SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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:
Title of Each Class Name of Each Exchange on Which Registered
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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
December 31, 1999 with an aggregate market value of approximately $2,368,506
(based upon the average of the bid and asked prices of the Common Stock on
December 31, 1999 as quoted by the National Association of Securities Dealers,
Inc. OTC Bulletin Board).
As of December 31, 1999, 62,796,476 shares of the registrant's Common
Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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COMMODORE ENVIRONMENTAL SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I............................................................................................................3
ITEM 1. BUSINESS........................................................................................3
General.........................................................................................3
Environmental Treatment and Services............................................................5
Polymer Manufacturing and Sales.................................................................8
Markets and Customers...........................................................................9
Raw Materials..................................................................................11
Research and Development.......................................................................11
Patents and Trademarks.........................................................................11
Competition....................................................................................12
Environmental Regulation.......................................................................12
Employees......................................................................................13
ITEM 2. PROPERTIES.....................................................................................13
ITEM 3. LEGAL PROCEEDINGS..............................................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................13
PART II..........................................................................................................14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................14
Market Information.............................................................................14
Dividend Information...........................................................................14
ITEM 6. SELECTED FINANCIAL DATA........................................................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........16
Overview.......................................................................................16
Results of Operations..........................................................................16
Liquidity and Capital Resources................................................................18
Net Operating Loss Carryforwards...............................................................20
Year 2000 Considerations.......................................................................20
New Accounting Pronouncements..................................................................21
Forward-Looking Statements.....................................................................21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........................................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................21
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........21
PART III.........................................................................................................23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................23
Executive Officers and Directors...............................................................23
Compensation of Directors......................................................................24
Compliance with Section 16(a) of the Exchange Act..............................................24
ITEM 11. EXECUTIVE COMPENSATION.........................................................................25
Summary Compensation...........................................................................25
Stock Options..................................................................................26
Compensation Committee Interlocks and Insider Participation....................................27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................31
Sale of Polymer Technologies...................................................................31
Loans to Applied...............................................................................31
Services Agreement.............................................................................32
Transactions with Lanxide......................................................................32
PART IV..........................................................................................................34
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................34
SIGNATURES.......................................................................................................38
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PART I
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ITEM 1. BUSINESS.
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GENERAL
Commodore Environmental Services, Inc. (the "Company") owns interests
in diverse environmental, chemical and other businesses with a focus on new
technologies that may have an impact upon their markets. As of December 15,
1999, the Company owned approximately 49% 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 of 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 PCB's, pesticides, dioxins
and other toxic contaminants. The Company believes that SET is capable of
destroying halogenated waste streams, neutralizing chemical weapons and warfare
agents and concentrating certain radioactive wastes for more effective removal.
Through a 50/50 joint venture with a subsidiary of Teledyne Technologies, 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. Through its wholly owned subsidiary, Commodore Advanced
Sciences, Inc. ("Advanced Sciences"), Applied 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.
Demand for Applied's environmental technologies and services arises
principally from two 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; 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.
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 35%. In November 1999, the Company converted 20,909
shares of Series B Convertible Preferred Stock, par value $0.001 per share (the
"Series B Preferred Stock"), 10,189 shares of Series C Convertible Preferred
Stock, par value $0.001 per share (the "Series C Preferred Stock"), and 20,391
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shares of Series D Convertible Preferred Stock, par value $0.001 per share (the
"Series D Preferred Stock"), of Applied into 7,258,533 shares of Applied common
stock, thereby increasing its ownership in Applied to 49%. See "Market for
Registrant's Common Equity and Related Stockholder Matters" "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions."
Effective as of September 28, 1998, the Company, through its wholly
owned subsidiary, Commodore Environmental Services LLC, acquired from Applied
approximately 87% of the outstanding common stock of Commodore Separation
Technologies, Inc. ("Separation"), a publicly traded company and former
operating subsidiary of Applied. Separation has developed and is commercializing
its separation technology and recovery system known as SLiM(TM) (supported
liquid membrane). Based on its continuing research and development program, 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 with little or no 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.
In December 1997 and February 1998, Separation was awarded its first
two commercial contracts from Maryland Environmental Service ("MES") to use its
SLiM technology in connection with the removal of chromium in water leaching
from waste sites at Baltimore Harbor and potentially polluting the Chesapeake
Bay. Prior to these awards, the Separation had performed a series of on-site
demonstrations of SLiM, in which a SLiM unit, in a single feedstream
passthrough, reduced the contamination level of chromium from more than 630
parts per million (ppm) to less than one ppm. Under a license agreement with
Lockheed Martin Energy Research Corporation, Separation also has received the
exclusive worldwide license (subject to a government use license) to use and
develop its SLiM technology for separating the radionuclides, technetium and
rhenium, from mixed wastes containing radioactive materials. Separation's
business strategy is to pursue these and other opportunities for SLiM and to
seek marketing arrangements with established engineering and environmental
services firms to use SLiM.
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 company which specializes in the manufacture of
ceramic bonding and refractory materials. 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." CERASET polymers are a unique family of low-viscosity, 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.
Initially, the Company believed that the market opportunities for
CERASET were to extend to a broad range of industries such as basic processing,
automotive, aerospace and defense, machine tool cement and sporting equipment
industries. However the Company has had little success in penetrating these
markets with a significant impact.
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From March 3, 1998 through March 6, 2000, CERASET had generated
approximately $80,000 in revenue. Due to the limited success in expanding its
sales, the Company believes that the CERASET License, CERASET Business and
CERASET Trademark have a nominal value. Polymer believes that the CERASET
License, CERASET Business and CERASET Trademark should be written down to its
estimated recoverable value of $100,000 as of December 31, 1999 and December 31,
1998.
Since 1998, the Company has embarked on efforts to develop new polymer
technologies. In doing so, the Company has expensed approximately $240,000 in
1998 and $410,000 in 1999 in research and development expenses with respect to
these new polymers (not including CERASET). The Company believes that the new
polymers may serve some of the same markets that the CERASET technology was
anticipated to serve and potentially other new markets. The technologies share
some of the same properties however the new polymers are not dependent on
CERASET.
In March 2000, the Commodore Environmental Services LLC, a wholly owned
subsidiary of the Company consummated the transfer of its 100% ownership in
Polymer Technologies to the Blum Technology Trust for $1,588,902. Bentley J.
Blum, Chairman, Chief Executive Officer and President of the Company and owner
of 52% of the outstanding shares of the Company's common stock, is also a
director of Polymer Technologies and the Trustee of the Blum Technology Trust.
The consideration was determined as a result of good faith negotiation among the
parties to the transfer of the Polymer stock taking into consideration Polymer's
net deficit of approximately $30,000. Because of the sale of Polymer, it has
been reflected as discontinued operations at December 31, 1999 and 1998 and the
years then ended.
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, 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
The Company, 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 waste
streams in degrees of concentration and purity which permit both the reuse of
such recovered materials and the ability for the remaining waste water 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 at ambient temperatures and
pressures.
SLiM involves passing a contaminated aqueous or gaseous feedstream
through a porous, hollow 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
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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,
cobalt, copper, zinc, strontium, calcium, nickel, cadmium, silver, mercury,
platinum and lead) 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 the Company's proprietary chemicals resident in the
membrane. The Company 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 the Company, which will monitor the equipment and process
while in operation, or the Company 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 may be a 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
laboratory and selected industrial settings at greater speed and with a
higher degree of effectiveness;
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 extract metals, organic chemicals and other elements and compounds
in degrees of concentration and purity which may 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 meeting 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:
Chromium (hexavalent) 400 ppm 0.05 ppm (field test) Less than 0.05 ppm
Zinc 2,700 ppm Less than 2 ppm (after 30 minutes) Less than 2 ppm
Cobalt 500 ppm Less than 1.1 ppm Less than 1.5 ppm
Copper 150 - 4,500 ppm Less than 0.15 ppm Less than 1.0 ppm
Calcium 85 ppm Less than 0.15 ppm ------
Nickel 2,500 ppm Less than 1.0 ppm (after 30 minutes) Less than 2 ppm
Radionuclides:
Strontium 30,000 pico curies Less than 8 pico curies Less than 8 pico
curies
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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, strontium 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 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 SLiM equipment was installed in 1998. Throughout 1999, the SLiM
equipment installed at the Hawkins Point site experienced several operation
difficulties due to SLiM's inability to remove "total chromium" to the specified
limits on an ongoing commercial basis. The SliM equipment removed the Chromium
VI to the specified limits but was unable to remove the Chromium III, solely or
in conjunction with third party technology designed for Chromium III removal, to
the specified limits of the Hawkins Point Contract. Separation is currently
investigating alternatives to the third party technologies to effectively meet
the "total chromium" removal limits specified by the Hawkins Point Contract. In
1999, Separation had generated revenues of approximately $250,000 relating to
this contract.
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. Separation has satisfied
approximately 25% of the terms of the contract and therefore recorded $87,500 in
revenues for 1999. 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. The SLiM
equipment has been delivered to the site. Installation was completed in June
1999 and is currently in its initial startup trials. Throughout the initial
startup trials at the Dundalk Marine Terminal, the SLiM equipment has been
unable to consistently meet the "total chromium" removal limits. The SliM
equipment removed the Chromium VI to the specified limits but was unable to
remove trace amounts of Chromium III to the specified limits of the Dundalk
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Contract. Separation is currently investigating alternative technologies, in
combination with SLiM or solely, to effectively meet the "total chromium"
removal limits specified by the Dundalk Contract.
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 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 employees 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 that 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 wastewater 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.
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.
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Pursuant to the terms of the CERASET License, Polymer Technologies had
agreed to pay a subsidiary of Lanxide, Lanxide Technology Company, L.P., 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. Effective
March 6, 2000, Polymer Technology was sold, along with any royalty commitments,
to the Blum Technology Trust.
The CERASET Technology
CERASET polymers are a unique family of low-viscosity, 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 (thermosetting), the polymers progressively
condense and cross-link, 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 making them 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. In March 2000,
the Commodore Environmental Services LLC, a wholly owned subsidiary of the
Company consummated the transfer of its 100% ownership in Polymer Technologies
to the Blum Technology Trust. The Company has restated Polymer as discontinued
operations for the years ended December 31, 1999 and 1998.
MARKETS AND CUSTOMERS
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, 1998, sales of approximately 5% of Applied's
environmental management services were to private sector customers and sales of
approximately 95% were derived from contracts with federal, state and municipal
government agencies. Contracts with these governmental customers generally may
be terminated at any time at the option of the customer. Advanced Sciences' WIPP
Contract and Rocky Flats Contract accounted for approximately, 68% and 20% in
1999, and 61% and 23% in 1998, respectively, of the Company's sales. No other
project accounted for more than 10% of the Company'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.
9
<PAGE>
Based on market data compiled by Separation, Separation estimates that,
as of December 31, 1999, there were approximately 7,000 companies operating
metal plating and metal finishing facilities in the United States and an
additional 1,000 such facilities in Canada. Based on estimated sales by these
facilities, the Company believes that on average each of these facilities could
utilize the Company's SLiM technology on a selected basis. Additionally, there
were more than 1,000 biochemical, bulk drug manufacturing and pharmaceutical
companies operating in the United States and Canada that may be potential users
of the SLiM technology. The Company believes that the potential international
market for the above applications may be equal or greater than the North
American market. Federal, state and local government entities are also a
potential market for the Company, particularly in the area of environmental
remediation and clean-up.
Commercialization and Marketing Strategy: Overview
During its initial commercialization phase, Separation intends to lease
its equipment to customers, with the lease payments being due and payable after
installation and successful start-up of the equipment. When replacement modules
are required, Separation will supply these modules at a reasonable mark-up over
their cost. As new patents are filed and issued, Separation may, for certain
applications, determine to make a direct sale of the equipment with additional
long-term royalty payment provisions. Separation may obtain additional revenues
through servicing the SLiM equipment, including periodic replacement of the
membrane component. In addition to leasing and selling its equipment, Separation
may 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.
Marketing of Environmental Treatment and Services
Metals Separation and Recovery. Separation's initial marketing efforts
were in this 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 potentially effective technologies are available
to effect proper separation.
Based on management studies and discussions with metals industry
executives, Separation 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, Separation expects SLiM to become a preferred alternative to some
existing metals separation methods. To date Separation has been unsuccessful in
placing SLiM equipment in this industrial sector.
Environmental Remediation and Restoration. The Company believes that
SLiM has the 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 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. To date the SLiM
technology has not performed profitability on a commercial scale.
Radionuclide/Mixed Waste Separation. In the United States, there are
numerous sites operated or maintained by the DOE and/or the DOD at which there
are present "mixed wastes" containing radionuclides intermingled with other
hazardous wastes. These sites are also contaminated with other compounds
associated with nuclear weapons testing and energy. SLiM may have capabilities
in the separation of radionuclides such as strontium, cesium, technetium and
rhenium. The United States government estimates that potential government
10
<PAGE>
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. Separation has successfully demonstrated selective
radionuclide capabilities on a limited basis.
Biochemicals Separation and Recovery. 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.
RAW MATERIALS
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.
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 including
discontinued operations were $748,000 and $543,000 for the years ended December
31, 1999 and 1998, respectively. These expenditures relate to Separation for the
period from October 1, 1998 through December 31, 1999 and Polymer for 1998 and
1999.
INTELLECTUAL PROPERTY
In September 1997, Separation filed two U.S. patent applications and
one international patent application covering the principal features of its SLiM
technology. One of the patent applications covers the joint inventions of Dr.
