this Warrant" shall mean and include this Warrant and any
Warrant or Warrants hereafter issued as a consequence of the exercise or
transfer of this Warrant in whole or in part.
The number of shares of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from time
to time as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period, as to the
whole or any lesser number of the respective whole Warrant Shares, by the
surrender of this Warrant (with the election at the end hereof duly executed) to
the Company at its office as set forth in
<PAGE>
the form of election attached hereto, or at such other place as is designated in
writing by the Company, together with a certified or bank cashier's check
payable to the order of the Company in an amount equal to the Exercise Price
multiplied by the number of respective Warrant Shares for which this Warrant is
being exercised. Notwithstanding the foregoing, or any other provision of this
Warrant to the contrary, to the extent that the Holder shall have acquired
shares of Series H Preferred Stock of the Company, this Warrant may be exercised
by the Holder during the Exercise Period and the Exercise Price for one or more
Warrant Shares may be paid by the Holder's surrender for cancellation of one or
more shares of Series H Preferred Stock. Upon such Holder's delivery of such
share(s) of Series H Preferred Stock, duly endorsed in blank for transfer, the
Company shall simultaneously deliver to the Holder of this Warrant that number
of Warrant Shares equal to the quotient obtained by dividing (a) the product of
(i) the number of shares of Series H Preferred Stock so surrendered for
cancellation and (ii) $100.00 by (b) $7.41. Upon issuance of such Warrant
Shares, the Corporation shall cancel the shares of Series H Preferred Stock so
surrendered by the Holder. In the event and to the extent that all shares of
Series H Preferred Stock acquired by the Holder pursuant to the Amendment shall
have been so surrendered for cancellation and Warrant Shares issued therefor,
the Exercise Price for all remaining Warrant Shares issuable pursuant to this
Warrant shall be paid in accordance with the first sentence of this Section 1.
2. Upon each exercise of the Holder's rights to purchase Warrant
Shares and payment of the Exercise Price, the Holder shall be deemed to be the
holder of record of the Warrant Shares issuable upon such exercise,
notwithstanding that the transfer books of the Company shall then be closed or
certificates representing such Warrant Shares shall not then have been actually
delivered to the Holder. As soon as practicable after each such exercise of this
Warrant and payment by the Holder, the Company shall issue and cause to be
delivered a certificate or certificates for the Warrant Shares issuable upon
such exercise, registered in the name of the Holder or its designee. If the
Warrant should be exercised in part only, the Company shall, upon surrender of
this Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the Warrant Shares (or portions
thereof) subject to purchase hereunder.
3. Any Warrants issued upon the transfer or exercise in part of this
Warrant shall be numbered and shall be registered in a Warrant Register as they
are issued. The Company shall be entitled to treat the registered holder of any
Warrant on the Warrant Register as the Owner in fact thereof for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other person, and shall not be liable for any
registration or transfer of Warrants which are registered or to be registered in
the name of a fiduciary or the nominee of a fiduciary unless made with the
actual knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with the knowledge of such facts
that its participation therein amounts to bad faith. This Warrant shall be
transferable only on the books of the Company upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment, or authority to
transfer. In all cases of transfer by an attorney, executor, administrator,
guardian, or other legal representative, duly authenticated evidence of his or
its authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Warrant or Warrants to the person entitled thereto. This
Warrant may be exchanged, at the option of the Holder thereof, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding the foregoing,
<PAGE>
the Company shall have no obligation to cause Warrants to be transferred on its
books to any person if, in the opinion of counsel to the Company, such transfer
does not comply with the provisions of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations promulgated thereunder.
4. The Company shall at all times reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of providing
for the exercise of the rights to purchase all Warrant Shares granted pursuant
to the Warrants, such number of shares of Common Stock as shall, from time to
time, be sufficient therefor. The Company covenants that all shares of Common
Stock issuable upon exercise of this Warrant, upon receipt by the Company of
the full Exercise Price therefor, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
5. (a) In case the Company shall at any time after the date the
Warrants were first issued (i) declare a dividend on the outstanding
Common Stock payable in shares of its capital stock, (ii) subdivide
the outstanding Common Stock, (iii) combine the outstanding Common
Stock into a smaller number of shares, or (iv) issue any shares of its
capital stock by reclassification of the Common Stock (including any
such reclassification in connection with a consolidation or merger in
which the Company is the continuing corporation), then, in each case,
the Exercise Price, and the number of Warrant Shares issuable upon
exercise of this Warrant, in effect at the time of the record date for
such dividend or of the effective date of such subdivision,
combination, or reclassification, shall be proportionately adjusted so
that the Holder after such time shall be entitled to receive the
aggregate number and kind of shares which, if such Warrant had been
exercised immediately prior to such time, he or it would have owned
upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination, or reclassification. Such
adjustment shall be made successively whenever any event listed above
shall occur.
(b) In case the Company shall issue or fix a record date for the
issuance to all holders of Common Stock of rights, options, or
warrants to subscribe for or purchase Common Stock (or securities
convertible into or exchangeable for Common Stock) at a price per
share (or having a conversion or exchange price per share, if a
security convertible into or exchangeable for Common Stock) less than
the Exercise Price per share of Common Stock on such record date,
then, in each case, the Exercise Price shall be adjusted by
multiplying the Exercise Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding on such record date plus the
number of shares of Common Stock which the aggregate offering price of
the total number of shares of Common Stock so to be offered (or the
aggregate initial conversion or exchange price of the convertible or
exchangeable securities so to be offered) would purchase at such
current Exercise Price and the denominator of which shall be the
number of shares of Common Stock outstanding on such record date plus
the number of additional shares of Common Stock to be offered for
subscription or purchase (or into which the convertible or
exchangeable securities so to be offered are initially convertible or
exchangeable). Such adjustment shall become effective at the close of
business on such record date; provided, however, that, to the extent
the shares of Common Stock (or securities convertible into or
exchangeable for shares of Common Stock) are not delivered, the
Exercise Price shall be readjusted after the expiration of such
rights, options, or warrants (but only with respect to Warrants
exercised after such
<PAGE>
expiration), to the Exercise Price which would then be in effect
had the adjustments made upon the issuance of such rights, options, or
warrants been made upon the basis of delivery of only the number of
shares of Common Stock (or securities convertible into or exchangeable
for shares of Common Stock) actually issued. In case any subscription
price may be paid in a consideration part or all of which shall be in
a form other than cash, the value of such consideration shall be as
determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error. Shares
of Common Stock owned by or held for the account of the Company or any
majority-owned subsidiary shall not be deemed outstanding for the
purpose of any such computation.
(c) In case the Company shall distribute to all holders of Common
Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the
Company is the continuing corporation) evidences of its indebtedness
or assets (other than cash dividends or distributions and dividends
payable in shares of Common Stock), or rights, options, or warrants to
subscribe for or purchase Common Stock, or securities convertible into
or exchangeable for shares of Common Stock (excluding those with
respect to the issuance of which an adjustment of the Exercise Price
is provided pursuant to Section 5(b) hereof), then, in each case, the
Exercise Price shall be adjusted by multiplying the Exercise Price in
effect immediately prior to the record date for the determination of
stockholders entitled to receive such distribution by a fraction, the
numerator of which shall be the Exercise Price per share of Common
Stock on such record date, less the fair market value (as determined
in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error) of the
portion of the evidences of indebtedness or assets so to be
distributed, or of such rights, options, or warrants or convertible or
exchangeable securities, applicable to one share, and the denominator
of which shall be such current Exercise Price per share of Common
Stock. Such adjustment shall be made whenever any such distribution is
made, and shall become effective on the record date for the
determination of shareholders entitled to receive such distribution.
(d) In case the Company shall issue shares of Common Stock or
rights, options, or warrants to subscribe for or purchase Common
Stock, or securities convertible into or exchangeable for Common Stock
(excluding only shares, rights, options, warrants, or convertible or
exchangeable securities issued or issuable (i) in any of the
transactions with respect to which an adjustment of the Exercise Price
is provided pursuant to Sections 5(a), 5(b) or 5(c) above, (ii) upon
exercise, in whole or in part, of the Warrants or (iii) to management
or employees of the Company of authorized shares of Common Stock), at
a price per share (determined, in the case of such rights, options,
warrants, or convertible or exchangeable securities, by dividing (x)
the total amount received or receivable by the Company in
consideration of the sale and issuance of such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum
aggregate consideration payable to the Company upon exercise,
conversion, or exchange thereof, by (y) the maximum number of shares
covered by such -rights, options, warrants, or convertible or
exchangeable securities) lower than the Exercise Price per share of
Common Stock in effect immediately prior to such issuance, then the
Exercise Price shall be reduced on the date of such issuance to a
price (calculated to the nearest cent) determined by multiplying the
Exercise Price in effect immediately prior to such issuance by a
fraction, (i) the numerator of which
<PAGE>
shall be an amount equal to the sum of (A) the number of shares of
Common Stock outstanding immediately prior to such issuance plus (B)
the quotient obtained by dividing the consideration received by the
Company upon such issuance by such current Exercise Price, and (ii)
the denominator of which shall be the total number of shares of Common
Stock outstanding immediately after such issuance. For the purposes of
such adjustments, the maximum number of shares which the holders of
any such rights, options, warrants, or convertible or exchangeable
securities shall be entitled to initially subscribe for or purchase or
convert or exchange such securities into shall be deemed to be issued
and outstanding as of the date of such issuance, and the consideration
received by the Company therefor shall be deemed to be the
consideration received by the Company for such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum
aggregate consideration or premiums stated in such rights, options,
warrants, or convertible or exchangeable securities to be paid for the
shares covered thereby. No further adjustment of the Exercise Price
shall be made as a result of the actual issuance of shares of Common
Stock on exercise of such rights, options, or warrants or on
conversion or exchange of such convertible or exchangeable securities.
On the expiration or the termination of such rights, options, or
warrants, or the termination of such right to convert or exchange, the
Exercise Price shall be readjusted (but only with respect to Warrants
exercised after such expiration or termination) to such Exercise Price
as would have obtained had the adjustments made upon the issuance of
such rights, options, warrants, or convertible or exchangeable
securities been made upon the basis of the delivery of only the number
of shares of Common Stock actually delivered upon the exercise of such
rights, options, or warrants or upon the conversion or exchange of any
such securities; and on any change of the number of shares of Common
Stock deliverable upon the exercise of any such rights, options, or
warrants or conversion or exchange of such convertible or exchangeable
securities or any change in the consideration to be received by the
Company upon such exercise, conversion, or exchange, including, but
not limited to, a change resulting from the antidilution provisions
thereof, the Exercise Price, as then in effect, shall forthwith be
readjusted (but only with respect to Warrants exercised after such
change) to such Exercise Price as would have been obtained had an
adjustment been made upon the issuance of such rights, options, or
warrants not exercised prior to such change, or securities not
converted or exchanged prior to such change, on the basis of such
change. In case the Company shall issue shares of Common Stock or any
such rights, options, warrants, or convertible or exchangeable
securities for a consideration consisting, in whole or in part, of
property other than cash or its equivalent, then the "price per share"
and the "consideration received by the Company" for purposes of the
first sentence of this Section 5(d) shall be as determined in good
faith by the board of directors of the Company, whose determination
shall be conclusive absent manifest error. Shares of Common Stock
owned by or held for the account of the Company or any majority-owned
subsidiary shall not be deemed outstanding for the purpose of any such
computation.
(e) No adjustment in the Exercise Price shall be required if such
adjustment is less than $0.10; provided however, that any adjustments
which by reason of this Section 5 are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-thousandth of a share, as the case may be.
<PAGE>
(f) In any case in which this Section 5 shall require that an
adjustment in the Exercise Price be made effective as of a record date
for a specified event, the Company may elect to defer, until the
occurrence of such event, issuing to the Holder, if the Holder
exercised this Warrant after such record date, the shares of Common
Stock, if any, issuable upon such exercise over and above the shares
of Common Stock, if any, issuable upon such exercise on the basis of
the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to the Holder a due bill or
other appropriate instrument evidencing the Holder's right to receive
such additional shares upon the occurrence of the event requiring such
adjustment.