Kilambi and Lockheed Martin. The other patent application and the international
patent application cover the sole inventions of Dr. Kilambi. The U.S. Patent
Office has decided to issue a patent for one of the two claims covering the
joint inventions of Dr. Kilambi and Lockheed Martin. The other claim will be
separated from the original application and filed as a separate patent
application. Based on comments provided by the U.S. Patent Office, the Company
has decided to abandon the two patent applications covering the sole inventions
of Dr. Kilambi. In January 1999, Separation filed a U.S. patent application for
chromium removal and recovery covering the sole invention of Dr. W.S. Winston
Ho, Senior Vice President - Technology. In February 1999, Separation filed a
U.S. Patent Application for using a strip dispersion technique with SLiM
covering the sole invention of Dr. W.S. Winston Ho. In February 2000, Separation
filed three U.S. Patent Application for using a strip dispersion technique and
interfacial polymerization with SLiM covering the sole inventions of Dr. W.S.
Winston Ho.
11
<PAGE>
COMPETITION
Waste Water Treatment
The most common alternative methods for metals separation from
solubilized process streams presently include ion exchange, reverse osmosis,
precipitation, ultrafiltration, nanofiltration and chromatography. Separation
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, Separation believes SLiM may be capable of handling a
broad range of compounds in a faster and cost effective manner. Furthermore, the
expected by-products of the SLiM process consist primarily of wastewater, which
can be discharged as normal wastewater effluent, and to a 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
Separation believes that SLiM may have advantages over many other known
separation technologies, any one or more of its 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. Separation believes that its 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 the Company
is unable to demonstrate that SLiM is a technologically superior and
cost-effective alternative to other separation technologies on a commercial
scale, the Company may not be able to compete successfully.
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
Separation's operations, as well as the use of specialized technical
equipment by its customers, are subject to numerous federal, state and local
regulations relating to the storage, handling and transportation of certain
regulated materials. Although Separation's role is generally limited to the
leasing of its specialized technical equipment for use by its customers, there
is always the risk of the mishandling of such materials or technological or
equipment failures, which could result in significant claims against Separation.
Any such claims against Separation could materially adversely affect the
Company's business, financial condition and results of operations.
Separation maintains environmental liability insurance with limits of
$1.0 million per occurrence and $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
12
<PAGE>
against all claims, and claims may be made against Separation or the Company
(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
the Company's business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1999, the Company (including all of its direct and
indirect subsidiaries) had a total of 15 full-time employees, of which
approximately 13 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.
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 January 2002. The Company pays an allocable portion of the
rent per year under such lease.
The Company also leases approximately 2,700 square feet of space in
Great Neck, New York at a rental expense of approximately $77,000 per annum. The
lease on the Great Neck space expires in March 2003. In addition, Separation
leases approximately 20,800 square feet of space in Kennesaw, Georgia, for
$132,000 per annum under a lease expiring in February 2002.
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, 1999.
13
<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 December 31, 1999, 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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1999
First Quarter................................................ $0.12 $0.06
Second Quarter............................................... 0.08 0.06
Third Quarter................................................ 0.20 0.06
Fourth Quarter............................................... 0.14 0.05
Fiscal 1998
First Quarter................................................ 0.84 0.37
Second Quarter............................................... 0.56 0.22
Third Quarter................................................ 0.28 0.09
Fourth Quarter............................................... 0.12 0.06
</TABLE>
DIVIDEND INFORMATION
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.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The following table presents selected financial data of the Company, as
of December 31, 1999, for the fiscal years ended December 31, 1995, 1996, 1997,
1998 and 1999. During 1998, the Company's investment in Applied fell below 50%
and is accounted for under the equity method of accounting, since that time. In
September 1998, the Company acquired Applied's 87% ownership of Separation.
Accordingly, Separation is included in the consolidated financial statements of
the Company as of December 31, 1998 and for the period from acquisition to
December 31, 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,
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue.......................... $ 1,044,000 $ 5,253,000 $ 19,493,000 $ 1,632,000 $ 337,000
Net (loss) from continuing (2,969,000) (8,311,000) (13,507,000) (1,834,000) (2,950,000)
operations
Discontinued operations.......... - - - (4,927,000) (946,000)
Net (loss)....................... (2,969,000) (8,311,000) (13,507,000) (6,761,000) (3,896,000)
Net (loss) per share from
continuing operations......... (.06) (.15) (.27) (.03) (.05)
Net (loss) per share -
continuing and discontinued... (.06) (.15) (.27) (.11) (.06)
Dividends per common share...... - - - - -
Consolidated Balance Sheet Data:
Year Ended December 31,
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------------------------------------------------------------------------------
Total assets...................... $ 5,321,000 $ 41,113,000 $ 35,016,000 $ 8,029,000 $ 5,134,000
Long-term obligations (including
current portion).............. 4,994,000 8,333,000 6,952,000 6,250,000 6,279,000
Redeemable preferred stock........ 0 0 3,557,000 0 0
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. 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 below 50%. 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 February 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. In September 1998, the Company acquired
Applied's 87% ownership of Separation. Accordingly, Separation is included in
the Consolidated Financial Statements of the Company as of December 31, 1999 and
1998 and for the period since the acquisition. See "Market for Registrant's
Common Equity and Related Stockholder Matters" and "Certain Relationships and
Related Transactions."
Results of Operations
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenues for the year ended December 31, 1999 were $337,000 as compared
to $1,632,000 for the year ended December 31, 1998. Such revenues for 1999
consisted of twelve months of Separation's revenues which were consolidated with
that of the Company. As of February 1998, the Company's ownership of Applied
dropped below 50% and therefore the results of Applied were not consolidated
with those of the Company subsequent to that date. Revenues for 1998 consisted
of $1,251,000 of revenues from Applied for the month of January, and the
remaining balance consisted primarily of revenues in connection with recovery of
bad debt associated with a non performing loan. Cost of sales for the year ended
December 31, 1999 were $541,000 which related to Separation, as compared to
$961,000 for 1998 which were Applied's results for the month of January. Cost of
sales include direct labor and fringes, subcontractor costs, travel related
expenses and material purchases.
Research and development costs were $338,000 for the year ended
December 31, 1999 as compared to $303,000 for the year ended December 31, 1998.
The 1999 results consisted of twelve months of Separation's research and
development costs. The 1998 results included $173,000 from Applied's results for
January and $130,000 from Separation which was consolidated with the Company's
results for the last quarter of 1998. A significant cause for the decrease was
that the 1998 results include only one month of Applied's activity.
General and administrative expenses were $1,672,000 for the year ended
December 31, 1999 as compared to $7,443,000 for the year ended December 31,
1998. In 1999, $743,000 of general and administrative expenses related to
Separation's results as compared to $1,096,000 for the year ended December 31,
1998. In 1999, Separation' general and administrative expenses decreased due to
a reduction in the number of employees and thereby reducing the amount of
related expenses. In 1998, the Company incurred a net charge of approximately
$1,962,000 for the write off of certain related party loans and $660,000 for the
impairment of certain warrants relating to the purchase of Applied common
shares.
In 1998, the Company recorded a gain on sale of subsidiary stock of
$7,623,000. This gain resulted from two private placements, one of which the
Company sold 1,724,250 shares of Applied Common Stock as a result of conversions
of the remaining 46,800 shares of Series D Preferred Stock, and the second of
which the Company sold 2,782,646 shares of Applied Common Stock.
In 1999, the Company incurred $1,478,000 of losses from unconsolidated
affiliates as compared to $2,229,000 of losses from unconsolidated affiliates
for 1998. The losses are primarily attributable to Applied. Effective February
1998, results from Applied were not consolidated with the Company and therefore
16
<PAGE>
the Company recorded its pro-rata share of the losses from Applied for the
remainder of the period.
Minority interest's share of the loss in consolidated subsidiaries was
$1,786,000 in 1999 as compared to $468,000 in 1998. The Company had recorded
minority interest income relating to Applied's losses for the month of January
1998. Minority interest income for 1999 relates to the portion of Separation's
losses which belong to the minority shareholders of Separation.
Interest income was $23,000 in 1999 as compared to $523,000 in 1998.
Interest income in 1998 resulted primarily from intercompany loans with Applied.
Interest expense was $520,000 in 1999 as compared to $616,000 in 1998.
As of December 31, 1998, the Company has fully amortized deferred loan fees in
connection with its long term indebtedness.
In March 2000, Commodore Environmental Services LLC, a wholly owned
subsidiary of the Company consummated the transfer of its 100% ownership in
Commodore Polymer Technologies, Inc. ("Polymer") to the Blum Technology Trust
for $1,588,902. Bentley J. Blum, Chairman, Chief Executive Officer and President
of the Company and owner of 52% of the outstanding shares of the Company's
common stock, is also a director of Polymer Technologies and the Trustee of the
Blum Technology Trust. The consideration was determined as a result of good
faith negotiation among the parties to the transfer of the Polymer stock taking
into consideration Polymer's net deficit of approximately $30,000. Accordingly,
the Company recorded a loss from discontinued operations of $946,000 in 1999 and
$4,927,000 at December 31, 1998, relating to Polymer.
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenues for the year ended December 31, 1998 were $1,632,000 as
compared to $19,493,000 for the year ended December 31, 1997. Such revenues for
1997 consisted of twelve months of Applied's revenues which were consolidated
with that of the Company. As of February 1998, the Company's ownership of
Applied dropped below 50% and therefore the results of Applied were not
consolidated with those of the Company as of that date. Revenues for 1998
consisted of $1,251,000 of revenues from Applied for the month of January, and
the remaining balance consisted primarily of revenues in connection with
recovery of bad debt associated with a non performing loan. Cost of sales for
the year ended December 31, 1998 were $961,000 which related to Applied for the
month of January, as compared to $16,325,000 for 1997 which were Applied's
results for the year of 1997. Cost of sales include direct labor and fringes,
subcontractor costs, travel related expenses and material purchases.
Research and development costs were $303,000 for the year ended
December 31, 1998 as compared to $3,074,000 for the year ended December 31,
1997. The 1997 results consisted of twelve months of Applied's research and
development costs. The 1998 results included $173,000 from Applied's results for
January and $130,000 from Separation which was consolidated with the Company's
results for the last quarter of 1998. A significant cause for the decrease was
that the 1998 results include only one month of Applied's activity.
General and administrative expenses were $7,443,000 for the year ended
December 31, 1998 as compared to $17,058,000 for the year ended December 31,
1997. In 1997, $12,196,000 of general and administrative expenses related to
Applied's results. In 1998, the Company incurred a net charge of approximately
$1,962,000 for the write off of certain related party loans and $660,000 for the
impairment of certain warrants relating to the purchase of Applied common
shares. In 1998, the Company reduced its general and administrative expenses by
terminating employees and thereby reducing the amount of related expenses. Such
employees were either terminated or assigned to Applied.
In 1998, the Company recorded a gain on sale of subsidiary stock of
$7,623,000. This gain resulted from two private placements, one of which the
Company sold 1,724,250 shares of Applied Common Stock as a result of conversions
17
<PAGE>
of the remaining 46,800 shares of Series D Preferred Stock, and the second of
which the Company sold 2,782,646 shares of Applied Common Stock. In 1997, the
Company recorded a gain on sale of subsidiary stock of $1,896,000 as a result of
conversions of 41,200 shares of Series D Preferred Stock.
In 1998, the Company incurred $2,229,000 of losses from unconsolidated
affiliates as compared to $1,827,000 of losses from unconsolidated affiliates
for 1997. The increase in losses is primarily attributable to Applied. Effective
February 1998, results from Applied were not consolidated with the Company and
therefore the Company recorded its pro-rata share of the losses from Applied for
the remainder of the period.
Minority interest income in consolidated subsidiaries decreased from
$4,718,000 in 1997 to $468,000 in 1998. The Company had recorded minority
interest income relating to Applied's losses for the month of January 1998 as
compared to the full year for 1997.
Interest income was $523,000 in 1998 as compared to $1,004,000 in 1997.
Interest income in 1998 resulted primarily from an intercompany loans with
Applied. Approximately $745,000 of interest income in 1997 related to Applied
whose results were consolidated with the Company for that period. Applied
successfully completed an initial public offering in April 1997 and through 1998
has generated interest income from the proceeds of the offering.
Interest expense was $616,000 in 1998 as compared to $1,052,000 in
1997. Interest expense in 1997 consisted of approximately $436,000 from
Applied's results. This accounts for a significant portion of the difference.
In March 2000, the Commodore Environmental Services LLC, a wholly owned
subsidiary of the Company consummated the transfer of its 100% ownership in
Commodore Polymer Technologies, Inc. ("Polymer") to the Blum Technology Trust
for $1,588,902. Bentley J. Blum, Chairman, Chief Executive Officer and President
of the Company and owner of 52% of the outstanding shares of the Company's
common stock, is also a director of Polymer Technologies and the Trustee of the
Blum Technology Trust. The consideration was determined as a result of good
faith negotiation among the parties to the transfer of the Polymer stock taking
into consideration Polymer's net deficit at December 31, 1999 of approximately
$30,000. Accordingly, the Company recorded discontinued operations of $4,927,000
in 1998 relating to Polymer.
LIQUIDITY AND CAPITAL RESOURCES
From May 1997 through February 1998, in a series of private
transactions, the Company sold an aggregate of 2,782,646 shares of common stock
of Applied that it owned and 88,000 shares of Series D Preferred Stock, to
certain private investors for an aggregate of $13,062,000 in net proceeds. The
Series D Preferred Stock converted into 4,019,210 shares of common stock of
Applied that the Company owned. These transactions resulted in the Company's
ownership of Applied common stock from 15,000,000 shares to 8,198,144 shares. On
November 24, 1999, the Company elected to convert all of the issued and
outstanding shares of Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock into an aggregate of 7,258,533 shares of Applied common
stock, and such shares of Applied common stock were issued to the Company as of
that date. See "Certain Relationships and Related Transactions."
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 was
obligated to pay the Company interest only at the rate of 8% per annum, payable
quarterly. Unless converted into common stock of Applied at any time, the unpaid
principal amount of the Convertible Note was due and payable, together with
accrued and unpaid interest, on August 31, 2002. Payments of principal and
accrued interest under the Convertible Note was subordinated to all other
indebtedness for money borrowed of Applied. The Company had the right to convert
the Convertible Note into shares of common stock of Applied 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
18
<PAGE>
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. 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.