(g) Upon each adjustment of the Exercise Price as a result of the
calculations made in Sections 5(b), 5(c) or 5(d) hereof, this Warrant
shall thereafter evidence the right to purchase, at the adjusted
Exercise Price, that number of shares (calculated to the nearest
thousandth) obtained by dividing (A) the product obtained by
multiplying the number of shares purchasable upon exercise of this
Warrant prior to adjustment of the number of shares by the Exercise
Price in effect prior to adjustment of the Exercise Price by (B) the
Exercise Price in effect after such adjustment of the Exercise Price.
(h) Whenever there shall be an adjustment as provided in this
Section 5, the Company shall promptly cause written notice thereof to
be sent by registered mail, postage prepaid, to the Holder, at its
address as it shall appear in the Warrant Register, which notice shall
be accompanied by an officer's certificate setting forth the number of
Warrant Shares purchasable upon the exercise of this Warrant and the
Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation
thereof, which officer's certificate shall be conclusive evidence of
the correctness of any such adjustment absent manifest error.
(i) The foregoing provisions of this Section 5 notwithstanding, no
adjustments shall be made under this Section 5 in respect of any
shares of Common Stock issued or issuable pursuant to a stock option
plan anticipated to be approved by Lanxide on or before March 31, 1998
(i) pursuant to which certain employees of Lanxide will be given five
year options to acquire shares of Common Stock for an exercise price
anticipated to be $1.00 per share and (ii) under which the aggregate
number of shares to be reserved for issuance is not to exceed
twenty-five percent (25%)of the issued and outstanding shares of
Common Stock as of the date hereof on a fully diluted basis, including
the Warrant Shares.
6. (a) In case of any consolidation with or merger of the Company
with or into another corporation (other than a merger or consolidation
in which the Company is the surviving or continuing corporation), or
in case of any sale, lease, or conveyance to another corporation of
the property and assets of any nature of the Company as an entirety or
substantially as an entirety, such successor, leasing, or purchasing
corporation, as the case may be, shall (i) execute with the Holder an
agreement providing that the Holder shall have the right thereafter to
receive upon exercise of this Warrant solely the kind and amount of
shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale,
lease, or conveyance by a holder of the number of shares of Common
Stock for which this Warrant might have been exercised immediately
prior to such consolidation,
<PAGE>
merger, sale, lease, or conveyance and (ii) make effective provision
in its certificate of incorporation or otherwise, if necessary, to
effect such agreement. Such agreement shall provide for adjustments
which shall be as nearly equivalent as practicable to the adjustments
in Section 5.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Warrant (other than a
change in par value or from no par value to a specified par value, or
as a result of a subdivision or combination, but including any change
in the shares into two or more classes or series of shares), or in
case of any consolidation or merger of another corporation into the
Company in which the Company is the surviving or continuing
corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of
the shares of Common Stock (other than a change in par value, or from
no par value to a specified par value, or as a result of a subdivision
or combination, but including any change in the shares into two or
more classes or series of shares), the Holder shall have the right
thereafter to receive upon exercise of this Warrant solely the kind
and amount of shares of stock and other securities, property, cash, or
any combination thereof receivable upon such reclassification, change,
consolidation, or merger by a holder of the number of shares of Common
Stock for which this Warrant might have been exercised immediately
prior to such reclassification, change, consolidation, or merger.
Thereafter, appropriate provision shall be made for adjustments which
shall be as nearly equivalent as practicable to the adjustments in
Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and
to successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on shares of
Common Stock in shares of Common Stock or make any other distribution
(other than regularly scheduled cash dividends which are not in a
greater amount per share than the most recent such cash dividend) to
all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional
shares of Common Stock or any other rights, warrants, or other
securities; or
(c) to effect any reclassification or change of outstanding shares
of Common Stock, or any consolidation, merger, sale, lease, or
conveyance of property, described in Section 6; or
(d) to effect any liquidation, dissolution, or winding-up of the
Company; or
(e) to take any other action which would cause an adjustment to the
Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the
<PAGE>
Warrant Register, mailed at least 10 days prior to (i) the date as of which the
holders of record of shares of Common Stock to be entitled to receive any such
dividend, distribution, rights, warrants, or other securities are to be
determined, (ii) the date on which any such reclassification, change of
outstanding shares of Common Stock, consolidation, merger, sale, lease,
conveyance of property, liquidation, dissolution, or winding-up is expected to
become effective, and the date as of which it is expected that holders of record
of shares of Common Stock shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such reclassification,
change of outstanding shares, consolidation, merger, sale, lease, conveyance of
property, liquidation, dissolution, or winding-up, or (iii) the date of such
action which would require an adjustment to the Exercise Price.
8. The issuance of any shares or other securities upon the exercise
of this Warrant, and the delivery of certificates or other instruments
representing such shares or other securities, shall be made without
charge to the Holder for any tax or other charge in respect of such
issuance. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue
and delivery of any certificate in a name other than that of the
Holder and the Company shall not be required to issue or deliver any
such certificate unless and until the person or persons requesting the
issue thereof shall have paid to the Company the amount of such tax or
shall have established to the satisfaction of the Company that such
tax has been paid.
9. Certificates evidencing the Warrant Shares issued upon exercise
of the Warrants shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
SHARES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT, OR AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT."
10. Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of any Warrant (and upon
surrender of any Warrant if mutilated) and a certificate executed by
the Holder and provided by the Company pursuant to which the Holder
agrees to indemnify the Company for any claims, losses or liability
the Company may suffer on account of the issuance of a new
certificate, and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the
Holder thereof a new Warrant of like date, tenor, and denomination.
11. The Holder of any Warrant shall not have, solely on account of
such status, any rights of a stockholder of the Company, either at law
or in equity, or to any notice of meetings of stockholders or of any
other proceedings of the Company, except as provided in this Warrant.
12. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified
mail, return receipt requested or sent by Federal Express, Express
Mail, or similar overnight delivery or courier service or delivered
(in person or by telecopy, telex, or similar telecommunications
equipment) against receipt to the party to whom it is to be given, if
sent to the Company, at: 150 East 58th Street, Suite 3400,
<PAGE>
New York, New York 10155, Attention: The Chairman or the Chief
Executive Officer; or if sent to the Holder, at the Holder's address
as it shall appear on the Warrant Register, or to such other address
as the party shall have furnished in writing in accordance with the
provisions of this Section 14. Any notice or other communication given
by certified mail shall be deemed given at the time of certification
thereof, except for a notice changing a party's address which will be
deemed given at the time of receipt thereof. Any notice given by other
means permitted by this Section 14 shall be deemed given at the time
of receipt thereof.
13. This Warrant shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of the Holder
and its successors and assigns.
14. This Warrant shall be construed in accordance with the laws of
the State of New York applicable to contracts made and performed
within such State, without regard to principles of conflicts of law.
15. The Company irrevocably consents to the jurisdiction of the
courts of the State of New York and of any federal court located in
such State in connection with any action or proceeding arising out of
or relating to this Warrant, any document or instrument delivered
pursuant to, in connection with or simultaneously with this Warrant,
or a breach of this Warrant or any such document or instrument. In any
such action or proceeding, the Company waives personal service of any
summons, complaint or other process.
IN WITNESS WHEREOF, the undersigned has duly executed and delivered
this Warrant on the date and year first set forth below.
Dated: March 5, 1998
LANXIDE CORPORATION
____________________ By: /s/ Marc S. Newkirk
---------------------
Name: Marc S. Newkirk
____________________ Title: President
[SEAL]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the attached Warrant.)
FOR VALUE RECEIVED, ______________________________ hereby sells,
assigns, and transfers unto ___________________________ a Warrant to
purchase shares of Common Stock, par value .01 per share, of Lanxide
Corporation (the "Company"), together with all right, title, and
interest therein, and does hereby irrevocably constitute and appoint
_____________________________ attorney to transfer such Warrant on
the books of the Company, with full power of substitution.
Dated:__________________
Signature
-----------------------------------
<PAGE>
NOTICE
The signature on the foregoing Assignment must correspond to the
name as written upon the face of this Warrant in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE>
To: Lanxide Corporation
1300 Marrows Road
Newark, Delaware 19714-6077
Attn: Marc S. Newkirk, President
ELECTION TO EXERCISE
The undersigned hereby exercises its rights to purchase Warrant Shares
covered by the within warrant and tenders payment herewith in the amount of
$ , or by delivery of shares of Lanxide Corporation's
Series H Preferred Stock, all in accordance with the terms thereof, and
requests that certificates for such securities be issued in the name of, and
delivered to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of, and
delivered to, the undersigned at the address stated below
Dated: Name
--------------------------------- -----------------
(Print)
Address:
----------------------------------------------------------
----------------------------
(Signature)
<PAGE>
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement ("This Agreement") is made and
entered into this 5th day of March, 1998, by and among LANXIDE CORPORATION, a
Delaware corporation ("Lanxide"), LANXIDE PERFORMANCE MATERIALS, INC., a
Delaware Corporation ("Lanxide Performance"), MARC S. NEWKIRK, an individual
residing in Delaware, COMMODORE ENVIRONMENTAL SERVICES, INC., a Delaware
corporation ("COES"), COMMODORE APPLIED TECHNOLOGIES, INC., a Delaware
corporation ("Commodore Applied") and other individuals and companies for whose
benefit and on whose behalf this Agreement is made, as more fully set forth
hereinafter.
RECITALS:
WHEREAS, Lanxide's subsidiary, Lanxide Performance, is a party to and
borrower under (i) a Line of Credit Agreement with Commodore Applied, as Lender,
dated August 30, 1996 in the amount of $1.5 Million (the "$1.5 Million Credit
Agreement"), (ii) a Line of Credit Promissory Note dated August 30, 1996 in the
amount of $1.5 Million (the "$1.5 Million Note"), and (iii) a Security Agreement
dated August 30, 1996 in the amount of $1.5 Million (the "$1.5 Million Security
Agreement"); Lanxide is a guarantor of the aforementioned $1.5 Million Credit
Agreement and $1.5 Million Note (the "$1.5 Million Guaranty"); the $1.5 Million
Credit Agreement, Note, Security Agreement and Guaranty Agreement are
hereinafter collectively referred to as the "Lanxide Performance $1.5 Million
Loan Documents");
WHEREAS, Lanxide Performance is a party to and borrower under a certain
Line of Credit Agreement with COES, as Lender, dated November 13, 1996 in the
amount of $3 Million (the "$3 Million Credit Agreement"), a Line of Credit
Promissory Note dated November 13, 1996 (the "$3 Million Note"), a corresponding
Security Agreement dated November 13, 1996 (the "$3 Million Security
Agreement"); Lanxide guaranteed the aforementioned $3 Million Credit Agreement,
the $3 Million Note and $3 Million Security Agreement (the "$3 Million
Guaranty"); the aforementioned $3 Million Credit Agreement, the $3 Million Note,
the $3 Million Security Agreement and the $3 Million Guaranty are hereinafter
collectively referred to as the "Lanxide Performance $3 Million Loan
Documents");
WHEREAS, Lanxide and COES are parties to a Securities Purchase
Agreement dated the third day of July, 1997 (the "Securities Purchase
Agreement") pursuant to which, inter alia, Lanxide granted to COES a warrant
entitling COES or the holder to purchase up to 250,000 shares of Lanxide Series
F Preferred Stock at an exercise price of $100 per warrant (the "Original
Warrant");
WHEREAS, certain individual stockholders of Lanxide (the "Subject
Lanxide Stockholders") entered into a "Voting Agreement" with Bentley J. Blum
("Blum"), Paul E. Hannesson ("Hannesson"), David Mitchell ("Mitchell"), Herbert
Cohen ("Cohen") and Kenneth Adelman ("Adelman") (collectively the "Proxy
Holders") pursuant to which the Subject Lanxide Stockholders granted a proxy to
the Proxy Holders to vote their shares in Lanxide;
<PAGE>
WHEREAS, the parties hereto and the parties for and on whose behalf
this Agreement is made desire to settle certain disputes which have arisen
relating to the Lanxide Performance $1.5 Million Loan Documents, the Lanxide
Performance $3 Million Loan Documents, the Securities Purchase Agreement, the
Voting Agreement and other miscellaneous agreements, and those same parties
desire to release each other from claims arising out of the foregoing
agreements;
NOW, THEREFORE, in consideration of the foregoing Recitals and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound, it is hereby agreed as follows:
1. Voting Trust Agreement. The parties hereto acknowledge and agree
that the Voting Agreement was terminated on February 5, 1998 and that from and
after that date, was no longer and is no longer of any force or effect
whatsoever.
2. Amendment to Securities Purchase Agreement. Lanxide and COES hereby
agree to amend the Securities Purchase Agreement and agree that they shall,
contemporaneously herewith, execute and deliver an AMENDMENT TO SECURITIES
PURCHASE AGREEMENT in the form of Exhibit A annexed hereto and made a part
hereof.
3. The $3 Million Loan. COES hereby agrees that any and all obligations
and liabilities of Lanxide Performance and/or Lanxide arising under or related
to the Lanxide Performance $3 Million Loan Documents, including, but not limited
to, the liability of Lanxide Performance to make any payment pursuant to, or to
repay any amount of money which it borrowed (including any interest thereon) in
respect to the Lanxide Performance $3 Million Loan Documents, and any duty of
Lanxide to guarantee that repayment (including any interest thereon) or make
that repayment (including any interest thereon), are hereby terminated.
Contemporaneously with the execution and delivery of this Agreement and as
consideration for this Agreement (including the releases herein contained) and
the License Agreement (as such term is defined in paragraph 5 hereof), COES
will return to Lanxide Performance and Lanxide the original $3 Million Note and
$3 Million Guaranty marked cancelled.
4. The $1.5 Million Loan. COES hereby agrees that any and all
obligations and liabilities of Lanxide Performance and/or Lanxide arising under
or related to the Lanxide Performance $1.5 Million Loan Documents, including,
but not limited to, the liability of Lanxide Performance to make any payment
pursuant to or to repay any amount of money which it borrowed (including any
interest thereon) in respect to the Lanxide Performance $1.5 Million Loan
Documents, and any duty of Lanxide to guarantee that repayment (including any
interest thereon) or make that repayment (including any interest thereon), are
hereby terminated. Contemporaneously with the execution and delivery of this
Agreement and as consideration for this Agreement (including the releases herein
contained) and the License Agreement, Commodore Applied will return to Lanxide
Performance and Lanxide the original $1.5 Million Note and $1.5 Million Guaranty
marked cancelled.
5. The Ceraset(TM) Business, Trademark and License. Lanxide shall cause
its subsidiary, Lanxide Technology Company, L.P., contemporaneously herewith, to
execute and deliver to Commodore Polymer Technologies, Inc., a Delaware
corporation and an affiliate of
2
<PAGE>
Commodore Applied and COES ("Polymer"), a license agreement (the "License") to
use Lanxide Technology Company, L.P.'s Ceraset(TM) technology and trademark,
which license agreement shall be in the form of Exhibit "B" annexed hereto and
made a part hereof (the "License Agreement"). Lanxide hereby agrees to transfer
to Polymer all aspects of Lanxide's Ceraset business that relate to the License,
including but not limited to customer lists, prospective contracts, and names
and addresses of former employees (whom Polymer is authorized to attempt to
hire). Lanxide further agrees to assign any agreements that it has that relate
exclusively to the rights being granted in the license to Polymer. In the event
of any conflict between the provisions of this paragraph 5 and the License
Agreement, the provisions of the License Agreement shall control.
6. Release.
A. Lanxide, for itself and all of its subsidiaries, including, without
limitation, Lanxide Performance, and Marc S. Newkirk (collectively the "Lanxide
Releasors") for and on behalf of themselves and their respective heirs,
administrators, executors, predecessors, successors and assigns hereby
unconditionally and forever fully release, remise, quit claim, settle and
discharge any and all claims, demands, liabilities, actions, choses-in-action,
causes-in-action, whether known or unknown, legal or equitable, absolute,
contingent or vested, which any or all of the Lanxide Releasors may have had,
have or may hereafter acquire against (i) COES and any of its subsidiaries or
affiliates, including without limitation, Commodore Applied, and their
respective past or present Board members and corporate officers (the "Commodore
Group"), (ii) the Lanxide stockholders identified on Schedule A to the Voting
Agreement, to wit, Bentley J. Blum, Laura Utley, Samuel Blum, Suzanne Hannesson,
Paul E. Hannesson, Marc S. Newkirk and Jon Paul Hannesson (the "Subject Lanxide
Shareholders"), (iii) the Proxy Holders identified in the Voting Agreement, to
wit, Bentley J. Blum, Paul E. Hannesson, David Mitchell, Herbert Cohen and
Kenneth Adelman (the "Lanxide Proxy Holders"), and (iv) those former members of
the Lanxide Board of Directors, to wit, Michael D. Fullwood, Esquire and William
R. Toller (the "Former Lanxide Directors"), and all of their respective heirs,
administrators, executors, predecessors, successors, assigns, privies, and
attorneys-at-law or other legal or financial advisors, which relate to, or arise
from, actions taken or agreements made prior to the date hereof. Without in any
way intending to limit the generality of the foregoing, the Lanxide Releasors
hereby, releases COES, Commodore Applied, the Subject Lanxide Shareholders and
the Proxy Holders, and Former Lanxide Directors, and their respective heirs,
administrators, executors, predecessors, successors and assigns from any and all
claims the Lanxide Releasors may have had or have as of the date hereof arising
out of the Voting Agreement including any vote of Lanxide shares undertaken by
or omitted by the Proxy Holders and for any breaches by COES under the
Securities Purchase Agreement.
B. COES and Commodore Applied, for and on behalf of themselves and all
of their subsidiaries (collectively, the "Commodore Releasors") and their
respective predecessors, successors and assigns, hereby unconditionally and
forever fully, release, remise, quit claim, settle and discharge any and all
claims, demands, liabilities, actions, choses-in-action, causes-in-action,
whether known or unknown, legal or equitable, absolute, contingent or vested,
which any or all of the Commodore Releasors may have had, have or may hereafter
acquire against the Lanxide Releasors and all of their respective past or
present board members, and corporate officers, heirs, administrators, executors,
predecessors, successors,
3
<PAGE>
assigns, privies, and attorneys-at-law or other legal or financial advisors,
which relate to, or arise from, actions taken or agreements made prior to the
date hereof. Without intending to limit the generality of the foregoing, each of
the Commodore Releasors hereby releases the Lanxide Releasors and all of their
respective past or present board members, and corporate officers, heirs,
administrators, executors, predecessors, successors, assigns, privies, and
attorneys-at-law or other legal or financial advisors, from and against any and
all liabilities and obligations arising under or related to the Lanxide
Performance $1.5 Million Loan Documents, the Lanxide Performance $3 Million Loan
Documents and the Securities Purchase Agreement.
C. Nothing in this section is intended to release any party hereto from
any breach or default under this Agreement, the Amendment to Securities Purchase
Agreement or the License Agreement from and after the date hereof
7. Representation and Warranties.
Each party hereto represents and warrants to each other party as follows:
7.1 Corporate Organization, Standing. It is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
7.2 Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by it and, subject to the due authorization,
execution and delivery by the other parties hereto, constitutes a legal, valid
and binding obligation of it, enforceable in accordance with its terms, except
that (i) the enforceability hereof may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and (ii) the remedy of specific performance and
injunctive and other terms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereto and the fulfillment and
compliance with the terms and conditions hereof do not and will not after the
giving or notice, or the lapsed of time, or otherwise: (a) violate any
provisions of any judicial or administrative order, award, judgment or decree
applicable to it, or (b) conflict with any of the provisions of the Articles or
Certificate of Incorporation or By-Laws of it, or (c) conflict with, result in a
breach of or constitute a default under any agreement or instrument to which it,
is a party or by which it is bound, except for any of the foregoing that,
individually or in the aggregate, would not have a material adverse effect on
the financial condition, operations or businesses of such party and its
subsidiaries, taken as a whole.
7.3 Disclosure. No representation, warranty or covenant in this
Agreement nor any Schedule, statement, list or certificate furnished or to be
furnished to Sellers pursuant thereto, or in connection with the transactions
contemplated hereby, contains any untrue statement of a material fact, or omits
to state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading.
8.1 Notices. All notices, requests, demands and other communications
under or in respect of this Agreement or any transactions hereunder shall be in
writing (which may include telegraphic or telecopied commununication) and shall
be personally delivered, sent by
4
<PAGE>
overnight courier, mailed (registered or certified mail, return receipt
requested), telegraphed or telecopied by facsimile transmission to the
applicable party at its address or telecopier number indicated below.
If to COES:
Commodore Environmental Services, Inc.
150 East 58th Street
Suite 3410
New York, New York 10155
Atten: Michael D. Fullwood, Esquire
Senior Vice President and General Counsel
Chief Financial and Administrative Officer
Telecopier No.: (212) 753-0731
If to Commodore Applied:
Commodore Applied Technologies, Inc.
150 East 58th Street
Suite 3410
New York, New York 10155
Atten: Michael D. Fullwood, Esquire
Senior Vice President and General Counsel
Chief Financial and Administrative Officer
Telecopier No.: (212) 753-0731
If to the Lanxide Companies:
Lanxide Corporation
1300 Marrows Road
Newark, Delaware 19714-6077
Atten: Mr. Marc S. Newkirk, President
Telecopier No.: (302) 454-1714
8.2 Entire Agreement. This Agreement (including the Exhibits and
Schedules) contains the entire agreement among the parties with respect to the
subject matter contained herein and supersedes all prior arrangements or
understandings, written or oral, with respect thereto.
5
<PAGE>
8.3 Amendments. Any term or condition of this Agreement may be amended
or modified in whole or in part at any time, to the extent authorized by
applicable law, by an agreement in writing, authorized and executed in the same
manner as this Agreement by the parties hereto. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any right,
power of privilege hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder. The
rights and remedies herein provided are cumulative and are not exclusive of any
rights or remedies which any party may otherwise have at law or in equity. The
rights and remedies of any party arising out of or otherwise in respect of any
inaccuracy in or breach of any representation, warranty, covenant or agreement
contained in this Agreement shall in no way be limited by the fact that the act,
omission, occurrence or breach may also be the subject matter of any other
representation, warranty, covenant or agreement contained in this Agreement (or
in any other agreement between the parties) as to which there is no inaccuracy
or breach.
8.4 Severability. If any provision of this Agreement is held invalid or
unenforceable, either in its entirety or by virtue of its scope or application
to given circumstances, such provision shall thereupon be deemed modified only
to the extent necessary to render same valid, or not applicable to given
circumstances, or excised from this Agreement, as the situation may require, and
this Agreement shall be construed and enforced as if such provision had been
included herein as so modified in scope or application, or had not been included
herein, as the case may be.
8.5 Execution and Delivery. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Delivery of a counterpart
shall be deemed effective upon receipt by the other party of telefaxed signature
page to this Agreement, provided that such party shall nonetheless transmit its
original executed signature page to the other party.
8.6 Exhibits. The Exhibits and other documents attached to or delivered
herewith are hereby incorporated and made a part of this Agreement as if set
forth in full herein.
8.7 Drafting. No presumption shall operate in favor of or against any
party in the construction or interpretation of this Agreement as a consequence
of a party's responsibility for drafting this Agreement.
8.8 Recitals. The recital clauses of this Agreement are incorporated
herein to the body as though set forth at length.
8.9 Attorney and Professional Fees. Each party will pay his/her own
attorney or professional fees in connection with this Agreement or settlement
discussions leading to this Agreement.
8.10 Captions. The captions of Sections hereof are for convenience only
and shall not control or affect the meaning or construction of any of the
provisions of this Agreement.