In February 1998, 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 was payable at the rate of 8% per
annum semiannually in cash. The unpaid principal amount of the Intercompany Note
was 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. 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. Such warrant was
subsequently amended to reduce the exercise price thereof from $10.00 per share
to $1.50 per share.
Effective September 28, 1998, Applied repaid the remaining balances on
the Convertible Note and the Intercompany Note, which totaled an aggregate of
$6,755,864, by (i) transferring 10,000,000 shares of Separation common stock,
representing 87% of Separation's outstanding common stock, to Commodore
Environmental Services, LLC, a Delaware limited liability company wholly-owned
by the Company; (ii) issuing 20,909 shares of newly created 6% Series B
Convertible Preferred Stock, par value $0.001 per share (the "Series B Preferred
Stock"), 10,189 shares of newly created 6% Series C Convertible Preferred Stock,
par value $0.001 per share (the "Series C Preferred Stock"), and 20,391 shares
of newly created 6% Series D Convertible Preferred Stock, par value $0.001 per
share (the "Series D Preferred Stock"), of Applied to the Company; (iii)
assigning to the Company an account receivable due to Applied from Separation in
the amount of $357,000; and (vi) amending the warrant held by the Company to
purchase 1,500,000 shares of Applied Common Stock to reduce the exercise price
thereof from $10.00 per share to $1.50 per share. The value of the consideration
received was less than the carrying amount of the Intercompany Note and the
Convertible Note. Accordingly, a $1,962,000 loss on the write off of the loans
has been recorded in the statement of operations.
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, CERASET License and
CERASET Trademark. See "Certain Relationships and Related
Transactions--Transactions with Lanxide."
19
<PAGE>
In March 2000, the Commodore Environmental Services LLC, a wholly owned
subsidiary of the Company consummated the transfer of its 100% ownership in
Polymer Technologies to the Blum Technology Trust for $1,588,902. Bentley J.
Blum, Chairman, Chief Executive Officer and President of the Company and owner
of 52% of the outstanding shares of the Company's common stock, is also a
director of Polymer Technologies and the Trustee of the Blum Technology Trust.
The consideration was determined as a result of good faith negotiation among the
parties to the transfer of the Polymer stock taking into consideration Polymer's
net deficit of approximately $30,000.
In 1993 and 1994 the Company issued $4,000,000 of convertible bonds
that carry an interest rate of 8.5%, payable quarterly. The maturity date of the
bonds has been extended from December 3, 1998 to June 3, 2000. The bonds are
secured by 16,800,000 treasury shares of the Company's Common Stock and
6,000,000 shares of Applied's common stock that the Company owns. The bonds are
convertible at any time into Common Stock of the Company at the rate of one
share per $1.00 of bond principal.
The Company has sustained losses of $3,896,000, $6,761,000 and
$13,507,000 for the years ended December 31, 1999, 1998 and 1997. At December
31, 1999 and 1998, the Company had a working capital deficit of $8,056,000 and
$438,000, respectively, and a Stockholders' Deficit of $6,349,000 at December
31, 1999 and $2,422,000 at December 31, 1998. The Company's increase in
stockholders' deficit is primarily due to the net loss for the period.
The Company is in the process of obtaining financing through external
sources of its subsidiaries in order to meet its capital requirements for 2000.
There can be no assurance that such financings will be available or, if
available, that it will be on terms satisfactory to the Company. Until the
completion of such financings, the Company is dependent upon financing from its
majority shareholder. There can be no assurance, however, that the majority
shareholder will continue to provide adequate financing for the Company to
continue as a going concern. There also can be no assurance that the Company
will be able to obtain financing from external sources.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carry forwards of approximately
$33,000,000, which expire in the years 2000 through 2019. 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 full valuation allowance of $11,276,000 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.
YEAR 2000 CONSIDERATIONS
Prior to January 1, 2000, there was a great deal of concern regarding
the ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished during the years leading up to
2000 was effective to prevent any problems. The Company has not experienced any
such computer difficulty, however, computer experts have warned that there may
still be residual consequences of the change in centuries and any such
difficulties may, depending upon their pervasiveness and severity, have a
material adverse effect on our business, financial condition and results of
operations.
20
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which
is effective for fiscal years beginning after June 15, 1999. SFAS 133 requires
that an entity recognize all derivative instruments as either assets or
liabilities on its balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The Company
will adopt SFAS 133 by the first quarter of 2000. Due to the Company's limited
use of derivative instruments, SFAS is not expected to have a material effect on
the financial position or results of operations of the Company.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------- -----------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements of the Company are included on
pages F-1 through F-42 of this Annual Report and are incorporated herein by
reference. The financial statements of the Company's significant subsidiary,
Commodore Applied Technologies, Inc., are also included on pages F-43 through
F-87 of this Annual Report and are incorporated herein by reference.
21
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. ON ACCOUNTING AND FINANCIAL DISCLOSURE.
- ------- ---------------------------------------
On August 17, 1999, the Company and its former auditors,
PricewaterhouseCoopers LLP ("PWC"), mutually agreed to terminate the
client-auditor relationship between the Company and PWC effective as of such
date. Additionally, as of August 19, 1999, the Company retained Tanner + Co.
("Tanner") to serve as independent accountants. Tanner had been the Company's
independent accountants prior to the Company's retention of PWC. The decision to
terminate the Company's client-auditor relationship with PWC and to retain
Tanner again was recommended by the Audit Committee of the Board of Directors
and unanimously approved by the Board of Directors of the Company.
During the past two fiscal years and through August 17, 1999, there
were no disagreements with PWC on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PWC, would have caused it
to make reference to the subject matter of the disagreements in connection with
its reports.
No "reportable events" as described under Item 304(a)(1)(v) of
Regulation S-K occurred during the Company's past two fiscal years.
Prior to engaging Tanner, the Company did not consult Tanner regarding
any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K.
22
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The names and ages of the executive officers, directors and key
employees of the Company, and their positions with the Company, as of December
31, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Bentley J. Blum 58 Chairman of the Board, President and Chief Executive Officer
Jerry Karlik 46 Vice President and Director
Andrew P. Oddi 38 Vice President and Treasurer
- ----------------------
</TABLE>
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 and subsequently
since June 1998. 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 that hold real estate interests, oil drilling interests
and other corporate interests. Mr. Blum is a director of Federal Resources
Corporation, a company formerly engaged in manufacturing, retail distribution
and natural resources development 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 Applied.
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. For more
than thirteen years, Mr. Karlik has been Chief Financial Officer of a number of
corporations, most of which are controlled by or affiliated with Mr. Blum.
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. 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.
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. No family relationship exists among any
other directors or executive officers of the Company.
23
<PAGE>
COMPENSATION OF DIRECTORS
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, 1999, and upon a
review of Forms 5 and amendments thereto furnished to the Company with respect
to the year ended December 31, 1999, 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, 1999.
24
<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 1999, 1998, and 1997 to the Company's Chief
Executive Officer at December 31, 1999, and to one additional individual who
served as the Company's Chief Executive Officer during 1998, but not at December
31, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------------------------------------- ----------------------------------------
Other Securities All
Annual Restricted Under- 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>
Bentley J. Blum 1999 -0- -0- -0- -0- -0- -0- -0-
1998 -0- -0- -0- -0- 4,500,000 -0- -0-
Chief Executive Officer 1997 -0- -0- -0- -0- -0- -0- -0-
Paul E. Hannesson 1999 -0- -0- -0- -0- -0- -0- -0-
Former Chief Executive 1998 58,658(1) -0- 1,620(3) -0- 525,705 -0- -0-
Officer 1997 15,302(1) 3,874(2) 930(3) -0- 3,450,000(4) -0- -0-
- --------------------------------
</TABLE>
(1) Represents the amount of Mr. Hannesson's base salary allocated to the
Company. Mr. Hannesson's total base salary for 1997 and 1998 was
$395,000 and $434,500, 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 1997 $100,000. 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 and
1998 was $24,000 and $12,000, respectively, certain portions of which
were also allocated to Applied and Separation.
(4) In November 1996, Mr. Hannesson was granted options to purchase
3,450,000 shares of Company Common Stock, which options were rescinded,
re-issued in June 1997 and cancelled in December 1998.
25
<PAGE>
STOCK OPTIONS
No stock options were granted during the year ended December 31, 1999
to the individuals listed in the Summary Compensation Table pursuant to the
Company's 1996 Stock Option Plan (the "Plan") and otherwise. The Company has no
outstanding stock appreciation rights and granted no stock appreciation rights
during the year ended December 31, 1999.
The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the Plan and
otherwise at December 31, 1999 by the individuals listed in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
Number Of Value Of
Securities Unexercised
Underlying In-The-Money
Unexercised Options
Options At Fiscal Year-
Shares Value At Fiscal Year-End(#) End($)
Name Acquired On Realized Exercisable/ Exercisable/
Exercise (#) ($)(1) Unexercisable Unexercisable(2)
-------------------- ------------------- ---------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Bentley J. Blum -0- -0- 4,500,000/-0- -0-/-0-
Jerry Karlik -0- -0- 50,000/-0- -0-/-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, 1999, and the exercise price of the
option multiplied by the applicable number of options exercised.
26
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive Officer Compensation
Base Salaries. In 1999, 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 former Chairman of the Board, President and Chief
Executive Officer of the Company, the Chairman of the Board, President and Chief
Executive Officer of 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, which agreement was assigned to Applied in June
1998. 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,
1998. In establishing Mr. Hannesson's base salary for 1999, 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 1998 goals and his
individual contributions to the Company and its affiliates. The Compensation
Committee concluded that he had achieved his 1998 goals and had provided a
leadership role in achieving the Company's and its affiliates' strategic
priorities for 1998. 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.
For 1999, neither the Company nor Separation have incurred any
compensation expense for Mr. Hannesson. Mr. Hannesson's base salary increased
from $395,000 for 1997 to $434,500 for 1998, representing an increase of
approximately 10%. 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 $58,658, $271,465 and $94,504, 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 1999, no incentive bonuses were paid to any officers or employees.
For 1998, no incentive bonuses were paid to any officers or employees.
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
27
<PAGE>
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 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.
No options were granted in 1999. A total of 8,245,000 stock options
were granted in 1998, of which 4,500,000 and 525,705 were granted to Messrs.
Blum and Hannesson, respectively, and 50,000 were granted to the other
individual named in the Summary Compensation Table. The number of stock options
granted in 1998 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 Company'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 Company 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 1998 to the individuals listed in the Summary
Compensation Table will be fully deductible by the Company.
28
<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 1999, 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.
29
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
ITEM 12. BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------
The following table sets forth certain information, as of December 31,
1999, 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............................. 34,979,737(3) 52.0%
Paul E. Hannesson........................... 6,325,705(4) 10.0%
Credit Agricole Deux Sevres................. 7,500,000(5) 10.7%
Jerry Karlik................................ 250,000(6) *
All executive officers
and directors as
a group (2 persons)....................... 35,229,737 52.3%
- -----------------------------------
</TABLE>
*Percentage ownership is less than 1%.
(1) The addresses of each of Bentley J. Blum, Paul E. Hannesson and Jerry
Karlik 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, his
spouse's ownership of 2,000,000 shares of Common Stock of the Company and
4,500,000 shares of Common Stock underlying currently exercisable options,
representing together 52.0% of the outstanding shares of Company Common
Stock at March 26, 2000. 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; (iii) 500,000 shares of Company Common Stock issued to
the Hannesson Family Trust in exchange for the surrender of options to
purchase 950,000 share of Company Common Stock and (iv) currently
exercisable options to purchase 525,705 shares of Company Common Stock at
$0.10 per share, representing collectively 10.0% of the outstanding shares
of Company Common 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. Mr. Hannesson disclaims any beneficial interest
in the shares of Company Common Stock owned by or for the benefit of his
spouse and children.
30
<PAGE>
(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
(1,000,000 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 2,000,000 shares of Company Common
Stock at $0.68 per share.
(6) Represents 200,000 shares of Company Common Stock owned by Mr. Karlik and
50,000 shares of Company Common Stock underlying currently exercisable
stock options granted to Mr. Karlik by the Company under the Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
SALE OF POLYMER TECHNOLOGIES
In March 2000, the Commodore Environmental Services LLC, a wholly owned
subsidiary of the Company consummated the transfer of its 100% ownership in
Polymer Technologies to the Blum Technology Trust for $1,588,902. Bentley J.
Blum, Chairman, Chief Executive Officer and President of the Company and owner
of 52% of the outstanding shares of the Company's common stock, is also a
director of Polymer Technologies and the Trustee of the Blum Technology Trust.
The consideration was determined as a result of good faith negotiation among the
parties to the transfer of the Polymer stock taking into consideration Polymer's
net worth of approximately $100,000. Because of the sale of Polymer, it has been
reflected as discontinued operations at December 31, 1998 and the years ended
December 31, 1999 and 1998.
LOANS TO APPLIED
In September 1997, the Company provided a $4.0 million unsecured loan
to Applied, evidenced by the Convertible Note. Pursuant to the terms of the
Convertible Note, Applied was obligated to pay the Company interest only at the
rate of 8% per annum, payable quarterly. Unless converted into common stock of
Applied at any time, the unpaid principal amount of the Convertible Note was due
and payable, together with accrued and unpaid interest, on August 31, 2002.
Payments of principal and accrued interest under the Convertible Note was
subordinated to all other indebtedness for money borrowed of Applied. The
Company had 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. 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.
In February 1998, the Company provided a $5,450,000 unsecured loan to
Applied, evidenced by the Intercompany Note. Pursuant to the terms of the
Intercompany Note, interest on the unpaid principal balance of the Intercompany
Note was payable at the rate of 8% per annum semiannually in cash. The unpaid
principal amount of the Intercompany Note was due and payable, together with
31
<PAGE>
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. In connection with the loan, Applied amended and restated in its
entirety the 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. Such warrant was subsequently amended to reduce the exercise price
thereof from $10.00 per share to $1.50 per share.