6
<PAGE>
8.11 Controlling Law. The parties hereto agree that this Agreement
shall be governed and construed by the internal, substantive laws of the State
of New York (without regard to that state's choice of law rules or doctrines)
and, if applicable, the substantive law (statutory, administrative or common
law) of the United States (without regard to its choice of law, rules or
doctrines) Sellers hereby consent to personal jurisdiction in the State of New
York for the purposes of any matter of or related to this Agreement or any other
agreement between the parties hereto executed and delivered on or about the date
hereof, including for purposes of any amendments hereto or thereto. The parties
hereto further agree that venue for any dispute arising under this Agreement or
for any other agreement between the parties hereto which are executed on or
about the date hereof shall be proper in the United States District Court for
the Southern District of New York. The parties also expressly waive trial by
jury and the right to request a transfer of venue.
8.12 Binding Effect. This Agreement shall be binding and inure to the
benefit of the named parties hereto, all of their wholly or partially-owned
subsidiaries, the parties on whose behalf and for whose benefit it is made and
their respective heirs, administrators, executors, successors and assigns.
8.13 Confirmation of Effectiveness of Earlier Granted Licenses. Nothing
contained herein shall affect in any manner any license granted by Lanxide or
any of its affiliates to Commodore Applied or any of its affiliates as
consideration in whole or in part for and in connection with the loans made
pursuant to the Lanxide Performance $1.5 Million Loan Documents and the Lanxide
Performance $3 Million Loan Documents, including without limitation that
certain License Agreement dated as of August 29, 1996 by and among Lanxide
Technology Company L.P., Commodore Applied and Lanxide, a copy of which is
attached hereto as Exhibit D.
(remainder of page intentionally left blank]
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IN WITNESS WHEREOF, and intending to be legally bound, the parties have
hereto executed this Agreement on the day and date first above written,
Attest: LANXIDE CORPORATION
By: /s/ Marc S. Newkirk
- ------------------------- -----------------------------
Marc S. Newkirk, its President
LANXIDE PERFORMANCE MATERIALS, INC.
By: /s/ Marc S. Newkirk
- ------------------------- -----------------------------
Marc S. Newkirk, its President
COMMODORE ENVIRONMENTAL SERVICES, INC.
/s/ Michael D. Fullwood By: /s/ Paul E. Hannesson
- ------------------------- -----------------------------
Paul E. Hannesson, its President
COMMODORE APPLIED TECHNOLOGIES, INC.
/s/ Michael D. Fullwood By: /s/ Paul E. Hannesson
- ------------------------- -----------------------------
Paul E. Hannesson, its CEO
/s/ Marc S. Newkirk
- ------------------------- -----------------------------
Marc S. Newkirk
[Signature page to Settlement and Release Agreement]
8
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Exhibit List
Exhibit
Amendment to Securities Purchase Agreement A
License Agreement B
List of Third Party Ceraset(TM) Licenses C
August 29, 1996 License Agreement D
<PAGE>
AMENDMENT TO SECURITIES PURCHASE AGREEMENT
This Amended Securities Purchase Agreement (this "Agreement") is
entered into this 5th day of March, 1998, by and between LANXIDE CORPORATION, a
Delaware corporation ("Lanxide") and COMMODORE ENVIRONMENTAL SERVICES, INC., a
Delaware corporation, ("COES").
RECITALS:
WHEREAS, Lanxide's subsidiary, Lanxide Performance, is a party to and
borrower under (i) a Line of Credit Agreement with Commodore Applied
Technologies, Inc., Lender, dated August 30, 1996 in the amount of $1.5 Million
(the "$1.5 Million Credit Agreement"), (ii) a Line of Credit Promissory Note
dated August 30, 1996 in the amount of $1.5 Million (the "$1.5 Million Note"),
and (iii) a Security Agreement dated August 30, 1996 in the amount of $1.5
Million (the "$1.5 Million Security Agreement"); Lanxide is a guarantor of the
aforementioned $1.5 Million Credit Agreement and $1.5 Million Note; the $1.5
Million Credit Agreement, Note, Security Agreement and Guaranty Agreement are
hereinafter collectively referred to as the "Lanxide Performance $1.5 Million
Loan Documents");
WHEREAS, Lanxide Performance is a party to and borrower under a certain
Line of Credit Agreement with COES dated November 13, 1996 in the amount of $3
Million (the $3 Million Credit Agreement"), a Line of Credit Promissory Note
dated November 13, 1996 (the $3 Million Note"), a corresponding Security
Agreement dated November 13, 1996 (the $3 Million Security Agreement"); Lanxide
guaranteed the aforementioned $3 Million Credit Agreement, the $3 Million Note
and $3 Million Security Agreement (the "Lanxide $3 Million Guaranty"); the
aforementioned $3 Million Credit Agreement, the $3 Million Note, the $3 Million
Security Agreement and the $3 Million Lanxide Guaranty are hereinafter
collectively referred to as the "Lanxide Performance $3 Million Loan
Documents");
WHEREAS, Lanxide and COES are parties to a Securities Purchase
Agreement dated the third day of July, 1997 (the "Securities Purchase
Agreement") pursuant to which, inter alia, Lanxide granted to COES a warrant
entitling COES or the holder to purchase up to 250,000 shares of Lanxide Series
F Preferred Stock (the "Series F Preferred Stock") at an exercise price of $100
per warrant (the "Original Warrant"); and
WHEREAS, certain individual stockholders of Lanxide entered into a
"Voting Agreement" with Bentley J. Blum ("Blum"), Paul E. Hannesson
("Hannesson"), David Mitchell ("Mitchell"), Herbert Cohen ("Cohen") and Kenneth
Adelman ("Adelman")
<PAGE>
(collectively the "Proxy Holders") pursuant to which said Lanxide stockholders
granted a proxy to the Proxy Holders to vote their shares in Lanxide.
NOW, THEREFORE, in consideration of the foregoing Recitals and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound, it is hereby agreed as follows:
1. Definitions. "Common Stock Warrant" shall mean the three (3) year
warrant issued to COES on the execution and delivery date hereof entitling the
holder to purchase up to 270,000 shares of Lanxide common stock, at an exercise
price of $7.41 per warrant share, in substantially the form of Exhibit "A"
annexed hereto.
2. Cancellation of Share Purchase Right. The parties hereto acknowledge
and agree that COES's right to purchase any additional shares of Series G
Preferred Stock of Lanxide (the "Series G Preferred Stock"), as provided in
Section 2.2(c) and (d) of the Securities Purchase Agreement is hereby cancelled.
3. Cancellation of Warrant. The parties hereto hereby agree that the
Warrant which Lanxide issued to COES for the right to purchase any shares of
preferred stock, as set forth in Section 2.3 of the Securities Purchase
Agreement, is hereby cancelled.
4. Board Action for Series F Preferred Stock; Consent to Employee
Stock Option Plan; Consent to Landlord Warrant Modifications. Lanxide hereby
covenants and agrees not to issue any shares of Series F Preferred Stock and
shall take all necessary action as soon as practicable to cancel all Series F
Preferred Stock, and COES hereby consents to such cancellation.
COES hereby consents to the adoption by Lanxide of a stock option plan
anticipated to be approved by Lanxide on or before March 31, 1998 (i) pursuant
to which certain employees of Lanxide will be given five year options to acquire
shares of Common Stock for an exercise price anticipated to be $1.00 per share
and (ii) under which the aggregate number of shares to be reserved for issuance
is not to exceed twenty-five percent (25%)of the issued and outstanding shares
of Common Stock as of the date hereof on a fully diluted basis, including shares
of Common Stock issuable under the Common Stock Warrant.
COES hereby consents to Lanxide's modifications to an outstanding
Warrant to acquire shares of Common Stock registered in the name of W.P. Carey &
Co., Inc., or an affiliate thereof, which entity is Lanxide's landlord for its
principal place of business, provided that such modifications do not (i) reduce
the exercise price under such modified Warrant below $1.00 per share of Common
Stock issuable upon exercise of such Warrant or (ii) increase the maximum number
of shares of Common Stock issuable upon a exercise of such modified Warrant to a
number that is greater than 31,000 shares.
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5. Post-Closing Financing and Consummation. The parties hereto hereby
acknowledge and agree that COES's duty to seek or obtain post-closing financing
and/or to consumunate any of the transactions contemplated in the Securities
Purchase Agreement not already consummated prior to the execution date hereof
are hereby cancelled.
6. Exchange of Shares of Series G Preferred Stock; Board Action for
Series G Preferred Stock: Common Stock Warrant. Lanxide, in consideration for
(a) the terms and conditions of this Agreement, (b) other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
shall (i) upon surrender to Lanxide of the share certificates representing COES'
ownership of all shares of Series G Preferred Stock, issue share certificate(s),
in such denominations and registered in such names as COES may reasonably
request, representing ownership of a like number of shares of Lanxide's
Preferred Stock, Series H, having terms and conditions set forth on Exhibit B
hereto (the "Series H Preferred Stock"), (ii) following COES' surrender of the
certificates representing its ownership of Series G Preferred Stock, cause its
Board to cancel all Series G Preferred Stock, and COES hereby consents to such
cancellation; and (iii) issue to COES (in such denominations as may reasonably
be requested by COES) the Common Stock Warrant.
7. Registration Rights. The following provisions replace the provisions
set forth in Section 11 of the Securities Purchase Agreement:
7.1 Piggyback Rights. If at any time following the date hereof, Lanxide
shall file a registration statement (other than a registration statement on Form
S-4, Form S-8, or any successor form) with the SEC while any Registrable
Securities (as hereinafter defined) are outstanding, Lanxide shall give all the
then holders of any Registrable Securities or securities which are convertible
into or exercisable for Registrable Securities, including for this purpose,
holders of the Registrable Securities (the "Eligible Holders") at least 30 days
prior written notice of the filing of such registration statement. If requested
by any Eligible Holder in. writing within 15 days after receipt of any such
notice, Lanxide shall, at Lanxide's sole expense (other than the fees and
disbursements of counsel for the Eligible Holders and the underwriting discounts
or commissions, if any, payable in respect of the Registrable Securities sold by
any Eligible Holder), register or qualify all or, at each Eligible Holder's
option, any portion of the Registrable Securities of any Eligible Holders who
shall have made such request, concurrently with the registration of such other
securities, all to the extent requisite to permit the public offering and sale
of the Registrable Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its best
efforts through its officers, directors, auditors, and counsel to cause such
registration statement to become effective as promptly as practicable.
Notwithstanding the foregoing, if the managing underwriter of any such offering
shall advise Lanxide in writing that, in its opinion, the distribution of all or
a portion of the Registrable Securities requested to be included in the
registration concurrently with the securities being registered by Lanxide would
adversely affect the distribution of such securities by Lanxide for its own
account, then the underwriters shall have the right to exclude any or all of the
securities that the Eligible Holders or other prospective seller requested to be
included in such public offering; provided,
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<PAGE>
however, that such exclusion shall be made pro rata among the Eligible Holders
and the other stockholders of Lanxide that have registration rights or have
otherwise requested to participate on a piggyback basis in such public offering
in proportion to the respective number of shares of securities which were
requested to be included in such public offering. As used herein, "Registrable
Securities" shall mean the shares of Lanxide Common Stock issuable upon full or
partial exercise of the Warrant, which have not been previously sold pursuant to
a registration statement or Rule 144 promulgated under the 1933 Act.
7.2 If at any time following COES's completion of its purchase and
payment for any of the 270,000 Shares of Common Stock, Lanxide shall receive a
written request, from Eligible Holders who in the aggregate own (or upon
exercise of all Warrants then outstanding or issuable would own) at least 50% of
the Registrable Securities then included (or upon such exercises would be
included) in the Registrable Securities (the "Majority Holders"), to register
the sale of all or part of such Registrable Securities, Lanxide shall, as soon
as reasonably practicable, but in any event within 180 days of Lanxide's receipt
of a written request from the Eligible Holders, prepare and file with the SEC a
registration statement sufficient to permit the public offering and sale of the
Registrable Securities through the facilities of all appropriate securities
exchanges and the over-the-counter market, and will use its best efforts through
its officers, directors, auditors and counsel to cause such registration
statement to become effective within such 180 day time period; provided,
however, that the Eligible Holders shall bear all expenses, fees (including
Lanxide's reasonable attorney's fees) and disbursements incurred in connection
with such registration. Lanxide shall not be obligated to effect any
registration of its securities pursuant to this Section 7.2 within six months
after the effective date of a previous registration statement prepared and filed
in accordance with Sections 7.1 or 7.2. Within seven (7) business days after
receiving any request contemplated by this Section 7.2, Lanxide shall give
written notice to all the other Eligible Holders, advising each of them that
Lanxide is proceeding with such registration and offering to include therein all
or any portion of any such other Eligible Holder's Registrable Securities,
provided that Lanxide receives a written request to do so from such Eligible
Holder within fifteen (15) days after receipt by him or it of Lanxide's notice.