Effective September 28, 1998, Applied repaid the remaining balances on
the Convertible Note and the Intercompany Note, which totaled an aggregate of
$6,755,864, by (i) transferring 10,000,000 shares of Separation common stock,
representing 87% of Separation's outstanding common stock, to Commodore
Environmental Services, LLC, a Delaware limited liability company wholly-owned
by the Company; (ii) issuing 20,909 shares of newly created Series B Preferred
Stock, 10,189 shares of newly created Series C Preferred Stock, and 20,391
shares of newly created Series D Preferred Stock of Applied to the Company;
(iii) assigning to the Company an account receivable due to Applied from
Separation in the amount of $357,000; and (vi) amending the warrant held by the
Company to purchase 1,500,000 shares of Applied common stock to reduce the
exercise price thereof from $10.00 per share to $1.50 per share. On November 24,
1999, Environmental elected to convert all of the issued and outstanding shares
of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock into an aggregate of 7,258,533 shares of Applied common stock, and such
shares were issued to the Company as of that date. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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.
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 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. 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
32
<PAGE>
guaranteed by Lanxide) in exchange for the CERASET Business, CERASET License and
CERASET Trademark. See "Business--Polymer Manufacturing and Sales."
Pursuant to the terms of the CERASET License, Polymer Technologies had
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."
33
<PAGE>
PART IV
-------
EXHIBITS, FINANCIAL STATEMENT
ITEM 14. 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.
Commodore Environmental Services, Inc.
Independent Auditor's Report...................................................... F-1
Report of Independent Accountants................................................. F-1A
Consolidated Balance Sheets as of December 31, 1999 and 1998...................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997......................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1999, 1998 and 1997......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997......................................... F-5
Notes to Consolidated Financial Statements........................................ F-7
Commodore Applied Technologies, Inc.
Independent Auditor's Report...................................................... F-43
Report of Independent Accountants................................................. F-43A
Consolidated Balance Sheets as of December 31, 1999 and 1998...................... F-44
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997...................................................... F-46
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997................................... F-47
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997......................................... F-50
Notes to Consolidated Financial Statements........................................ F-52
</TABLE>
Except for the unconsolidated financial statements of Commodore Applied
Technologies, Inc. included herein, all other financial statement schedules for
which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and, therefore, have been omitted.
34
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
<PAGE>
<TABLE>
<CAPTION>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Index
- ----------------------------------------------------------------------------------------------------------
Page
----
<S> <C>
Independent Auditor's Report F-1
Report of Independent Accountants F-1A
Consolidated Balance Sheet as of December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998, and 1997 F-3
Consolidated Statements of Stockholders' (Deficit) Equity for the
years ended December 31, 1999, 1998, and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Commodore Environmental Services, Inc.
We have audited the consolidated balance sheet of Commodore Environmental
Services, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for the years then ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commodore
Environmental Services, Inc. and Subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses,
net cash outflows from operations, and has a net stockholders deficit that raise
substantial doubt about its ability to continue as a going concern. Management's
plan regarding those matters also are described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Salt Lake City, Utah
February 4, 2000,
except notes 15 and 22
which are dated
March 6, 2000
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of Commodore Environmental Services, Inc.
In our opinion, the consolidated statements of income, of cash flows and of
changes in stockholders' equity present fairly, in all material respects, the
results of operations and cash flows of Commodore Environmental Services, Inc.
and its subsidiaries for the year ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Commodore Environmental Services, Inc. for
any period subsequent to December 31, 1997.
Price Waterhouse LLP
Philadelphia, Pennsylvania
March 30, 1998
F-1A
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1999 1998
----------------------------------
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30 $ 712
Accounts receivable 10 1
Restricted cash and certificates of deposit 270 260
Inventory 519 685
----------------------------------
Total current assets 829 1,658
Other receivables 321 321
Investments 3,085 4,630
Property and equipment, net 736 1,154
Other assets:
Patents and completed technology, net of
accumulated amortization of $26 and $14, respectively 145 148
Other assets 18 18
----------------------------------
Total other assets 163 166
Net assets of discontinued operations - 100
----------------------------------
Total assets $ 5,134 $ 8,029
----------------------------------
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999 and 1998
(Amounts in thousands, except shares and per share data)
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit 1999 1998
-------------------------------------
----------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 531 $ 78
Due to related parties 2,911 281
Other accrued liabilities 1,180 1,287
Unearned revenue 263 450
Bonds payable - current 4,000 -
----------------------------------
Total current liabilities 8,885 2,096
----------------------------------
Bonds payable and long-term debt - 4,000
Promissory note to related party 2,250 2,250
Net liabilities of discontinued operations 29 -
----------------------------------
Total liabilities 11,164 8,346
----------------------------------
Minority interests in consolidated subsidiaries 319 2,105
Commitments and contingencies - -
Stockholders' deficit:
Preferred Stock, par value $0.01 per share,
10,000,000 shares authorized, 3,912,202 shares
issued and outstanding at December 31, 1999
and 1998 39 39
Common Stock, par value $0.01 per share,
100,000,000 shares authorized, 62,796,476
shares issued and outstanding at
December 31, 1999 and 1998 628 628
Additional paid-in capital 46,710 46,741
Accumulated deficit (53,701) (49,805)
----------------------------------
(6,324) (2,397)
Less 506,329 common shares of treasury stock at cost (25) (25)
----------------------------------
Total stockholders' deficit (6,349) (2,422)
----------------------------------
Total liabilities and stockholders' deficit $ 5,134 $ 8,029
----------------------------------
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended December 31, 1999, 1998 and 1997
(Amounts in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Revenues:
Contract revenues $ 337 $ 1,251 $ 19,493
Other operating income - 381 -
--------------------------------------------
Total revenues 337 1,632 19,493
--------------------------------------------
Costs and expenses:
Cost of sales 541 961 16,325
Research and development 338 303 3,074
General and administrative 1,672 7,443 17,058
Depreciation and amortization 547 528 1,282
--------------------------------------------
Total costs and expenses 3,098 9,235 37,739
--------------------------------------------
Loss from operations: (2,761) (7,603) (18,246)
Interest income 23 523 1,004
Gain on sale of subsidiary stock - 7,623 1,896
Interest expense (520) (616) (1,052)
Equity in losses of unconsolidated affiliate (1,478) (2,229) (1,827)
--------------------------------------------
Loss before income taxes, minority interests, and
discontinued operations (4,736) (2,302) (18,225)
Income tax expense - - -
--------------------------------------------
Net loss before minority interests and discontinued operations (4,736) (2,302) (18,225)
Minority interests in consolidated subsidiaries 1,786 468 4,718
--------------------------------------------
Loss from continuing operations (2,950) (1,834) (13,507)
Discontinued operations:
Loss from discontinued operations (946) (4,927) -
--------------------------------------------
Net loss $ (3,896) $ (6,761) $ (13,507)
--------------------------------------------
Net loss per share - basic and diluted -
continuing operations$ $ (.05) $ (.03) $ (.27)
Net loss per share - basic and diluted -
discontinued operations (.01) (.08) -
--------------------------------------------
Total loss per share $ (.06) $ (.11) $ (.27)
--------------------------------------------
Number of weighted average shares outstanding 62,290 61,981 58,482
--------------------------------------------
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders' (Deficit) Equity
Years Ended December 31, 1999, 1998, and 1997
(Amounts in thousands, except shares and per share data)
- ---------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
-----------------------------------------------------------
Shares Amount Shares Amount
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 4,649,917 $ 46 57,924,368 $ 579
Equity gains on changes of interest
in consolidated subsidiaries - - - -
Issuance of Common Stock for
services - - 500,000 5
Issuance of Common Stock -
exercise of options and warrants - - 512,435 5
Issuance of Common Stock -
conversion of Preferred Stock (340,340) (3) 296,780 3
Issuance of stock options for services - - - -
Dividends on Preferred Stock - - - -
Beneficial conversation feature on
Series D Preferred Stock - - - -
Net loss - - - -
-----------------------------------------------------------
Balance, December 31, 1997 4,309,577 43 59,233,583 592
Equity gains on changes of interest
in subsidiary - - - -
Issuance of Common Stock for
services - - 500,000 5
Issuance of stock options for services - - - -
Issuance of Common Stock -
exercise of options and warrants - - 591,143 6
Issuance of Common Stock -
conversion of Preferred Stock (397,375) (4) 2,471,750 25
Dividends on Preferred Stock - - - -
Net loss - - - -
-----------------------------------------------------------
Balance, December 31, 1998 3,912,202 39 62,796,476 628
Equity losses on changes of interest in
subsidiary - - - -
Net loss - - - -
-----------------------------------------------------------
Balance December 31, 1999 3,912,202 $ 39 62,796,476 $ 628
===========================================================
</TABLE>
<TABLE>
<CAPTION>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders' (Deficit) Equity
Years Ended December 31, 1999, 1998, and 1997
(Amounts in thousands, except shares and per share data)
- ---------------------------------------------------------------------------------------------------------------
<PAGE>
Total
Additional Common Stockholders'
Paid-In Accumulated Stock Held Equity
Capital Deficit In Treasury (Deficit)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 41,768 $ (29,537) $ (25) $ 12,831
Equity gains on changes of interest
in consolidated subsidiaries 3,517 - - 3,517
Issuance of Common Stock for
services 308 - - 313
Issuance of Common Stock -
exercise of options and warrants 44 - - 49
Issuance of Common Stock -
conversion of Preferred Stock - - - -
Issuance of stock options for services 650 - - 650
Dividends on Preferred Stock (1,766) - - (1,766)
Beneficial conversation feature on
Series D Preferred Stock 1,553 - - 1,553
Net loss - (13,507) - (13,507)
------------------------------------------------------------
Balance, December 31, 1997 46,074 (43,044) (25) 3,640
Equity gains on changes of interest
in subsidiary 720 - - 720
Issuance of Common Stock for
services 50 - - 55
Issuance of stock options for services 164 - - 164
Issuance of Common Stock -
exercise of options and warrants 33 - - 39
Issuance of Common Stock -
conversion of Preferred Stock (21) - - -
Dividends on Preferred Stock (279) - - (279)
Net loss - (6,761) - (6,761)
------------------------------------------------------------
Balance, December 31, 1998 46,741 (49,805) (25) (2,422)
Equity losses on changes of interest in
subsidiary (31) - - (31)
Net loss - (3,896) - (3,896)
------------------------------------------------------------
Balance December 31, 1999 $ 46,710 $ (53,701) $ (25) $ (6,349)
=============================================================
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
(Amounts in thousands, except shares and per share data)
- -------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,896) $ (6,761) $ (13,507)
Loss from discontinued operations 946 4,927 -
Adjustments to reconcile net loss to cash used in
operating activities:
Minority interests in losses of subsidiaries (1,786) (468) (4,718)
Depreciation and amortization 547 528 1,282
Equity in losses of unconsolidated subsidiary 1,478 2,229 1,827
Accrued interest on loan receivables - (110) -
Provision for related party bad debt - 921 1,043
Provision for investment in, and receivables from,
related party 4,694 2,000
Gain on sale of subsidiary stock - (7,623) (1,896)
Issuance of common stock and
stock options for services - 219 936
Other non-cash charges - (131) 197
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (9) 138 4,085
Other receivables - 163 (132)
Patents and completed technology - - (401)
Inventory 166 (181) (360)
Restricted cash (10) 153 1,505
Prepaid and other assets - 127 180
Other assets - (75) 106
Accounts payable 453 (724) (1,651)
Insurance loss reserve - - (1,275)
Other accrued liabilities and deferred revenue (294) (62) (196)
----------------------------------------------
Net cash used in continuing operations (2,405) (2,036) (10,975)
Net cash used in discontinued operations (817) (561) -
----------------------------------------------
Net cash used in operating activities (3,222) (2,597) (10,975)
----------------------------------------------
Cash flows from investing activities:
Payments on notes receivables - 869 -
Decrease (increase) in related party receivables,
net of payments - - (1,875)
Purchase of property and equipment (81) (40) (1,409)
Purchase of patents and completed technology (9) - -
Increase in investments and advances - (779) (1,723)
Investment in related party - - (2,000)
Proceeds from sale of subsidiary's common stock - 5,450 -
Loans to (repayments from) related party - (4,641) -
Deconsolidation of subsidiary owned cash - (11,060) -
Cash acquired in subsidiary's acquisition - 715 -
----------------------------------------------
Cash for investing activities - continuing operations (90) (9,486) (7,007)
Cash for investing activities - discontinued operations - (530) -
----------------------------------------------
Net cash used in investing activities (90) (10,016) (7,007)
----------------------------------------------
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Continued
- ----------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from subsidiaries' sale of common and
preferred stock - - 15,097
Proceeds from exercise of options and warrants - 39 49
Proceeds from the sale of redeemable preferred stock - - 7,612
Borrowings under (repayments on) line of credit - (130) (5,843)
Proceeds from long-term debt - 7 -
Payments on long-term debt - (6) (72)
Preferred stock cash dividends - (127) (289)
Preferred stock dividends paid by subsidiary - - (438)
Borrowings from (repayments to) related parties 2,630 - 128
----------------------------------------------
Cash for financing activities - continuing operations 2,630 (217) 16,244
Cash for financing activities - discontinued operations - - -
----------------------------------------------
Net cash provided by (used in)
financing activities 2,630 (217) 16,244
----------------------------------------------
Decrease in cash and cash equivalents (682) (12,830) (1,738)
Cash and cash equivalents, beginning of year 712 13,542 15,280
----------------------------------------------
Cash and cash equivalents, end of year $ 30 $ 712 $ 13,542
----------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 340 $ 526 $ 972
----------------------------------------------
Income taxes paid $ - $ - $ 53
----------------------------------------------
(See Note 16 for non-cash investing and financing activities)
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-6
</TABLE>
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts in thousands, except shares and per share data)
- --------------------------------------------------------------------------------
1. Background
Commodores 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 through its consolidated subsidiaries and affiliates. 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.
As discussed in Note 18, during the periods represented by these financial
statements, Commodore has experienced significant changes in the ownership
structure of its two publicly held affiliates, Commodore Applied Technologies,
Inc. ("Applied") and Commodore Separation Technologies, Inc. ("Separation"). The
following table summarizes the related party ownership structure of these
entities for the three year periods ended December 31, 1999:
Applied Separation
------- ----------
January 1, 1997 69 percent owned by 100 percent owned by Applied
Commodore and consolidated and consolidated with Applied
with Commodore
April 1997 - Initial Public Offering of 13
percent of the common stock of
Separation
Throughout 1997 Applied sells new common stock
and Commodore sells holdings
in Applied Common stock, -
reducing Commodore's
ownership in Applied
December 31, 1997 56 percent owned by 87 percent owned by Applied
Commodore and consolidated and consolidated with Applied
with Commodore
- --------------------------------------------------------------------------------
F-7
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Background Continued
Applied Separation
------- ----------
February 1998 Commodore's ownership in
Applied drops below 50 percent,
Commodore begins to account -
for investment in Applied under
the Equity method
September 1998 Applied sold its 87 percent
- ownership in Separation to
Commodore and Separation is
consolidated with Commodore
December 31, 1998 35 percent owned by 87 percent owned by
Commodore and accounted for Commodore and consolidated
under the equity method with Commodore
November 1999 Commodore converted preferred
stock to common stock,
increasing its common stock -
ownership to 49%
December 31, 1999 49 percent owned by 87 percent owned by Commodore
Commodore and accounted for and consolidated
under the equity method with Commodore.
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. Investments in 20% to 50% owned affiliates
are accounted for on the equity method. In February 1998, Commodore's investment
in Commodore Applied Technologies, Inc. ("Applied") fell below 50% and has been
accounted for under the equity method of accounting (see Note 18). In September
1998, Commodore acquired Applied's 87% ownership of Commodore Separation
Technologies, Inc. ("Separation"). Accordingly, Separation is included in the
consolidated financial statements of Commodore as of December 31, 1999 and 1998
and for the period since acquisition (see Note 18).
Discontinued operations include Commodore Polymer Technologies, Inc. (Polymer)
from March 5, 1998 (date of inception) through December 31, 1999. Polymer is a
100% owned subsidiary of Commodore. The Company sold Polymer effective March 6,
2000 (see Note 22).
- --------------------------------------------------------------------------------
F-8
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies Continued
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, 1999 and 1998 consisted of $220 and $210 held in
an interest bearing deposit accounts as collateral for a performance bond at
December 31, 1999 and 1998, respectively, and $50 held in certificates of
deposit at December 31, 1999 and 1998. Restricted cash and certificates of
deposit are classified according to the term of their restriction.
Inventory
Inventory, held by Separation, represents finished goods and consists of
machinery and equipment built and held for sale. Inventory is recorded at the
lower of historical cost per unit or market value.
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 in the statement of operations. Depreciation and
amortization are computed on the straight-line method based on the estimated
useful lives of the assets, which range from 2 - 10 years.
Other Assets
Goodwill represented the fair value of securities issued plus the fair value of
net liabilities assumed in connection with the acquisition of ASI, a subsidiary
of Commodore's formerly majority-owned subsidiary, Applied (see Note 18).
Goodwill was being amortized on a straight-line basis over its estimated 30 year
life. Effective February 1998, the Company accounted for Applied on the equity
method and goodwill is no longer consolidated.
- --------------------------------------------------------------------------------
F-9
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies Continued
Other Assets - Continued
Completed technology represents certain technology acquired in connection with
the purchase of third-party interests in consolidated subsidiaries (See Note 18)
and other technology acquired from a related party (see Note 15) which are being
amortized on a straight-line basis over their estimated 7 and 15 year lives,
respectively.
Patents are being amortized on a straight-line basis over their estimated life
of 17 years.
Deferred financing costs which became fully amortized in 1998 were being
amortized over 5 years.
Impairment of Long-Lived Assets
Commodore reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable through undiscounted future cash flows. If it is determined that
an impairment loss has occurred based on expected cash flows, such loss is
recognized in the statement of operations.
Unearned Revenue
Separation has unearned revenue of $263 and $450 at December 31, 1999 and 1998,
respectively, related to the contracts described in the revenue recognition
policy. Such amount has been deferred until the commencement of the contract.
Revenue Recognition
Interest Income. Commodore recognizes interest income on notes receivable when
earned. 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.
- --------------------------------------------------------------------------------
F-10
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies Continued
Revenue Recognition - Continued
Contracts. Through January 1998, the period prior to Commodore's ownership of
Applied falling below 50%, substantially all of Commodore's revenues were
derived from Advanced Sciences, Inc. ("ASI"), a subsidiary of Applied,
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 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.
- --------------------------------------------------------------------------------
F-11
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies Continued
Revenue Recognition - Continued
In February 1998 and November 1997, Separation entered into two contracts with
the State of Maryland for the treatment of chromium- contaminated leachate at
the Hawkins Point Hazardous Waste Treatment Facility at the Port of Baltimore.
As of December 31, 1998, Separation had not yet commenced work on these
contracts and accordingly, had not recorded revenue related to the contracts. As
of December 31, 1999, Separation had not yet commenced work on the second
contract and accordingly, had not recorded revenue related to this contract in
1999. Costs incurred in preparation for the commencement of the contract have
been recorded as expenses as incurred.
Research and Development
Research and development expenditures are charged to operations as incurred.
Income Taxes
Income taxes are determined in accordance with Statement of Financial Accounting
Standards ("SFAS") 109, which requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred income tax liabilities and assets are determined based on the
difference between financial statement and tax bases of assets and liabilities
using estimated tax rates in effect for the year in which the differences are
expected to reverse. SFAS 109 also provides for the recognition of deferred tax
assets only if it is more likely than not that the asset will be realized in
future years.
Stock-Based Compensation
Compensation costs attributable to stock option and similar plans are recognized
based on the difference between the quoted market price of the stock on the date
of the grant and the amount the employee is required to pay to acquire the stock
(In the intrinsic value method under Accounting Principles Board Opinion 25).
SFAS 123, "Accounting for Stock-Based Compensation," requires companies electing
to continue to use the intrinsic value method to make pro forma disclosures of
net income and earnings per share as if the fair value based method of
accounting had been applied. Commodore has adopted the disclosure only
provisions of SFAS 123.
- --------------------------------------------------------------------------------
F-12
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies Continued
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.
Segment Reporting
In 1998, Commodore adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 provides that the internal
organization that is used by management for making operating decisions and
assessing performance is the source of Commodore's reportable segments. SFAS 131
also requires disclosure about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect the results of operations or
financial position of Commodore. Required disclosures are included in Note 20.
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 the 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, 1999 and 1998.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
- --------------------------------------------------------------------------------
F-13
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies Continued
New Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. SFAS 133 is not
expected to have a material effect on the financial position or results of
operations of Commodore.
Reclassification
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform with the current year presentation
3. Going Concern
Going Concern
The accompanying consolidated financial statements have been prepared under the
assumption that Commodore will continue as a going concern. Such assumption
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. As shown in the financial statements for the years
ended December 31, 1999, 1998 and 1997, Commodore has incurred substantial
losses and net cash outflows from operating activities. At December 31, 1999 and
1998, Commodore also has a net stockholders' deficit.
The consolidated financial statements do not include any adjustments that might
be necessary should Commodore be unable to continue as a going concern.
Commodore's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitability. Potential sources of cash include new contracts, profitable
operations, external debt, the sale of new shares of company stock or
alternative methods such as mergers or sale transactions. No assurances can be
given, however, that Commodore will be able to obtain any of these potential
sources of cash.
- --------------------------------------------------------------------------------
F-14
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Other Receivables
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. Other receivables comprise the following
at December 31, 1999 and 1998:
Note receivable, with interest at
10%, due in various installments
through 2002, unsecured $ 221
Other receivables 100
---------------
Total notes and other receivables
net of realization allowance $ 321
---------------
5. Notes Receivable
Commodore held a mortgage note receivable and other receivables of $2,715 at
December 31, 1997. Because the note and receivables were non-performing
according to their terms, Commodore had recorded realization allowances of
$1,803 at December 31, 1997, in order to reduce the net book value of the
receivables to $912 at such date. In 1998, Commodore collected $1,505 of
non-performing receivables, of which $157 was collected against an advance, $100
paid as a settlement and $336 was recorded as a recovery of bad debt.
6. Property and Equipment
Property and equipment consist of the following:
December 31,
----------------------
1999 1998
----------------------
Machinery and equipment $ 1,370 $ 1,289
Furniture, fixtures, and equipment 366 366
Leasehold improvements 211 211
----------------------
1,947 1,866
Less: accumulated depreciation
and amortization 1,211 712
----------------------
Net property and equipment $ 736 $ 1,154
----------------------
- --------------------------------------------------------------------------------
F-15
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Investments
Investments consist of the following:
1999 1998
---------------------------------
Commodore Applied Technologies $ 2,987 $ 4,496
Louisiana Property 98 134
---------------------------------
$ 3,085 $ 4,630
---------------------------------
As described in notes 1, 2, and 18, the Company accounts for Applied on the
equity method at December 31, 1999 and 1998. The difference between the carrying
value of Commodore's ownership percentage in Applied and the equity book value
on Applied's financial statements is the result of various equity sales of
preferred stock by Applied. Condensed financial statements for Applied at
December 31, 1999 and 1998 and for the years then ended are as follows:
December 31,
---------------------------------------
1999 1998
---------------------------------------
Current assets $ 6,001 $ 5,341
---------------------------------------
Non-current assets $ 10,046 $ 10,276
---------------------------------------
Current liabilities $ 5,195 $ 3,524
---------------------------------------
Equity $ 9,951 $ 11,908
---------------------------------------
Year Ended December 31,
---------------------------------------
1999 1998
---------------------------------------
Revenues $ 18,147 $ 17,470
Expenses 22,132 23,005
---------------------------------------
Net loss $ (3,985) $ (5,535)
---------------------------------------
- --------------------------------------------------------------------------------
F-16
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Investments Continued
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 each from 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 as much as Applied is accounted for on the equity method by
Commodore in 1999 and 1998, the equity investment in Applied included the LLC.
In February 1997 and pursuant to the agreement, Applied contributed an
additional $1,000 to the LLC. The investment was accounted for under the equity
method on Applied's financial statement. Summarized information of the LLC's
results of operations are as follows at December 31, 1997:
1997
-----------------
Revenues $ 510
-----------------
Expenses $ 4,163
-----------------
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 $98 and $134 at December 31, 1999
and 1998, respectively, is accounted for under the equity method. Condensed
financial information is not presented as the investment and its operations are
immaterial to Commodore.
- --------------------------------------------------------------------------------
F-17
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Other Accrued Liabilities
Other accrued liabilities consist of the following:
1999 1998
-------------------------------
Warrants issued for purchase of
Applied Common Stock $ 1,054 $ 1,054
Other 126 233
-------------------------------
$ 1,180 $ 1,287
-------------------------------
9. Bonds Payable and Long-Term Debt
Bonds Payable
In 1993 and 1994, Commodore issued $4,000 of convertible bonds which carry an
interest rate of 8.5% payable quarterly, and mature on June 3, 2000. The bonds
are secured by 16,800,000 and 6,000,000 unissued shares of Commodore's Common
Stock and Applied's Common Stock which Commodore owns, respectively. The bonds
are convertible at any time into Common Stock of Commodore at the rate of one
share per $1.00 of bond principal. To obtain the bonds, Commodore paid an
aggregate commission of $480 in cash and issued 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.
Promissory Note Payable
The Company has an 8% note payable to a former officer of a subsidiary. The
principal amount of the loan is $2,250 at December 31, 1999 and 1998, and is due
in 2006. The note is unsecured and requires interest only payments until
maturity. Accrued and unpaid interest is $349 and $169 as of December 31, 1999
and 1998, respectively, and is included in amounts due to related parties.
- --------------------------------------------------------------------------------
F-18
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. 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 provision for income taxes for the years ended December 31, results in an
effective tax rate which differs from federal income tax rates as follows:
1999 1998 1997
---------------------------------------
Expected tax benefit at federal
statutory rate $ (1,325) $ (2,299) $ (4,592)
State income taxes, net of federal
income tax benefit (234) (406) (810)
Loss from unconsolidated subsidiary 591 892 -
Change in valuation allowance 963 1,807 6,152
Other 5 6 (750)
---------------------------------------
Income tax benefit $ - $ - $ -
---------------------------------------
The components of the net deferred income tax as of December 31, are as follows:
1999 1998 1997
---------------------------------------
Components of current deferred
taxes, net:
Reserve for uncollectible
receivables and potential
disallowances $ - $ - $ 2,104
In-process technology - - 969
Net operating loss
carryforward 11,276 10,313 16,356
---------------------------------------
Total 11,276 10,313 19,429
Less: Valuation allowance (11,276) (10,313) (19,429)
---------------------------------------
Total $ - $ - $ -
---------------------------------------
Included in the change in the valuation allowance at December 31, 1998 is
$10,923 which relates to the deconsolidation of Applied and its net operating
loss carryforwards which are no longer available to the consolidated group.
- --------------------------------------------------------------------------------
F-19
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Income Taxes Continued
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 1999 and 1998,
Commodore has established a valuation allowance for the entire amount of net
deferred tax assets.
Commodore has net operating loss ("NOL") carryforwards at December 31, 1999 of
approximately $33,000 which includes the NOL of Separation and expire in the
years 2000 through 2019. The NOL carryforwards are limited to use against future
taxable income due to changes in ownership and control. 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.