Provided, however, that the Eligible Holders may not make such a request or
demand provided for in this Section 7.2 before January 1, 2000.
7.3 Blue Sky Matters. In the event of a registration pursuant to the
provisions of this Section 7, Lanxide shall use its best efforts to cause the
Registrable Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Eligible
Holder or such holders may reasonably request; provided, however, that Lanxide
shall not be required to qualify to do business in any state by reason of this
Section 7.3 in which it is not otherwise required to qualify to do business.
7.4 Period During Which Registration Statement to Remain Effective.
Lanxide shall keep effective any registration or qualification contemplated by
this Section 7 and shall from time to time amend or supplement each applicable
registration statement, preliminary prospectus, final prospectus, application,
document, and communication for such period of time as shall be
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<PAGE>
required to permit the Eligible Holders to complete the offer and sale of the
Registrable Securities covered thereby. Lanxide shall in no event be required to
keep any such registration or qualification in effect for a period in excess of
nine months from the date on which the Eligible Holders are first free to sell
such Registrable Securities; provided, however, that, if Lanxide is required to
keep any such registration or qualification in effect with respect to securities
other than the Registrable Securities beyond such period, Lanxide shall keep
such registration or qualification in effect as it relates to the Registrable
Securities for so long as such registration or qualification remains or is
required to remain in effect in respect of such other securities.
7.5 Copies of Documents. In the event of a registration pursuant to the
provisions of this Section 7, Lanxide shall furnish to each Eligible Holder such
number of copies of the registration statement and of each amendment and
supplement thereto (in each case, including all exhibits), such reasonable
number of copies of each prospectus contained in such registration statement and
each supplement or amendment thereto (including each preliminary prospectus),
all of which shall conform to the requirements of the 1933 Act and the rules and
regulations thereunder, and such other documents, as any Eligible Holder may
reasonably request to facilitate the disposition of the Registrable Securities
included in such registration.
7.6 Opinion of Counsel to Lanxide. In the event of a registration
pursuant to the provisions of this Section 7, Lanxide shall furnish each
Eligible Holder of any Registrable Securities so registered with an opinion of
its counsel (reasonably acceptable to the Eligible Holders) to the general
effect that (i) the registration statement has become effective under the 1933
Act and no order suspending the effectiveness of the registration statement,
preventing or suspending the use of the registration statement, any preliminary
prospectus, any final prospectus, or any amendment or supplement thereto has
been issued nor has the SEC or any securities or blue sky authority of any
jurisdiction instituted or threatened to institute any proceedings with respect
to such an order, (ii) the registration statement and each prospectus forming a
part thereof (including each preliminary prospectus), and any amendment or
supplement thereto, complies as to form with the 1933 Act and the rules and
regulations thereunder, and (iii) such counsel has no knowledge of any material
misstatement or omission in such registration statement or any prospectus, as
amended or supplemented.
7.7 Terms of Underwriting Agreement. In the event of a registration
pursuant to the provision of this Section 7, Lanxide shall enter into a
cross-indemnity agreement and a contribution agreement, each in customary form,
with each underwriter, if any, and, if requested, enter into an underwriting
agreement containing conventional representations, warranties, allocation of
expenses, and customary closing conditions, including, but not limited to,
opinions of counsel and accountants' cold comfort letters, with any underwriter
who acquires any Registrable Securities.
7.8 Undertakings of Eligible Holders. In the event of a registration
pursuant to the provisions of this Section 7:
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<PAGE>
(a) each Eligible Holder shall furnish to Lanxide in writing such
appropriate information (relating to such Eligible Holder and the intention of
such Eligible Holder as to proposed methods of sale or other disposition of
their Shares) and the identity of and compensation to be paid to any proposed
underwriters to be employed in connection therewith as Lanxide, any underwriter,
or the SEC or any other regulatory authority may request;
(b) the Eligible Holders shall enter into the usual and customary
form of underwriting agreement agreed to by Lanxide and any underwriter with
respect to any such offering, if required, and such underwriting agreement
shall contain the customary rights of indemnity between Lanxide, the
underwriters, and such Eligible Holders;
(c) each Eligible Holder shall agree that he shall execute, deliver
and/or file with or supply Lanxide, any underwriters, the SEC and/or any state
or other regulatory authority such information, documents, representations,
undertakings and/or agreements necessary to carry out the provisions of the
registration covenants contained in this Section 7 and/or to effect the
registration or qualification of his or its Registrable Securities under the
1933 Act and/or any of the laws and regulations of any state or governmental
instrumentality;
(d) Lanxide's obligation to include any Registrable Securities in a
registration statement shall be subject to the written agreement of each holder
thereof to offer such securities in the same manner and on the same terms and
conditions as the other securities of the same class are being offered pursuant
to the registration statement, if such shares are being underwritten;
(e) in the event that all the Registrable Securities have not been
sold on or prior to the expiration of the period specified in Section 7.4 above,
Lanxide may de-register by post-effective amendment any Registrable Securities
covered by the registration statement, but not sold on or prior to such date.
Lanxide agrees that it will notify each holder of Registrable Securities of the
filing and effective date of such post-effective amendment; and
(f) each Eligible Holder agrees that upon notification by Lanxide
that the prospectus in respect to any public offering covered by the provisions
hereof is in need of revision, such Eligible Holder shall immediately upon
receipt of such notification (i) cease to offer or sell any securities of
Lanxide which must be accompanied by such prospectus, (ii) return all such
prospectuses in such Eligible Holder's hands to Lanxide, and (iii) not offer or
sell any securities of Lanxide until such Holder has been provided with a
current prospectus and Lanxide has given such Eligible Holder notification
permitting such Eligible Holder to resume offers and sales.
6
<PAGE>
7.9 Covenant Regarding Current Information. Lanxide agrees that until
all the Registrable Securities have been sold under a registration statement or
pursuant to Rule 144 under the 1933 Act, it shall use its best efforts to keep
current in filing all reports, statements and other materials required to be
filed with the SEC to permit holders of the Registrable Securities to sell such
securities under Rule 144.
7.10 Negative Covenant Regarding Future Registration Rights. Except for
(i) rights granted to holders of the Warrants, and (ii) rights granted by
Lanxide to other security holders of Lanxide prior to the date hereof, Lanxide
will not, without the written consent of the Majority Holders, grant to any
persons the right to request Lanxide to register any securities of Lanxide,
provided that Lanxide may grant such registration rights to other persons so
long as such rights are subordinate or pari passu to the rights of the Eligible
Holders.
7.11 Definitions. Wherever the term "Warrant" is used in this Article
it means and refers to the Common Stock Warrant defined in Section I hereof
8. Series H Preferred Stock. Lanxide covenants and agrees that, within
seven (7) business days following the execution and delivery of this Agreement,
it will take all necessary action to fix the rights, preferences and limitations
of the Series H Preferred Stock in the manner set forth on Exhibit B hereto.
Lanxide shall deliver to COES a fully executed Certificate of Stock Designation
for the Series H Preferred Stock promptly following the filing of such
certificate.
9. Partys' Representations and Warranties. Each of the parties hereby
represents and warrants to the other party hereto as follows:
9.1 Corporate Organization, Standing. It is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
9.2 Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by it and, subject to the due authorization,
execution and delivery by such other party, constitutes a legal, valid and
binding obligation of it, enforceable in accordance with its terms, except that
(i) the enforceability hereof may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and (ii) the remedy of specific performance and
injunctive and other terms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought. The execution and delivery of this Agreement, the consummation
of the transactions contemplated hereto and the fulfillment and compliance with
the terms and conditions hereof do not and will not after the giving or notice,
or the lapse of time, or otherwise: (a) violate any provisions of any judicial
or administrative order, award, judgment or decree applicable to it, or (b)
conflict with any of the provisions of the Certificate of Incorporation or
By-Laws of it, or (c) conflict with, result in a breach of or constitute a
default under any agreement or instrument to which it is a party or by which it
is bound, except for any of the foregoing that, individually or in the
aggregate, would not have a material adverse effect
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on the financial condition, operations or businesses of such party and its
subsidiaries, taken as a whole.
10. Indemnification. The indemnification provision set forth in
Sections 12.1 through 12.3 of the Securities Purchase Agreement are incorporated
herein by reference as though set forth at length and apply with equal force
with respect to the Common Stock Warrant and stock purchases as a result of any
exercise thereof.
11. Miscellaneous.
11.1 Notices. All notices, requests, demands and other communications
under or in respect of this Agreement or any transactions hereunder shall be in
writing (which may include telegraphic or telecopied communication) and shall be
personally delivered, sent by overnight courier, mailed (registered or certified
mail, return receipt requested), telegraphed or telecopied by facsimile
transmission to the applicable party at its address or telecopier number
indicated below.
If to COES:
Commodore Environmental Services, Inc.
150 East 58th Street
Suite 3410
New York, New York 10155
Atten: Michael D. Fullwood, Esquire
Senior Vice President and General Counsel
Chief Financial and Administrative Officer
Telecopier No.: (212)753-0731
Commodore Applied Technologies, Inc.
150 East 58th Street
Suite 3410
New York, New York 10155
Atten: Michael D. Fullwood, Esquire
Senior Vice President and General Counsel
Chief Financial and Administrative Officer
Telecopier No.: (212)753-0731
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<PAGE>
If to the Lanxide Companies:
Lanxide Corporation
1300 Marrows Road
Newark, Delaware 19714-6077
Atten: Mr. Marc S. Newkirk, President
Telecopier No.: (302) 454-1714
11.2 Entire Agreement. This Agreement (including the Exhibits and
Schedules) contains the entire agreement among the parties with respect to the
purchase of the Purchased Shares and related transactions and supersedes all
prior arrangements or understandings, written or oral, with respect thereto.
11.3 Amendments. Any term or condition of this Agreement may be amended
or modified in whole or in part at any time, to the extent authorized by
applicable law, by an agreement in writing, authorized and executed in the same
manner as this Agreement by the parties hereto. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any right,
power of privilege hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder. The
rights and remedies herein provided are cumulative and are not exclusive of any
rights or remedies which any party may otherwise have at law or in equity. The
rights and remedies of any party arising out of or otherwise in respect of any
inaccuracy in or breach of any representation, warranty, covenant or agreement
contained in this Agreement shall in no way be limited by the fact that the act,
omission, occurrence or breach is based may also be the subject matter of any
other representation, warranty, covenant or agreement contained in this
Agreement (or in any other agreement between the parties) as to which there is
no inaccuracy, or breach.
11.4 Severability. If any provision of This Agreement is held invalid
or unenforceable, either in its entirety or by virtue of its scope or
application to given circumstances, such provision shall thereupon be deemed
modified only to the extent necessary to render same valid, or not applicable to
given circumstances, or excised from this Agreement, as the situation may
require, and this Agreement shall be construed and enforced as if such provision
had been included herein as so modified in scope or application, or had not been
included herein, as the case may be.
11.5 Execution and Delivery. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Delivery of a counterpart
shall be deemed effective upon receipt by the other party of telefaxed signature
page to this Agreement, provided that such party shall nonetheless transmit its
original executed signature page to the other party.
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11.6 Exhibits and Schedules. The Exhibits and Schedules and other
documents attached to or delivered herewith are hereby incorporated and made a
part of this Agreement as if set forth in full herein.