11. Stockholders' Equity
Common Stock
In 1997, Commodore issued 500,000 shares of Common Stock valued at $313 in
exchange for services. In 1998, Commodore issued 500,000 shares of Common Stock
valued at $55 in exchange for services. Common Stock issued through the exercise
of options and warrants is described in Note 13.
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. In 1998, 200,000 shares
of Series AA Preferred Stock were converted into 200,000 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. At December 31, 1999, 2,525,000 shares of Series AA Preferred Stock
remained outstanding.
- --------------------------------------------------------------------------------
F-20
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Stockholders' Equity Continued
Preferred Stock - Continued
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 into 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. In
1998, 82,167 shares of Series B Preferred Stock were converted into 27,389
shares of Commodore Common Stock. At December 31, 1999, 1,387,202 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
January, 1998, all of the outstanding shares of 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 $10.00 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.
In addition, the Company has 3.9 million shares of unissued preferred stock.
12. 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.
- --------------------------------------------------------------------------------
F-21
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Redeemable Preferred Stock Continued
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
in 1997 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 were 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. In addition, if Applied Common Stock traded at less than 50% of
the August 17, 1998 closing bid price for any 10 consecutive trading days, the
exercise price was 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. The exercise price of the warrants issued in connection with the
Series D Preferred Stock were reset to $0.82 per share effective August 18,
1998.
As of December 31, 1998, the 88,000 shares of Series D Preferred Stock had been
converted into an aggregate of 4,019,210 shares of Applied Common Stock, based
upon conversion prices ranging from $1.50 per share to $3.69 per share during
the two years ended December 31, 1998 and 1997. These conversions resulted in
net gains of $3,046 and $1,896 during the years ended December 31, 1998 and
1997, respectively which were included in gain on sale of subsidiary stock.
- --------------------------------------------------------------------------------
F-22
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Redeemable Preferred Stock Continued
Because the Series D Preferred Stock was convertible into a security other than
the Common Stock of Commodore, the Series D Preferred stock was classified as
Redeemable Preferred Stock, and excluded from stockholder's equity.
13. Stock Option Plan
Under the 1997 Stock Option Plan (the Option Plan), a maximum of 15,000,000
Non-Qualified and 3,000,000 incentive options may be granted to purchase common
stock at the date of grant. Under the Option Plan, grants of non-qualified
options may be made to selected officers, directors, key employees, and
consultants without regard to performance measures. The options may be
immediately exercisable or may vest over time as determined by the Board of
Directors. However, the maximum term of an option may not exceed ten years.
Options may not be transferred except by reason of death, with certain
exceptions and termination of employment accelerates the expiration date of any
outstanding options to 3 months from the date of termination.
Number of Option Price
Options Warrants Per Share
------------------------------------------
Outstanding at January 1, 1997 8,585,000 15,146,000 $0.05 - 1.12
Granted 6,155,000 - 0.60 - 1.13
Exercised (190,000) (323,000) 0.05 - 0.10
Expired/Forfeited (5,885,000) - 1.12
------------------------------------------
Outstanding at December 31, 1997 8,665,000 14,823,000 0.05 - 1.13
Granted 8,245,000 3,557,000 0.10
Exercised - (1,141,000) 0.10
Expired/Forfeited - (11,482,000) 0.01 - 0.10
Rescinded (6,905,000) - 0.10 - 0.84
------------------------------------------
Outstanding at December 31, 1998 10,005,000 5,757,000 0.10 - 1.13
Granted - - -
Exercised - - -
Expired/Forfeited - (200,000) 0.14
------------------------------------------
Outstanding December 31, 1999 10,005,000 5,557,000 $0.10 - 1.13
------------------------------------------
- --------------------------------------------------------------------------------
F-23
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock Option Plan Continued
Options exercisable are as follows:
December 31,
----------------------------------------
1999 1998 1997
----------------------------------------
Options exercisable 9,965,000 9,633,000 5,400,000
Options available for grant 9,755,000 9,755,000 18,000,000
14. Stock Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting (SFAS) No. 123, Accounting for Stock-Based Compensation. Accordingly,
no compensation cost has been recognized in the financial statements. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards in 1999, 1998, and 1997 consistent
with the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share amounts):
Years Ended December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
Net loss - as reported $ (3,896) $ (6,761) $ (13,507)
Net loss - pro forma $ (3,928) $ (7,418) $ (17,733)
Loss per share - as reported $ (0.06) $ (0.11) $ (.27)
Loss per share - pro forma $ (0.06) $ (0.12) $ (.34)
- --------------------------------------------------------------------------------
F-24
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Stock Based Compensation Continued
No option grants were made in 1999. The fair value of each option grant is
estimated at the date of grant using the Black-Scholes option pricing model with
the following assumptions:
December 31,
1998 1997
-------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 105% 60-65%
Risk-free interest rate 5% 4.9-6.3%
Expected life of options 5-10 years 5-10 years
-------------------------------
The weighted average fair value of options granted during 1998 and 1997 are
$.10, and $.85, respectively.
The following table summarizes information about stock options and warrants
outstanding at December 31, 1999.
Outstanding Exercisable
--------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercisable
Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------
$ .10 11,802,000 3.22 years $ 0.10 11,430,000 $ 0.10
.37 - .50 450,000 3.67 years 0.41 450,000 0.41
.68 2,000,000 .92 years 0.68 2,000,000 0.68
1.12 - 1.13 1,310,000 6.87 years 1.13 1,310,000 1.13
- ---------------------------------------------------------------------------
$ .10 - 1.13 15,562,000 3.13 years $ 0.19 15,190,000 $ 0.21
- ---------------------------------------------------------------------------
Stock Warrants
In 1998 and 1997, Warrants for the purchase of 591,143, shares, and 322,435
shares of Common Stock were exercised resulting in net proceeds to Commodore of
$39, and $49, respectively.
In 1998, warrants for the purchase of 2,070,834 shares of common stock were
issued to consultants, the warrants were valued at $81 and recorded as an
expense.
As of December 31, 1999, all stock warrants are exercisable.
- --------------------------------------------------------------------------------
F-25
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Related Party Transactions
In March 1998, Applied held a note receivable from Lanxide Performance
Materials, Inc. (LPM), a wholly owned subsidiary of Lanxide Corp. Lanxide Corp.
was related to Commodore by significant common ownership. The receivable was
recorded at a net realizable value of $831. During March 1998, Applied
transferred its receivable from LPM and $500 cash to Commodore as a payment on
amounts due under the September 1997 Intercompany Note (see Note 18).
Also in March 1998, Commodore incorporated Polymer as a wholly-owned subsidiary,
and through Polymer exchanged its note receivable from LPM, including the note
recently acquired from Applied, along with $500 cash for a license and trademark
technology called CERASET owned by Lanxide. Commodore recorded the license at
the carrying value of the notes receivable plus the cash exchanged. The Company
sold its investment in Polymer on March 6, 2000 to a company related by common
ownership (see Note 22).
Due to Related Parties
The Company has a note payable to a related party in the amount of $2,250 at
December 31, 1999 and 1998 with accrued interest payable of $349 and $169,
respectively (see note 9).
During 1999 the Company received advances of $2,300 from a company wholly owned
by the majority shareholder of Commodore for which it has a payable at December
31, 1999 recorded in due to related parties.
The Company also has payables to Applied of $262 and $112 at December 31, 1999
and 1998.
- --------------------------------------------------------------------------------
F-26
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Non-Cash Investing and Financing Activities
During the years ended December 31, 1999, 1998, and 1997, Commodore had the
following non-cash investing and financing transactions:
1999
----
o Commodore recorded equity losses on changes of interest in Applied of $31
as a direct decrease in equity (see Note 18).
1998
----
o In February 1998, Commodore's investment in Applied was reduced below 50%
and Commodore began to account for its investment on the equity method
rather than through consolidation. Upon de- consolidation, Commodore
removed its minority interest liability related to Applied of $5,478 and
recorded an investment in Applied of $6,060. The company also removed the
following assets and liabilities from its consolidation:
Assets
Cash $ 11,060
Accounts receivable, net 2,926
Notes and advances to related parties 911
Restricted cash and CDs 107
Inventory 487
Prepaid and other current assets 275
Other receivables 32
Investments and advances 1,333
Property and equipment, net 2,440
Patents and completed technology 1,144
Goodwill, net 7,332
Other assets 93
-----------------
Total assets $ 28,140
-----------------
Liabilities
Accounts payable $ 1,441
Payables to related parties 251
Line of credit 1,069
Accrued liabilities 3,794
Long term debt 53
Notes to related parties 3,340
Minority interest 6,645
-----------------
Total liabilities $ 16,593
-----------------
- --------------------------------------------------------------------------------
F-27
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Non-Cash Investing and Financing Activities Continued
o In September 1998, Commodore acquired an 87% common stock interest in
Separation from Applied and consolidated the financial statements of
Separation. Separation was acquired for $1,250,000 which was partial
satisfaction of a receivable from Applied. Due to the liquidation value of
the preferred stock held by minority shareholders the entire net assets of
Separation of $2,138 is recorded as a minority interest liability.
Consequently, the Company's investment in Separation was written down to
zero. The assets and liabilities acquired are as follows:
Assets
Cash $ 715
Accounts receivable 1
Notes and advances to related parties 2
Restricted cash and CDs 210
Inventory 631
Property and equipment, net 1,494
Patents and completed technology 184
-----------------
Total assets $ 3,237
-----------------
Liabilities
Accounts payable $ 93
Payables to related parties 367
Unearned revenue 450
Accrued liabilities 183
Long term debt 6
-----------------
Total liabilities $ 1,099
-----------------
o In February 1998, Applied transferred a receivable of $1,500 from an
affiliate to Commodore for debt reduction.
o In March 1998, Commodore transferred notes receivables from an affiliate of
$3,936, and cash of $500 in exchange for purchased technology (see Note
15).
- --------------------------------------------------------------------------------
F-28
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Non-Cash Investing and Financing Activities Continued
o In September 1998, Applied repaid Intercompany Notes of $5,506 through the
exchange of a receivable from Separation of $357 and issuance of Preferred
Stock of $5,149 (see Note 18).
o Commodore recorded equity gains on changes of interest in Applied of $720
as a direct increase in equity (see Note 18).
o The remaining shares of Series D Preferred Stock were converted into shares
of Applied common stock held by Commodore.
o 397,375 shares of Preferred stock were converted into 2,471,750 shares of
common stock.
o The Company distributed its common stock of Applied as a dividend to
holders of Series D Preferred Stock in the amount of $152.
1997
----
o In 1997, Commodore recorded equity gains on changes of interest in Applied
of $3,517 as a direct increase in equity (see Note 18).
o In connection with Commodore's sale of 88,000 shares of Series D Preferred
Stock, the beneficial conversion feature of $1,553 was recorded as a direct
increase in additional paid-in capital. Amortization of the beneficial
conversion feature of $1,477 was recorded as preferred dividends. The
purchasers of the Series D Preferred Stock also received warrants to
purchase Applied common stock. The warrants were valued at $923 and
recorded as an accrued liability (see Note 14).
- --------------------------------------------------------------------------------
F-29
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Earnings Per Share
All earnings per share amounts reflect the implementation of SFAS 128, "Earnings
Per Share." 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. 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 year.
Years Ended December 31
-----------------------------------
1999 1998 1997
-----------------------------------
Net loss from continuing operations $ (2,950) $ (1,834) $ (13,507)
Preferred Stock dividends - (279) (1,766)
Dividends on Series D Preferred Stock
(not declared) - - (232)
-----------------------------------
Net loss applicable to common
shareholders from continuing operations (2,950) (2,113) (15,505)
Net loss applicable to common
shareholders from discontinued operations (946) (4,927) -
-----------------------------------
Total net loss applicable to common
shareholders $ (3,896)$ (7,040)$ (15,505)
-----------------------------------
Weighted average common shares
outstanding (basic) 62,290,000 61,981,000 58,482,000
-----------------------------------
- --------------------------------------------------------------------------------
F-30
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Earnings Per Share Continued
Employee stock options (Note 14) (*) (*) (*)
Series AA Convertible Preferred Stock
(Note 11) (*) (*) (*)
Series B Convertible Preferred Stock
(Note 11) (*) (*) (*)
Series C Convertible Preferred Stock
(Note 11) (*) (*) (*)
Warrants issued in connection with
various transactions (Note 14) (*) (*) (*)
------------------------------------
Weighted average common shares
outstanding (diluted) 62,290,000 61,981,000 58,482,000
Net loss per share - basic and diluted -
continuing operations $ (.05) $ (.03) $ (.27)
Net loss per share - basic and diluted -
discontinued operations $ (.01) $ (.08) $ -
-----------------------------------
Total net loss per share $ (.06) $ (.11) $ (.27)
-----------------------------------
(*) Due to Commodore's loss from continuing operations in 1999, 1998, and 1997,
the incremental shares issuable in connection with these instruments are
anti-dilutive and accordingly not considered in the calculation.
18. Acquisitions and Reorganizations
Commodore Applied Technologies, Inc.
At December 31, 1999 and 1998, Commodore owned 49% and 35%, respectively, of the
Common Stock outstanding of 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 February 1998, Commodore's investment in
Applied fell below 50% due to the Company selling an aggregate of 2,782,646
shares of its investment in Applied. Accordingly, Applied was deconsolidated and
is now accounted for under the equity method of accounting from February 1, 1998
through December 31, 1999.
- --------------------------------------------------------------------------------
F-31
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18. Acquisitions and Reorganizations Continued
Commodore Applied Technologies, Inc. - Continued
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 equity during 1997. 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 was accrued by Applied as a
liability. In 1998, Applied issued 599,063 additional shares of Applied Common
Stock to unrelated parties in fulfillment of this liability. This issuance of
Applied's Common Stock resulted in a net gain for Commodore of $343, which was
recorded directly to equity during 1998.
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
equity during 1997. In 1998, the remaining 9,600 shares were converted to
Applied Common Stock. Commodore recognized a $376 gain on the 1998 conversions
of preferred stock as a direct increase in equity. No cash dividends were paid
on the Applied Series A Preferred Stock in 1997 or 1998.
In February 1998, Commodore sold (i) 1,381,692 shares of its 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. Pursuant to the terms of this transaction,
Commodore was required to issue an additional 1,400,954 shares of Applied Common
Stock to the investors for no additional consideration related to price reset
provisions of the sale agreement, based upon the market price of Applied Common
Stock. This sale of Applied Common Stock resulted in a net gain for Commodore of
$4,577 during 1998 which is reflected in the statement of operations. The
warrants were valued at $131 and were recorded as a liability until such time as
the warrants are either exercised or expire.
- --------------------------------------------------------------------------------
F-32
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18. Acquisitions and Reorganizations Continued
Commodore Applied Technologies, Inc. - Continued
In March 1998, Applied transferred its $1.5 million receivable from Lanxide
Performance Materials, Inc., a wholly-owned subsidiary of Lanxide Corporation,
with a carrying value of $831 with $500 in cash for debt reduction for amounts
due under the 1997 Intercompany Note (see Note 15). Lanxide was related to
Commodore by substantial common ownership. In connection with the exchange,
Applied issued a warrant to Commodore to purchase 14,000 shares of Common Stock
at an exercise price of $4.50, 100% of the market price on the date of closing.
The warrant expires in August 2001. The warrant issued in connection with this
transaction was subsequently valued at $0 with no net effect on the financial
statements.
On September 28, 1998, Applied repaid the Intercompany Notes Receivable which
totaled $6,756 owed to Commodore by i) transferring its 87% interest in the
common stock of Separation ii) issuing 20,909 shares of newly created Applied
Series B Convertible Preferred Stock, iii) issuing 10,189 shares of newly
created Applied Series C Convertible Preferred Stock, iv) issuing 20,391 of
newly created Applied Series D Convertible Preferred Stock, v) transferring a
$357 receivable from Separation, and vi) making a modification of the new
warrants granted in connection with the 1998 Intercompany Note reducing the
exercise price to $1.50. The value of the stock and receivable was determined by
an outside unrelated party. The value of consideration received was less than
the carrying amount of the Intercompany Notes. Accordingly, a $1,962 loss was
recognized on satisfaction of the notes receivable and is included in general
and administration expenses.
In November 1999, Commodore converted all of its 51,489 shares of Applied's
Series B, C and D Convertible Preferred Stock to 7,258,533 shares of Applied's
Common Stock, increasing its ownership of Applied Common Stock to 49%.
In December 1999, Applied paid dividends to the holders of its Series E
Convertible Preferred Stock. As a result, Commodore recorded a decrease in its
investment in Applied of $31 directly against equity.
- --------------------------------------------------------------------------------
F-33
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18. Acquisitions and Reorganizations Continued
Commodore Separation Technologies, Inc.
On December 2, 1996 Applied purchased three wholly-owned subsidiaries of
Commodore, including, 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. 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. Commodore's $2,721 gain
on this transaction was recorded as a direct increase in Commodore's equity
during 1997 because Separation is a development stage company.
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 years ended December 31, 1999, 1998 and 1997, Separation paid
dividends to its Preferred shareholders of $0, $300 and $438, respectively.
Effective September 28, 1998, Commodore acquired Applied's 87% ownership of
Separation, as part of the debt restructuring between Commodore and Applied as
previously discussed. Accordingly, Separation is included in the consolidated
financial statements of Commodore as of December 31, 1999 and 1998 and for the
period since the acquisition. The results of operations of Separation were
consolidated with Commodore through January 1998, through Commodore's ownership
in Applied. The unaudited pro forma combined results of operations of Commodore
for the year ended December 31, 1998, as if the acquisition of Separation had
occurred on January 1, 1998 is as follows:
Revenues $ 1,673
Net loss before extraordinary item $ (6,105)
Net loss $ (8,067)
Net loss per share $ (0.13)
- --------------------------------------------------------------------------------
F-34
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18. Acquisitions and Reorganizations Continued
Commodore Polymer Technologies, Inc.
On March 5, 1998 Commodore incorporated a new company, Commodore Polymer
Technologies, Inc. (Polymer), as a wholly-owned subsidiary and transferred the
CERASET technology acquired from Lanxide into Polymer (see Note 15).
The Company has determined that although the CERASET technology has proven
effective during testing, the commercial viability of the technology has not
been demonstrated. Further, the Company is unable to determine the cost, in
dollars or time, necessary to bring the CERASET technology to economic
profitability. As a result of this uncertainty, at December 31, 1998 Polymer
recorded an impairment on the technology asset of $4,154, bringing its net
equity, and the investment of Commodore in Polymer to $100. Also in 1998 and
through March 6, 2000 the Company began developing new Polymer technologies.
During 1999 and 1998, the Company, through Polymer, has expensed approximately
$240 and $410, respectively, related to the development of the new technologies.
Effective March 6, 2000 Commodore sold all of its stock in Polymer, which
contains the new technologies, to Blum Technology Trust, an entity with common
majority ownership for $1,588,902, recognizing a gain on disposal of
discontinued operations in 2000 (see Note 22).
Minority Interests in Consolidated Subsidiaries
Minority interest in the consolidated financial statements at December 31, 1999
and 1998 consist of the Separation Preferred Stock and accrued unpaid dividends
to Separation's preferred stockholders. By December 31, 1998, all of
Separation's Common Equity had been reduced to zero, resulting in 100% of the
equity operations of Separation being attributed to Separation's preferred
stockholders.
Minority interest in Applied at December 31, 1997 consist of the minority
interest in Separation previously discussed, Applied Redeemable Preferred Stock,
warrants outstanding to purchase shares of Applied Common Stock, and minority
shareholders of Applied Common Stock. As of December 31, 1998, Commodore
accounted for its investments in Applied using the equity method and
accordingly, no minority interests are carried on the balance sheet of
Commodore.
- --------------------------------------------------------------------------------
F-35
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
19. Discontinued Operations
Condensed financial information for Polymer, which was discontinued, is as
follows for the year ended December 31, 1999 and the period from March 5, 1998
(date of inception) through December 31, 1998:
1999 1998
---------------------------
Revenues $ 44 $ 22
Costs and expenses (990) (795)
Impairment loss - (4,154)
---------------------------
Net loss before income tax expense (946) (4,927)
Income tax expense - -
---------------------------
Net loss from discontinued operations $ (946) $ (4,927)
---------------------------
Net (liabilities) assets of discontinued operations consists of the following at
December 31, 1999 and 1998:
1999 1998
---------------------------
Cash $ - $ 1
Accounts receivable - 12
Property and equipment, net 21 27
Completed technology, net 60 60
Accounts payable (110) -
---------------------------
$ (29) $ 100
---------------------------
- --------------------------------------------------------------------------------
F-36
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
20. Segment Information
Using the guidelines set forth in SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," Commodore has identified three
reportable segments in which it operates based on the services it provides. The
reportable segments are as follows: Commodore Applied Technologies, Inc.,
("Applied") which primarily provides various engineering, legal, sampling and
public relations service to Government agencies on a cost -plus basis; Commodore
Separation Technologies, Inc., ("Separation"), which provides water and
contaminant separation by use of patented process; and Commodore Polymer
Technologies, Inc. ("Polymer"), which specializes in the manufacture of ceramic
bonding and refractory materials. Common overhead costs are allocated between
segments based on a record of time spent by executives. Commodore evaluates
segment performance based on the segment's net income (loss). The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Commodore's foreign and export sales and assets
located outside of the Untied States are not significant. Summarized financial
information concerning Commodore's reportable segments is shown in the following
table. Effective February 1998, Commodore's investment in Applied fell below 50%
and is now accounted for on the equity method. Accordingly, the 1998 results of
operations reflected only one month for Applied and nothing is reflected for
1999. Effective September 28, 1998, Applied sold its investments in Separation
to Commodore, and accordingly, the summarized information for Separation is only
included from the date of sale for 1998. For 1997, Applied consolidated
Separation since it owned 87% of the outstanding common stock and therefore for
purposes of segment reporting, Separation's results for 1997 were deducted from
Applied's amounts.
- --------------------------------------------------------------------------------
F-37
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 Corporate
---- Overhead&
Total Separation Polymer Other
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 337 $ 337 $ - $ -
---------------------------------------------------------------
Costs and expenses:
Cost of sales 541 541 - -
Research and development 338 338 - -
General and administrative 1,672 755 - 917
Depreciation and
amortization 547 507 - 40
---------------------------------------------------------------
Total costs and expenses 3,098 2,141 - 957
---------------------------------------------------------------
Loss from operations (2,761) (1,804) - (957)
Interest income 23 18 - 5
Interest expense (520) - - (520)
Equity in losses of
unconsolidated subsidiary (1,478) - - (1,478)
Minority interest 1,786 1,786 - -
Income tax expense - - - -
Loss from discontinued operations (946) - (946) -
---------------------------------------------------------------
Net loss $ (3,896) $ - $ (946) $ (2,950)
---------------------------------------------------------------
Total assets $ 5,134 $ 1,908 $ - $ 3,226
---------------------------------------------------------------
Expenditures for long-lived
assets $ 90 $ 90 $ - $ -
---------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
F-38
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 Corporate
---- Overhead
Total Applied Separation Polymer & Other
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 1,632 $ 1,251 $ - $ - $ 381
--------------------------------------------------------------------
Costs and expenses:
Cost of sales 961 961 - - -
Research and development 303 173 130 - -
General and administrative 7,443 777 164 - 6,502
Depreciation and
amortization 528 96 121 - 311
--------------------------------------------------------------------
Total costs and expenses 9,235 2,007 415 - 6,813
--------------------------------------------------------------------
Loss from operations (7,603) (756) (415) - (6,432)
Interest income 523 - - - 523
Gain on sale of subsidiary stock 7,623 - - - 7,623
Interest expense (616) (6) - - (610)
Equity in losses of
unconsolidated subsidiary (2,229) - - - (2,229)
Minority interest 468 - - - 468
Income tax expense - - - - -
Loss from discontinued
operations (4,927) - - (4,927) -
--------------------------------------------------------------------
Net loss $ (6,761) $ (762) $ (415) $ (4,927) $ (657)
--------------------------------------------------------------------
Total assets $ 8,029 $ - $ 2,665 $ 100 $ 5,264
--------------------------------------------------------------------
Expenditures for long-lived
assets $ 70 $ $ 5 $ 30 $ 35
--------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
F-39
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 Corporate
---- Overhead
Total Applied Separation Polymer & Other
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 19,493 $ 19,493 $ - $ - $ -
--------------------------------------------------------------------
Costs and expenses:
Cost of sales 16,325 16,275 50 - -
Research and development 3,074 1,684 1,390 - -
General and administrative 17,058 8,499 3,697 - 4,862
Depreciation and
amortization 1,282 1,049 233 - -
--------------------------------------------------------------------
Total costs and expenses 37,739 27,507 5,370 - 4,862
--------------------------------------------------------------------
Income (loss) from operations (18,246) (8,014) (5,370) (4,862)
Gain on sale of subsidiary stock 1,896 - - - 1,896
Interest income 1,004 459 286 - 259
Interest expense (1,052) (1,310) - - 258
Equity in losses of
unconsolidated subsidiary (1,827) (1,827) - - -
Minority interest 4,718 (82) - - 4,800
Income taxes - - - - -
--------------------------------------------------------------------
Net (loss) income $ (13,507) $ (10,774) $ (5,084) $ - $ 2,351
--------------------------------------------------------------------
Total assets $ 35,016 $ 23,300 $ 6,396 $ - $ 5,320
--------------------------------------------------------------------
Expenditures for long-lived
assets $ 1,409 $ 774 $ 1,226 $ $ (591)
--------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
F-40
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
21. 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:
Year Amount
---- ------
2000 $ 201
2001 207
2002 86
2003 21
-----------------
$ 515
-----------------
Rent expenses were approximately $200, $137, and $847, in 1999, 1998 and 1997,
respectively.
Self-Insurance
Harvest American. In July 1987, Commodore established Harvest American Insurance
Company, a wholly-owned licensed "captive" insurance company subsidiary. Harvest
issued insurance polices 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.
- --------------------------------------------------------------------------------
F-41
<PAGE>
COMMODORE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
21. Commitments and Contingencies Continued
Self-Insurance - Continued
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.
Royalties
Commodore and its related entities have entered into agreements where upon the
generation of certain revenue royalties will be accrued and paid under various
technology agreements.
Litigation
Commodore has matters of litigation arising in the ordinary course of its
business which, in the opinion of the management, will not have a material
adverse effect on the financial condition or results of operation.
22. Subsequent Event
On March 6, 2000 the Company sold 100% of the stock in its wholly-owned
subsidiary, Polymer, to an entity with common majority ownership for $1,588,902,
recognizing a gain on disposal of discontinued operations.
- --------------------------------------------------------------------------------
F-42
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
We have audited the consolidated balance sheet of COMMODORE APPLIED
TECHNOLOGIES, INC. AND SUBSIDIARIES as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. 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 financial position of COMMODORE APPLIED
TECHNOLOGIES, INC. AND SUBSIDIARIES as of December 31, 1999, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Tanner + Co.