11.7 Drafting. No presumption shall operate in favor of or against any
party in the construction or interpretation of this Agreement as a consequence
of a party's responsibility for drafting this Agreement.
11.8 Recitals. The recital clauses of this Agreement are incorporated
herein to the body as though set forth at length.
11.9 Attorney and Professional Fees. Each party will pay his/her own
attorney or professional fees in connection with this Agreement or settlement
discussions leading to this Agreement.
11.10 Captions. The captions of Sections hereof are for convenience
only and shall not control or affect the meaning or construction of any of the
provisions of this Agreement.
11.11 Controlling Law. The parties hereto agree that this Agreement
shall be governed and construed by the internal, substantive laws of the State
of New York (without regard to that state's choice of law rules or doctrines)
and, if applicable, the substantive law (statutory, administrative or common
law) of the United States (without regard to its choice of law, rules or
doctrines) Sellers hereby consent to personal jurisdiction in the State of New
York for the purposes of any matter of or related to this Agreement or any other
agreement between the parties hereto executed and delivered on or about the date
hereof, including for purposes of any amendments hereto or thereto. The parties
hereto further agree that venue for any dispute arising under this Agreement or
for any other agreement between the parties hereto which are executed on or
about the date hereof shall be proper in the United States District Court for
the Southern District of New York. The parties also expressly waive trial by
jury and the right to request a transfer of venue.
11.12 Binding Effect. This Agreement shall be binding and inure to the
benefit of the named parties hereto, all of their wholly or partially-owned
subsidiaries, the parties on whose behalf and for whose benefit it is made and
their respective heirs, administrators, executors, successors and assigns.
11.13 Survival. The Securities Purchase Agreement, as amended by the
Amendment, shall survive and remain valid, binding and enforceable according to
its terms.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, and intending to be legally bound, the parties have
hereto executed this Agreement on the day and date first above written.
Attest: LANXIDE CORPORATION
By: /s/ Marc S. Newkirk
-------------------------- --------------------------------
Marc S. Newkirk, its President
COMMODORE ENVIRONMENTAL SERVICES, INC.
/s/ Michael D. Fullwood By: /s/ Paul E. Hannesson
-------------------------- --------------------------------
Paul E. Hannesson, its President
Signature page to Amendment to Securities Purchase Agreement
<PAGE>
LICENSE AGREEMENT
This License Agreement ("Agreement"), dated as of March 5, 1998
(the "Effective Date"), is made among
1. Lanxide Technology Company L.P. of 1300 Marrows Road, P.O. Box 6077,
Newark, Delaware 19714-6077, U.S.A. a Delaware limited partnership
("LTC"),
2. Commodore Polymer Technologies, Inc. of 150 East 58th Street, Suite 3400,
New York, New York 10155, a Delaware corporation ("Licensee") and
3. Lanxide Corporation of 1300 Marrows Road, P.O. Box 6077, Newark, Delaware
19714-6077, U.S.A., a Delaware corporation ("Lanxide").
WHEREAS, LTC and Lanxide Performance Materials, Inc. ("LPM") are wholly
owned and controlled by Lanxide; and
WHEREAS, LTC holds rights in certain valuable Technology and Lanxide
owns certain valuable trademarks and has licensed certain of those rights to
Lanxide K.K. in Japan; and
WHEREAS, Licensee wishes to enter into the transactions contemplated
herein; and
WHEREAS, Licensee wishes to license certain of such rights for the
purposes defined herein; and
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto hereby agree as follows:
I. DEFINITIONS
Terms used with initial capital letters in this Agreement shall have
the meaning set forth below
1.1 "Affiliate(s)" of a corporation or other entity means a person or
entity that, directly or indirectly through one or more intermediaries
controls, is controlled by, or is
1.2 "CMC and/or MMC Materials" shall mean composite materials that comprise
a reinforcing material contained within a ceramic and/or metal matrix.
1.3 "Government Entity" shall mean any sovereign, state or political
subdivision thereof, whether foreign or domestic.
<PAGE>
1.4 "Government Regulations" shall mean and include any and all terms,
conditions and provisions of: (a) any law, regulation, order, statute,
decree, rule, writ, injunction, determination or award of any court or
Governmental Entity; and (b) any contract for research, development
and/or manufacturing between LTC and any department or agency of the
United States government but only to the extent such contracts reflect
provisions required by clause (a) above to be included therein.
1.5 "Licensed Technology" shall mean Technology which is now or hereafter
owned by LTC, and all other Technology licensed to LTC without
restriction upon the grant of sublicenses including improvements and
modifications thereto, that is relevant to the manufacture of Polymer
Materials and Products but excluding Technology, the transfer or
license of which, or an interest in which, would be expressly
prohibited, either generally or specifically, by Government Regulations
or contracts with third parties which are further described in Schedule
1.5 hereto.
1.6 "Person" shall mean any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision
thereof.
1.7 "Polymer Materials" shall mean CERASET(TM) polyureasilazane polymers
for use in the manufacture of Products.
1.8 "Products" shall mean any and all products that contain Polymer
Materials except for the following: (a) products that contain CMC
and/or MMC Materials, (b) Polymer Materials supplied by LTC or Lanxide
to the Licensees set forth in Schedule 2.1 in accordance with currently
existing contractual rights, obligations, or commitments of LTC or
Lanxide, and (c) products produced by the Licensees set forth in
Section 2.1 in accordance with the terms of their currently existing
licenses from LTC or Lanxide.
1.9 "Technology" shall mean technical information, know-how, data,
techniques, patents, patent applications and trade secrets.
1.10 "Territory" shall mean the world excluding only the country of Japan.
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II. GRANT OF TECHNOLOGY LICENSES: TRADEMARK ASSIGNMENT
2.1 License to Licensed Technology. Except as otherwise hereinafter
provided, subject to Government Regulations and the provisions of this
Agreement, LTC hereby grants to Licensee a sole and exclusive license
to use the Licensed Technology to make, use, sell and offer for sale
Polymer Materials and Products in the Territory.
2.2 Rights Outside the Territory. The license granted under this Section 2
shall not include any rights to use the Licensed Technology for the
manufacture of Polymer Materials or Products outside the Territory and
such license shall not include any right to export Polymer Materials or
Products from the Territory.
2.3 Sublicensing Rights. The Licenses granted under this Section 2 shall
include the right to grant sublicenses, provided that any such
sublicenses shall not exceed the scope of this license.
2.4 Reservation of Rights. No rights are granted under the Licensed
Technology except as expressly set forth in this Section 2 and all
rights not expressly granted are reserved.
2.5 Provision of Technnology. Subject to applicable Government
Regulations, including obtaining any necessary licenses prior to
disclosure, LTC or Lanxide shall preserve and make available in the
English language and U.S. units of measurement to Licensee at
Licensee's request, any technical information, formulae, data,
analyses, know-how, and information with respect to the Licensed
Technology, Polymer Materials and Products and all related confidential
know-how for the Licensee's use for the purposes set out in this
Agreement. Additional technical support shall be made available by LTC
or Lanxide to Licensee on a basis of cost and availability no less
favorable to Licensee than that afforded to any other licensee of the
Licensed Technology.
2.6 Protection of Technology. Licensee shall not use and shall not permit
its authorized sublicensees to use the Licensed Technology for any
purpose other than to manufacture, use and sell Polymer Materials
and/or Products as provided in this Agreement. Licensee shall take no
action in respect of Licensed Technology which is inconsistent with the
terms of the licenses granted under this Agreement.
2.7 Acknowledgment of Rights; Patent Marking. Licensee acknowledges that
Licensee's right to use the Licensed Technology arises only out of the
licenses granted under this Agreement. All containers of Polymer
Materials and/or Products manufactured under issued patents of LTC
shall bear a patent notice as may be necessary or desirable under the
laws of the applicable Government Entities.
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III. TRADEMARK LICENSE, INDEMNITY AND INSURANCE.
3.1 Trademark License. Subject to Government Regulations and the provisions
of this Agreement, Lanxide hereby grants to Licensee an exclusive right
to use the trademark CERASET(TM) (the "Trademark") in connection with
the marketing and sale in the Territory of Polymer Materials and
Products made using the Licensed Technology. Licensee shall have the
right but not the obligation to use the Trademark in connection with
the marketing and sale of Polymer Materials and Products, providing the
requirements of Section 3.5 hereof shall be met. This provision does
not restrict Licensee from using any other trademark(s) in connection
with Polymer Materials or Products.
3.2 Registration. Registration of the Trademark shall only be made in the
name of LTC or its designee. Licensee shall provide such assistance as
LTC or its designee may require in relation to such registration in the
Territory at LTC's expense, including the execution of all documents
necessary or desirable for obtaining and maintaining such registration.
In addition, Licensee shall cooperate with LTC in seeking the
registration of this License Agreement or of an executed registered
user agreement as may be necessary or desirable under the laws of the
Territory to record the trademark license granted under this Agreement
with LTC to bear any associated expense.
3.3 Acknowledgment of Rights. As between the parties, Licensee acknowledges
that the Trademark and the goodwill associated with the trademark are
the property of Lanxide and that, except to the extent of the license
rights granted hereunder, Licensee shall not acquire any rights in such
Trademark or in any registration of the Trademark. Licensee
acknowledges that Licensee's right to use the Trademark arises only out
of the licenses granted under this Agreement. Licensee shall neither
challenge nor dispute the rights of Lanxide with respect to use or
ownership of the Trademark. However, Lanxide makes no warranty that the
Trademark will be successfully registered in any countries in the
Territory.
3.4 Use of Trademark; Quality Control. Licensee shall only use the
Trademark in connection with Products manufactured using the Licensed
Technology or as otherwise agreed to in writing by LTC or Lanxide from
time to time. The standards of manufacture of such Products shall be at
least equal to the standards of quality required by LTC and Lanxide in
relation to their other manufacturing or licensing activities. Licensee
shall follow all reasonable instruction in relation to the quality of
manufacture of Products communicated to it by any representative of
LTC or Lanxide. In no event shall Licensee manufacture any Products
which are not in accordance with applicable Government Regulations
relating to safety and product quality.
3.5 Indemnity and Insurance. Licensee shall indemnify and hold harmless
LTC, Lanxide, their Affiliates and their respective directors, officers
and employees from and against any losses, claims and damages including
reasonable attorney's fees arising out of manufacture, use or sale of
Polymer Materials and/or Products by Licensee. During the term of this
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Agreement and until the last applicable statute of limitations expires,
but only from and after the time Licensee or its permitted assigns or
sublicensees first begin to make, use, sell, or offer for sale Products
based on the Licensed Technology, Licensee will procure and maintain,
at its own cost and expense, product liability insurance written on an
occurrence basis from an insurance company rated A or above by A. M.
Bests' providing protection against liability for any alleged damage or
injury arising out of any alleged defect in material or workmanship in
such Polymer Materials and/or Products in the primary amount of 1
million U.S. dollars with respect to any one accident or occurrence,
and 1 million U.S. dollars in the aggregate. From and after the time
Licensee or its permitted assigns or sublicensees first begin to make,
use, sell, or offer for sale Products based on the Licensed Technology,
Licensee shall also procure and maintain, at its own expense, excess
liability insurance in the amount of 10 million U.S. dollars in the
aggregate. The insurance policy shall name LTC as an additional insured
and shall be endorsed to provide for written notification to LTC by
insurer not less than 30 days prior to cancellation. Licensee shall
provide LTC with a certificate of insurance evidencing such coverage
within 45 business days after such initial activity and annually
thereafter.
3.6 Inspection and Approval Rights. The Trademark shall only be used in
accordance with the license granted by this License Agreement. Licensee
shall provide to Lanxide upon request samples of Products manufactured
by Licensee and its sublicensees as well as advertising and other
publicity materials bearing the Trademark proposed to be use by its
authorized sublicensees, together with an English language translation
if necessary. Licensee shall allow and cause any of its sublicensees to
permit Lanxide or its representatives at all reasonable times to
inspect any facility where Products which will be sold under the
Trademark are manufactured.
3.7 Reservation of Rights. No rights are granted under the Trademark except
as expressly set forth in this Section 3. Without limitation, Licensee
acknowledges the rights of Lanxide and its Affiliates to use the
Trademark themselves in connection with the manufacture, or use of
products or polymer materials which have not otherwise been licensed to
Licensee by this License Agreement. Lanxide expressly reserves the
right to assign its entire right, title, and interest in and to the
Trademark to LTC, in which event LTC shall assume Lanxide's rights and
obligations under this Agreement.
IV. FEE AND ROYALTY
4.1 Fee Payment and Amount. Licensee shall pay to LTC alicense fee in
accordance with the following (the "Fee"):
1. The sum of five hundred thousand dollars ($500,000) in wired funds
on the Effective Date, wired to the account of Lanxide identified
in instructions delivered to Licensee contemporaneously with the
execution and delivery hereof,
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2. cancellation of the notes from LPM to Commodore Environmental
Services, Inc., and Commodore Applied Technologies, Inc., each an
Affiliate of Licensee, in the amounts of $3 million and $1.5
million respectively in addition to cancellation of any accrued
interest thereon.
4.2 Royalty Payment and Amount. Licensee shall pay to LTC a royalty equal
to 4% of the Net Sales Price of all Products sold by Licensee and any
of its sublicensees, which are manufactured using the Licensed
Technology until the aggregate royalty payments shall equal $4,000,000.
Thereafter perpetually Licensee shall pay to LTC a royalty equal to 2%
of the Net Sales Price of all Products sold by Licensee and its
sublicensees, which are manufactured using the Licensed Technology.
Licensee shall pay the royalty to LTC so long as Licensee or any
subcontract manufacturer or other sublicensee of Licensee shall use the
Licensed Technology. This license shall remain in force and effect
unless Licensee shall cease or suspend payment of royalties due to
non-use of the Licensed Technology. For purposes of this Agreement, the
term "non-use" shall mean (i) the failure of the Licensee to make any
sales of Polymer Materials or Products licensed hereunder for any
consecutive three (3) year period beginning from and after the date
hereof and (ii) after any such three (3) year period, the Licensee
continues to fail for a period of six (6) consecutive months after
receipt of written notice from LTC to make any such sales hereunder. In
the event of such non-use, the license granted hereby shall terminate.
4.3 Net Sales Price. The "Net Sales Price" referred to in Section 4.1 shall
mean the invoiced price for a Product less insurance, transport, bona
fide rebates and allowances to the extent identified on the invoice,
and less returns. The "Net Sales Price" applicable to transfers to
entities affiliated with Licensee will be the price at which such
Products would be sold at the time in question on an arms-length basis
to a third party.
4.4 Third Party Royalties. In any case where use of Licensed Technology
requires or required LTC to pay a royalty to a third party (whether
lump-sum or payable by reference to sales), then in the event that
Licensee determines to use such Technology, Licensee may offset the
amount of such third party royalty against the royalty specified in
Section 4.1.
4.5 Tax Withholdng. Licensee may withhold taxes from royalties payable
hereunder only to the extent that such withholding is required under
any applicable law and to the extent that Licensee provides copies of
all documents required by LTC hereunder to claim credit for such
tax payment.
4.6 Payment and Accounting. Royalties due under this Agreement shall be
paid in U.S. dollars to the bank account specified by LTC within 45
days after each of December 31, March 31, June 30, and September 30, in
relation to the period of three (3) calendar months (or less in the
case of the first such period ) ending on such date. At the same time
as payment of royalties is made, Licensee shall provide to LTC a
statement setting out the sales of products manufactured using the
Licensed Technology made during the period to which such royalties
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relate, the type and description of product in question, the applicable
Net Sales Price, the amount of royalties payable and the amount of any
tax withheld. Overdue payments shall bear interest at the annual rate
of two percent (2%) above the prime rate of Citibank, in New York.
4.7 Books and Records. Licensee shall keep proper books and records
showing the description and price of products sold, and such records
shall be open at all reasonable times to inspection by Lanxide or its
representatives, who shall be entitled to take copies of such books
and records.
4.8 Currency Conversion. For the purpose of converting into U.S. dollars
the currency in which royalties may arise, the rate of exchange to be
applied shall be the rate of exchange for the purchase of U.S. dollars
with the currency quoted by Citibank, in New York as at the close of
business on the last business day of the quarterly period to which a
payment shall relate.
V. TERM AND TERNUNATION
5.1 Effective Date. This Agreement shall come into effect upon the
Effective Date set forth in the first page hereof. This Agreement shall
thereafter be perpetual and non-cancelable, subject to earlier
termination as provided herein.
5.2 Events of Termination. This Agreement may be terminated upon the
happening of any of the following events:
(i) Upon written notice from LTC or Lanxide, in the event that
Licensee is in material breach of any of its obligations under
this Agreement, and fails to remedy that breach within 30 days
after receipt of written notice from LTC or Lanxide, requiring
it to remedy that breach;
(ii) Upon 180 days prior written notice by LTC, in the event that any
Government Entity or court requires substantial modifications to
the provisions of this Agreement;
(iii) Upon written notice by Licensee to LTC;
(iv) As provided elsewhere in this Agreement.
5.3 Effects of Termination. On termination of this Agreement for any
reason, the following provisions shall have effect:
(i) All licenses and rights granted to Licensee by Licensor shall
forthwith cease and Licensee shall cooperate in canceling any
registration of such licenses.
(ii) Licensee shall, except as otherwise agreed with LTC or Lanxide,
as applicable, forthwith cease all use of the Licensed
Technology and the Trademarks.
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(iii) Termination of this Agreement shall not affect the continued
enforceability of Section 3.7 and Section 8 and the continued
existence of the license from Licensee to Licensor under Section
7.1 hereunder of improvements and inventions made up to the date
of termination.
(iv) Licensee shall promptly deliver all Proprietary Information in
all forms to LTC or to its authorized representatives.
VI. GOVERNMENT REGULATIONS, ETC.
6.1 Compliance with Government Regulations. Licensee agrees to obtain and
maintain any necessary governmental consents or licenses. LTC
represents and warrants that, except for governmental licenses required
in connection with manufacturing the chemicals used to produce Polymer
Materials, to the best of LTC's knowledge, no other consents or
licenses are required. Licensee shall comply with all Government
Regulations governing export of goods and information from the
Territory and between the various countries of the Territory, including
without limitation the Export Administration Regulations of the United
States (15 C.F.R. 730 et seq.) as such may be amended from time to
time, and the terms of any licenses or consents obtained.
VII. PATENTS AND IMPROVEMENTS
7.1 LTC's Rights in Inventions. Licensee shall promptly disclose to LTC any
inventions or improvements which relate solely to the Licensed
Technology that are made by Licensee's employees or by the employees of
any sublicensee without the participation of any of the employees of
LTC or its Affiliates and Licensee shall obtain the right to grant, and
grant, to LTC a full world-wide, royalty-free, perpetual, irrevocable,
non-exclusive license to make, use, sell and offer for sale such
improvements or inventions related to Products that contain CMC and/or
MMC Materials with full right by LTC to grant sublicenses of such
improvements or inventions which themselves include the right to
sublicense.
The provisions of this Section 7.1 shall not affect the ownership of
inventions or improvements made by employees of LTC or its Affiliates
(with or without the participation of the employees of the Licensee or
any sublicensee) which inventions and improvements shall be the
property of LTC or its Affiliates, but subject to the licenses granted
under this Agreement.
7.2 Licensee's Rights in Inventions. LTC shall promptly disclose to
Licensee any inventions or improvements which relate solely to the
Licensed Technology and Products that are made by LTC's employees or by
the employees of any sublicensee without the participation of any of
the employees of Licensee or its Affiliates and LTC shall obtain the
right to grant, and grant, to Licensee to make, use, sell and offer for
sale such improvements or inventions in any manner not prevented by the
terms of any other existing license by which LTC is bound, with full
right by Licensee to grant sublicenses of such improvements or
inventions which themselves include the right to sublicense.
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7.3 Prosecution and Registration. Licensee shall not seek any patent or
other intellectual property registration in relation to the Licensed
Technology in its own name, other than improvements and inventions
relating to the Licensed Technology made by Licensee's employees with
or without the participation of employees of authorized sublicensees or
contract manufacturers. Licensee will cooperate with LTC as reasonably
requested by LTC in relation to obtaining and prosecuting patents in
the name of LTC. LTC and Lanxide covenant and agree to fully and timely
pay all patent maintenance fees for all patents on which the Licensed
Technology is based. However, Licensee shall have the right but not the
obligation to maintain, at Licensees expense, patents and patents
pending of LTC that directly relate to Licensed Technology but only in
the event that LTC and Lanxide are unable to do so.
7.4 Actions and Claims Against Third Parties. If, during the term of this
Agreement, Licensee learns of any infringement, unfair competition or
misappropriation ("Infringement") by a third party of any Licensed
Technology licensed to Licensee, Licensee shall promptly and fully
notify LTC in writing.
7.5 Infringement Claims by Third Parties. If, during the term of this
Agreement, any claim or action is threatened or commenced by a third
party alleging Infringement of third party rights by practice of
Licensed Technology by Licensee, Licensee shall promptly and fully
notify LTC in writing.
7.6 Procedure, LTC shall have the right, but not the obligation, to take
all reasonable steps to prosecute or defend any such claim or action
relating to the matter set forth in Sections 7.3 or 7.4, and may
institute, defend, or settle claims, actions or proceedings at its
expense. Licensee, at LTC's request shall render all reasonable
assistance and cooperation at LTC's expense. If LTC refuses or fails to
take or defend such actions within six (6) months after receipt of the
notice described above (or such shorter period as shall be reasonable
in the circumstances), then Licensee shall have the right (but not the
obligation), after first notifying LTC in writing, to institute, defend
or settle such actions or claims or proceedings, which shall be at
Licensee's expense. In such case LTC, at Licensee's request, shall
render all reasonable assistance and cooperation at Licensee's expense,
and LTC shall have the right to participate in such proceedings through
LTC's own counsel. In no event shall LTC bear any expense of any
claims, actions, or proceedings not instituted or defended by LTC
unless their written consent is obtained prior to the institution or
defense of such claims, actions, or proceedings.
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VII. CONFIDENTIALITY, RESTRICTED DISCLOSURE AND LIMIITED USE
COMMITMENTS
8.1 Confidentialfty Undertaking. The parties hereto shall (i) treat as
confidential all Proprietary Information (as hereinafter defined) which
is obtained by a receiving party directly or indirectly from a
disclosing party in connection with this Agreement, and (ii) not
disclose the same to any third party nor use the same, except as
provided herein. The provisions of this Section shall apply, without
limitation, to all information learned by the parties in the course of
implementing this Agreement concerning the business, assets, customers,
processes or methods of Lanxide, LTC, or Licensee, or their Affiliates.
The provisions of Section 8 shall remain in effect during the term of
this Agreement and for a period of five (5) years after termination or
expiration of the Agreement.
8.2 Proprietary information. As used herein, "Proprietary Information"
means any information of Lanxide, LTC, Licensee, or their Affiliates
that might reasonably be considered proprietary, sensitive or private,
including but not limited to the following:
(i) Technical information, know-how, data, techniques,
discoveries, inventions, ideas, unpublished patent applications,
proprietary information, formulae, analyses, laboratory reports,
other reports, financial information, studies, findings, or
other information relating to Lanxide, LTC, Licensee, or their
Affiliates, or the Licensed Technology or methods or techniques
used by Lanxide, LTC, Licensee, or their Affiliates, whether or
not contained in samples, documents, sketches, photographs,
drawings, lists, and the like;
(ii) Data and other information employed in connection with the
marketing of the products of Lanxide, LTC, Licensee, or their
Affiliates including cost information, business policies and
procedures, revenues and markets, distributors and customers,
and similar items of information whether or not contained in
documents or other tangible materials; and
(iii) Any other information obtained by the parties to this
Agreement during the term hereof, that is not generally known
to, and not readily ascertainable by proper means by, third
parties.
8.3 Precautions. The parties hereto shall take all appropriate steps to
prevent unauthorized disclosure of any Proprietary Information by their
employees, which steps include the execution or acceptance by all
such persons of written agreements containing obligations of
confidentiality, restricted disclosure and limited use relative thereto
consistent with this Section 8 prior to disclosure of Proprietary
Information to them. The parties shall not permit access to Proprietary
Information by their employees, except on a need-to-know basis. The
parties shall further take all appropriate steps to protect the
Proprietary Information against espionage, misuse, loss or theft.
8.4 Exclusions. The provisions of Section 8 shall not apply to any
Proprietary Information after (i) it has become generally available to
the public through no fault of the receiving party or its employees,
(ii) the receiving party can prove by clear and convincing documentary
evidence that it was in its possession before disclosure hereunder and
did not come directly or indirectly from the disclosing party or (iii)
it becomes known to the receiving party through lawful disclosure from
a third party that is not subject to a confidentiality agreement with
any disclosing party or Affiliate.
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8.5 Permitted Disclosure. Proprietary Information may not be disclosed by
the receiving party without the prior written consent of the disclosing
party, except that:
(i) Any party hereto, as appropriate, may disclose such Proprietary
Information to their employees on a need-to-know basis for the
purposes of this Agreement in accordance with Section 8.3.
(ii) Any party hereto may disclose Licensee's Proprietary
Information to its Affiliates or its other licensees or
sublicensees of the Licensed Technology, provided that prior to
disclosure of the Proprietary Information, such Persons execute
written agreements containing obligations of confidentiality
consistent with this Section 8.
(iii) In the event that a third party wishes to evaluate the
Licensed Technology in connection with a business transaction,
Lanxide may disclose as much of Licensee's Proprietary
Information to that third party as is necessary to conduct such
evaluation, provided that prior to disclosure such third party
executes a written agreement prohibiting use of the Proprietary
Information for any reason other than evaluation of this
technology and containing obligations of confidentiality
consistent with this Section 8.
8.6 Government Regulations. The provisions of this Section 8 shall not be
deemed to obligate either party to do or refrain from doing any act,
the doing or not doing of which would cause or reasonably be expected
to cause either party to fail to fulfill or comply with any obligation
or requirement imposed by any Governmental Regulation, provided that,
any disclosures of Proprietary Information made to fulfill or comply
with any such Regulation shall be made (i) only after notice to the
other party, and (ii) under conditions invoking all confidentiality
protections as are available by law or regulation.
IX. MISCELLANEOUS
9.1 Warranties. Except as otherwise expressly set forth in Section 9.2
hereof, LTC and Lanxide make no warranty or representation with respect
to the Trademarks the Licensed Technology or other assistance furnished
under this Agreement, or with respect to the Trademarks, nor are LTC or
Lanxide in any way responsible for the accuracy, utility or
completeness of any Licensed Technology or other assistance furnished
under this Agreement. LTC AND LANXIDE HEREBY EXPRESSLY DISCLAIM ANY AND
ALL WARRANTIES AND REPRESENTATIONS, EXPRESS OR IMPLIED, ARISING BY LAW
OR CUSTOM, WITH RESPECT TO THE TRADEMARKS OR THE LICENSED TECHNOLOGY,
INCLUDING, WITHOUT LIMITATION, WARRANTIES OF NON-INFRINGEMENT,
MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE. LTC AND LANXIDE
DO NOT IN ANY WAY PROMISE THAT THE LICENSED TECHNOLOGY WILL PRODUCE ANY
PARTICULAR RESULTS, PRODUCTS OR PROFITABILITY.
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9.2 Representations and Warranties. LTC and Lanxide represent and warrant,
jointly, and severally, to Licensee as follows:
(a) LTC owns free and clear of all liens and encumbrances, all right,
title and interest in and to all patents, patent applications,
trademarks (if any), and trademark applications that relate to the
Licensed Technology described on Schedule 9.2 hereto, Schedule 9.2
sets forth accurate information with respect to the filing dates of
all such items, and the existing registrations for any issued
patents and trademarks included therein are in good standing.
(b) all maintenance fees for the patents described on Schedule 9.2
hereto have been paid up through and including the date of this
Agreement;
(c) the trademarks described on Schedule 9.2 which are registered with
the U.S. Patent & Trademark Office, or for which applications for
registration with the U.S. Patent & Trademark Office have been
filed, were first used in interstate commerce on the dates
specified in the respective applications filed with the U.S. Patent
& Trademark Office, and have been continuously used in the
interstate commerce since that date.
(d) neither LTC nor Lanxide has knowledge nor has either of them
received any notice of (i) the invalidity or conflict of any patent
or trademark described on Schedule 9.2 hereto or (ii) asserted
rights of others in or to any patent or trademark described on
Schedule 9.2 hereto;
(e) To the knowledge of LTC and Lanxide, within the past five (5)
years, no claim is pending, is threatened or has been made with
respect to the Licensed Technology, Polymer Materials or Products;
(f) no claim has been made within the past five (5) years or is now
pending nor, to the knowledge of LTC and Lanxide, is or has been
threatened, within the past five (5) years, for interference,
opposition, re-examination or cancellation of the patents described
on Schedule 9.2 hereto;
(g) the execution and delivery of this Agreement will not conflict
with, alter or impair the rights in or to, or the validity of any
other agreement to which either of them are a party;
(h) to the knowledge of LTC and Lanxide, the Licensed Technology hereby
licensed does not infringe on or misapply any other technology
licensed by Lanxide;
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(i) the use of the Licensed Technology as permitted under this License
Agreement does not infringe on, misapply or interfere with
agreements that LTC or Lanxide has with any other person, and,
(j) to the knowledge of LTC and Lanxide, no other party has been
infringing on or misapplying the Licensed Technology described on
Schedule 9.2 hereto.
9.3 Force Majeure. Neither party shall be liable for failure to perform its
obligations hereunder for so long as that failure may be the result of
any event beyond its reasonable control (a "force majeure" event),
provided that such party uses all reasonable efforts to comply with the
terms of this Agreement to the extent that it is able to do so.
9.4 Waivers. The failure at any time of either party to require performance
by the other party of any obligation required by this Agreement shall
in no way affect the first party's right to require such performance at
any time thereafter, nor shall the waiver by either party of a breach
of any provision of this Agreement by the other party constitute a
waiver of any other breach of the same or any other provision or
constitute a waiver of the obligation itself.
9.5 Amendment. This Agreement may be amended only by an instrument in
writing duly executed by the parties hereto.
9.6 Assignabilily. This Agreement shall be binding upon and inure to the
benefit of the permitted successors and assigns of each party hereto.
Neither this Agreement nor any right or obligation hereunder may be
assigned or delegated in whole or in part by any party without the
prior written consent of the other parties which consent shall not be
unreasonably withheld, except that either party shall have the right to
transfer its rights and obligations to an Affiliate.
9.7 Notices. In any case where any notice or other communication is
required or permitted to be given hereunder (including, without
limitation, any change in the information set forth in this Section
9.6) such notice or communication (i) shall be in writing and in the
English language, (ii) shall be sent to the parties set out below, and
(iii) shall be (A) personally delivered, (B) sent by postage prepaid
registered airmail, (C) transmitted by telecopy receipt of which is
confirmed, (D) sent by courier service requiring signature on receipt,
as follows:
If to LTC, to:
Lanxide Technology Company, L.P.
c/o Lanxide Corporation, General Partner
1300 Marrows Road
P.O. Box 6077
Newark, DE 19714-6077
U.S.A.
Attention: President
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If to Lanxide. to:
Lanxide Corporation
1300 Marrows Road
P.O. Box 6077
Newark, Delaware 19714-6077
U.S.A.
Attention: President
If to Licensee, to:
Commodore Polymer Technologies, Inc.
150 East 58th Street, Suite 3400
New York, New York 10155
Attention: President
All such notices or other communications shall be deemed to have
been given or received (i) upon receipt if personally delivered, or
if by courier, (ii) on the tenth business day following posting if
by postage prepaid registered airmail, or (iii) when sent with
confirmed answer back if sent by telecopy.
9.8 Choice of Law. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Delaware,
United States of America.
9.9 Forum Jurisdiction, Venue and Service. The Licensee hereby irrevocably
and unconditionally:
(i) agrees that any action, suit or proceeding by any person arising
from or relating to this Agreement or any statement, course of
conduct, act, omission, or event occurring in connection herewith
(collectively, "Related Litigation") may be brought in any state
or federal court of competent jurisdiction sitting in the State
of Delaware, submits to the jurisdiction of such courts, and to
the fullest extent permitted by law agrees that it will not bring
any Related Litigation in any other forum;
(ii) waives any objection which it may have at any time to the
laying of venue of any Related Litigation brought in any such
court, waives any claim that any such Related Litigation has
been brought in an inconvenient forum, and waives any right to
object, with respect to any Related Litigation brought in any
such court, that such court does not have jurisdiction over the
Licensee; and
14
<PAGE>
(iii) consents and agrees to service of any summons, complaint or
other legal process in any Related Litigation by registered or
certified U.S. mail, postage prepaid, to the Licensee at the
address for notices described in Section 9.6 hereof, and
consents and agrees that such service shall constitute in every
respect valid and effective service (but nothing herein shall
affect the validity or effectiveness of process served in any
other manner permitted by law).
9.10 Interpretation. The headings of the sections and Sections in this
Agreement are provided for convenience of reference only and shall not
be deemed to constitute a part hereof. The Agreement is executed in the
English language.
9.11 Entire Agreement. This Agreement constitutes the entire agreement of
the parties hereto with respect to the subject matter of this Agreement
and supersedes all prior agreements and understandings, oral and
written, if any, among the parties hereto with respect to the subject
matter of this Agreement.
9.12 Severability. Should any provision of this Agreement be deemed in
contradiction with the laws of any jurisdiction in which it is to be
performed or unenforceable for any reason, such provision shall be
deemed null and void, but, except as provided in Section 5.2, this
Agreement shall remain in force in all other respects.
9.13 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
[remainder of page intentionally left blank]
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
LANXIDE TECHNOLOGY COMPANY, L.P. LANXIDE CORPORATION
BY: LANXIDE CORPORATION BY: /s/ Marc S. Newkirk
General Partner ------------------------------
BY: /s/ Marc S. Newkirk NAME: Marc S. Newkirk
-------------------- -------------------------------
NAME: Marc S. Newkirk TITLE: ______________________________
--------------------
TITLE: __________________
COMMODORE POLYMER TECHNOLOGIES, INC.
BY: /s/ Paul E. Hannesson
----------------------
NAME: Paul E. Hannesson
----------------------
TITLE: __________________
Signature Page to License Agreement
16
<PAGE>
SCHEDULE-1.5
Technology which is, or may in the future be
(i) provided to Lanxide or its Affiliates under Non Disclosure
Agreements and is identified as the proprietary information of
the disclosing party.
(ii) designated as classified by a government agency.
(iii) controlled by the export regulations of the United States.
(iv) Provided under license to Lanxide or its Affiliates with limits
on its use or transfer.
17
<PAGE>
SCHEDULE 2.3
LIST OF EXISTING LICENSES
18
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Name of Subsidiary State of Incorporation Percentage Owned
- ------------------ ---------------------- ----------------
Harvest American Corp. Delaware 100%
Commodore Polymer Technologies, Inc. Delaware 100%
Commodore Oil & Gas Corporation Delaware 100%
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,542
<SECURITIES> 0
<RECEIVABLES> 3,525
<ALLOWANCES> (461)
<INVENTORY> 360
<CURRENT-ASSETS> 21,544
<PP&E> 3,476
<DEPRECIATION> (978)
<TOTAL-ASSETS> 35,016
<CURRENT-LIABILITIES> 8,336
<BONDS> 6,269
0
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<COMMON> 592
<OTHER-SE> 3,005
<TOTAL-LIABILITY-AND-EQUITY> 35,016
<SALES> 0
<TOTAL-REVENUES> 19,493
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<TOTAL-COSTS> 16,325
<OTHER-EXPENSES> 21,414
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (13,507)
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