Salt Lake City, Utah
February 18, 2000, except Note 18 which is
dated March 17, 2000
F-43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Commodore Applied Technologies, Inc. and Subsidiaries:
In our opinion, the consolidated balance sheet as of December 31, 1998 and the
related consolidated statements of operations and comprehensive loss, of
stockholders' equity and of cash flows for each of the two years in the period
ended December 31, 1998 present fairly, in all material respects, the financial
position, results of operations and cash flows of Commodore Applied
Technologies, Inc. and its subsidiaries at December 31, 1998 and for each of the
two years in the period ended December 31, 1998, 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. We have not
audited the consolidated financial statements of Commodore Applied Technologies,
Inc. for any period subsequent to December 31, 1998.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and net cash outflows from operations that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 8, 1999
F-43A
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2) $ 1,797 $ 1,777
Accounts receivable, net (Notes 2, 6 and 10) 3,552 3,142
Notes and advances to related parties (Note 15) 265 130
Restricted cash and certificates of deposit (Note 2) 21 21
Prepaid assets and other current receivables 366 271
---------- ----------
Total current assets 6,001 5,341
Investments and advances (Note 7) -- --
Property and equipment, net (Notes 2, 8 and 10) 2,244 2,202
Other assets (Notes 2 and 5):
Patents and completed technology, net of accumulated
amortization of $425 and $296, respectively 961 977
Goodwill, net of accumulated amortization of $831
and $575, respectively 6,841 7,097
---------- ----------
Total assets $ 16,047 $ 15,617
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,792 $ 975
Current portion of long-term debt (Note 10) 200 5
Line of credit (Note 10) 948 361
Other accrued liabilities (Note 9) 2,255 2,183
---------- ----------
Total current liabilities 5,195 3,524
---------- ----------
Long-term debt (Note 10) 716 --
Notes payable to related parties (Note 15) 185 185
---------- ----------
Total liabilities 6,096 3,709
Minority interest in subsidiary (Note 5) -- --
Commitments and contingencies (Note 16) -- --
Stockholders' Equity:
Convertible Preferred Stock, Series B, C and D, par value $.001 per share,
6% non-cumulative dividends, 65,000 shares authorized, 0 and 51,489 share
issued and outstanding, at December 31, 1999 and 1998,
respectively (Notes 5 and 13) -- --
Convertible Preferred Stock, Series E, par value $0.001
per share, aggregate liquidation value of $4,355,000, 12% cumulative
dividends, 335,000 shares authorized, 335,000 shares and 0 shares issued
and outstanding at December 31, 1999 and 1998,
respectively (Notes 5 and 13) -- --
Common Stock, par value $0.001 per share, 100,000,000
shares authorized, 30,962,938 and 23,702,263 issued
and outstanding, at December 31, 1999 and 1998,
respectively 31 24
Additional paid-in capital 49,350 47,329
Accumulated deficit (39,430) (35,445)
---------- ----------
Total stockholders' equity 9,951 11,908
---------- ----------
Total liabilities and stockholders' equity $ 16,047 $ 15,617
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
F-45
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Contract revenue (Note 2) $ 18,147 $ 17,470 $ 19,493
Costs and expenses:
Cost of sales 16,127 15,421 16,325
Research and development (Note 2) 1,145 2,722 3,074
General and administrative 4,037 8,118 12,196
Depreciation and amortization (Note 2) 696 1,150 1,282
Minority interest -- 300 (82)
-------- -------- --------
Total costs and expenses 22,005 27,711 32,795
-------- -------- --------
Loss from operations (3,858) (10,241) (13,302)
Gain on sale of affiliate (Note 5) -- 4,664 --
Interest income 39 337 745
Interest expense (166) (1,066) (1,310)
Equity in losses of unconsolidated subsidiary -- (2,383) (1,827)
-------- -------- --------
Loss before income taxes and extraordinary item (3,985) (8,689) (15,694)
Income tax benefit (Note 12) -- 1,262 --
-------- -------- --------
Net loss before extraordinary item (3,985) (7,427) (15,694)
Extraordinary item - gain on troubled debt
restructuring, net of taxes $1,262 (Note 5) -- 1,892 --
-------- -------- --------
Net loss $ (3,985) $ (5,535) $(15,694)
======== ======== ========
Net loss per share before extraordinary item -
basic and diluted $ (.16) $ (.32) $ (.73)
Extraordinary item per share - basic and diluted -- .08 --
-------- -------- --------
Net loss per share - basic and diluted (Note 3) $ (.16) $ (.24) $ (.73)
======== ======== ========
Number of weighted average shares outstanding 24,819 23,194 21,844
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-46
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 -- $ -- 21,650,000 $ 22 $ 34,270 $ (14,216)
Gain on subsidiary's sale of Common Stock -- -- -- -- 3,927 --
Warrants issued in connection with
Redeemable Preferred Stock -- -- -- -- 25 --
Warrants issued in connection with convertible loan
from parent -- -- -- -- 660 --
Beneficial conversion feature on convertible loan
from parent -- -- -- -- 750 --
Beneficial conversion feature on Series A Preferred
Stock -- -- -- -- 216 --
Sale of Common Stock, net of $1,189 liability for
price reset -- -- 700,000 1 1,143 --
Preferred Stock dividends -- -- -- -- (240) --
Conversion of Series A Preferred Stock into
Common Stock -- -- 416,334 -- 790 --
Net loss -- -- -- -- -- (15,694)
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
F-47
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 -- -- 22,766,334 23 41,541 (29,910)
Conversion of Series A Preferred Stock into Common
Stock -- -- 336,866 -- 890 --
Issuance of Common Stock to satisfy price reset liability -- -- 599,063 1 1,197 --
Preferred stock dividends -- -- -- -- (14) --
Warrant issued in connection with early paydown
on intercompany note -- -- -- -- 340 --
Warrant issued in connection with loan from parent -- -- -- -- 527 --
Change in exercise price of warrant issued in connection
with convertible loan from parent -- -- -- -- 842 --
Change in exercise price of warrant issued in connection
with debt restructuring -- -- -- -- 5 --
Issuance of Series B Convertible Preferred Stock
(Notes 5 and 13) 20,909 -- -- -- 813 --
Issuance of Series C Convertible Preferred Stock
(Notes 5 and 13) 10,189 -- -- -- 396 --
Issuance of Series D Convertible Preferred Stock
(Notes 5 and 13) 20,391 -- -- -- 792 --
Net loss -- -- -- -- -- (5,535)
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
F-48
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 51,489 -- 23,702,263 24 47,329 (35,445)
Conversion of series B, C, and D preferred stock
into common stock (Notes 5 and 13) (51,489) -- 7,258,533 7 (7) --
Issuance of Series E Convertible Preferred Stock
at redemption value (Notes 5 and 13) 335,000 -- -- -- 2,030 --
Warrants issued in connection with Series E
Convertible Preferred Stock -- -- -- -- 60 --
Preferred stock dividends -- -- -- -- (63) --
Exercise of stock options -- -- 2,142 -- 1 --
Net loss -- -- -- -- -- (3,985)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 335,000 $ -- 30,962,938 $ 31 $ 49,350 $ (39,430)
========== ========== ========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements. F-49
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,985) $ (5,535) $(15,694)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 696 1,150 1,282
Loss on disposition of property and equipment -- 601 --
Equity in losses of unconsolidated subsidiary -- 2,340 1,827
Write down of investment in unconsolidated subsidiary -- 43 --
Provision for related party bad debt -- -- 814
Minority interest in subsidiary losses -- 300 (82)
Amortization of debt discount -- 695 792
Non-cash gain on sale of affiliate -- (4,664) --
Non-cash gain on early extinguishment of debt -- (3,154) --
Other -- 26 135
Changes in assets and liabilities, net of sale of subsidiary
and acquisitions:
Accounts receivable (410) (79) 4,085
Inventory -- (271) (360)
Restricted cash -- (21) --
Prepaid assets (95) 132 178
Other accounts receivable -- 18 45
Accounts payable and accrued liabilities 889 (776) (1,347)
Other -- 19 105
-------- -------- --------
Net cash used in
operating activities (2,905) (9,176) (8,220)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment purchased or constructed (353) (2,554) (1,409)
Patents acquired (113) (150) (401)
Purchase of Commodore Separation Technologies, Inc.,
Commodore CFC Technologies, Inc., and CFC
Technologies, Inc., net of cash acquired -- -- --
Advances to related parties (135) (96) --
Increase in restricted cash -- 50 410
Cash held by subsidiary at the time of sale -- (715) --
Repayment of loans to affiliate, net of advances -- 752 (723)
Contributions to affiliate -- (2,377) (1,000)
-------- -------- --------
Net cash used in
investing activities (601) (5,090) (3,123)
-------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-50
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Proceeds from sale of Common Stock 1 -- 2,341
Proceeds from sale of Preferred Stock 2,090 -- 1,668
Preferred stock dividends paid by subsidiary -- (300) (438)
Preferred stock dividends (63)
Proceeds from subsidiary's sale of Common
and Preferred Stock -- -- 11,088
Payments to principal shareholder -- (1,328) --
Borrowings from principal shareholder -- 5,450 4,000
(Repayments)/borrowings under the line of credit 587 (838) (5,843)
Borrowings on long term debt 1,000 -- --
Payments on long term debt and capital leases (89) (35) (72)
Repayment of related party accounts receivable
and payable -- (57) (326)
---------- ---------- ----------
Net cash provided by
financing activities 3,526 2,892 12,418
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents 20 (11,374) 1,075
Cash and cash equivalents, beginning of year 1,777 13,151 12,076
---------- ---------- ----------
Cash and cash equivalents, end of year $ 1,797 $ 1,777 $ 13,151
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 166 $ 289 $ 446
========== ========== ==========
Taxes $ -- $ -- $ --
========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-51
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
1. BACKGROUND Commodore Applied Technologies, Inc. and subsidiaries
("Applied"), is engaged in the destruction and
neutralization of hazardous waste from other materials.
Applied owns technologies related to the separation and
destruction of polychlorinated biphenyls (PCBs) and
chlorofluorocarbons (CFCs).
Applied is currently working on the commercialization
of these technologies through development efforts,
licensing arrangements and joint ventures. Through
Commodore Advanced Sciences, Inc. ("CASI"), formerly
Advanced Sciences, Inc., a subsidiary acquired on
October 1, 1996, Applied has contracts with various
government agencies and private companies in the United
States and abroad. As some government contracts are
funded in one year increments, there is a possibility
for cutbacks as these contracts constitute a major
portion of CASI's revenues, and such a reduction would
materially affect the operations. However, management
believes the subsidiary's existing client relationships
will allow Applied to obtain new contracts in the
future.
Until September 1998, Applied was also engaged in the
separation of hazardous waste through its 87% owned
subsidiary, Commodore Separation Technologies, Inc.
("Separation"). Effective September 28, 1998, Applied
sold its investments in Separation to Commodore
Environmental Services, Inc. ("Commodore") (See Note
5).
- --------------------------------------------------------------------------------
F-52
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
2. SUMMARY OF LIQUIDITY
SIGNIFICANT
ACCOUNTING The accompanying consolidated financial statements have
POLICIES been prepared under the assumption that Applied will
continue as a going concern. Such assumption
contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business. As shown in the consolidated financial
statements for the years ended December 31, 1999, 1998
and 1997, Applied incurred losses exclusive of their
gains on the sale of an affiliate and extraordinary
item of $3,985, $13,353 and $15,694, respectively.
Applied has also experienced net cash outflows from
operating activities of $2,905, $9,155 and $8,220 for
the years ended December 31, 1999, 1998 and 1997,
respectively. With the financing described in Note 18,
The consolidated financial statements do not include
any adjustments that might be necessary should Applied
be unable to continue as a going concern. Applied's
continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional
financing as may be required, and ultimately to attain
profitability. Potential sources of cash include new
contracts, external debt, the sale of new shares of
company stock or alternative methods such as mergers or
sale transactions.
As described in Note 18, in March 2000 Applied
completed a $2.0 million dollar financing through a
private placement. Net proceeds to the Company were
$1.77 million. With this additional cash, it appears
Applied will be able to meet its obligations on a
timely basis and continue as a going concern.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the
accounts of Applied 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 of accounting as Applied does
not have a controlling interest in the venture.
Effective September 28, 1998, Applied sold its
investment in Separation to Commodore (see Note 5).
- --------------------------------------------------------------------------------
F-53
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
2. SUMMARY OF USE OF ESTIMATES
SIGNIFICANT
ACCOUNTING The preparation of consolidated financial statements in
POLICIES conformity with generally accepted accounting
CONTINUED 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
Substantially all of Applied's revenues are generated
by its subsidiary, CASI. Revenues consist of
engineering and scientific services performed for the
U.S. Government and prime contractors that serve the
U.S. Government under a variety of contracts, most of
which provide for reimbursement of cost plus fixed
fees. Revenue under cost-reimbursement contracts is
recorded using the percentage of completion method as
costs are incurred and include estimated fees in the
proportion that costs incurred to date bear to total
estimated costs.
Anticipated losses on contracts are provided for by a
charge to income during the period such losses are
first identified. Changes in job performance, job
conditions, estimated profitability (including losses
arising from contract penalty provisions) 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 audits to materially
affect the financial statements and have 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 CASI's 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.
- --------------------------------------------------------------------------------
F-54
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
2. SUMMARY OF CASH AND CASH EQUIVALENTS
SIGNIFICANT
ACCOUNTING Applied considers cash and highly liquid debt
POLICIES instruments with original maturities of three months or
CONTINUED less at the date of purchase to be cash equivalents.
Applied's investments in cash equivalents are
diversified among securities with high credit ratings
in accordance with Applied's investment policy.
RESTRICTED CASH AND CERTIFICATES OF DEPOSIT
Restricted cash consists of $21 held in interest
bearing deposit accounts as security for closure costs
on potential permitted facilities.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Applied maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits.
Applied has not experienced any losses in such
accounts. With respect to trade receivables, Applied
generally does not require collateral as the majority
of Applied's services are performed for the U.S.
Government and prime contractors that serve the U.S.
Government. Applied believes it is not exposed to any
significant credit risk on cash, cash equivalents and
trade receivables.
The contract with Customer A is scheduled to end on
September 30, 2000. Sales to major customers which
exceeded 10 percent of net sales are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Customer A $ 12,287 $ 10,673 $ 12,729
Customer B $ 3,692 $ 4,061 $ 3,058
Customer C $ 1,006 $ 1,972 $ 2,168
</TABLE>
RISK AND UNCERTAINTY
Applied's operations involving the separation and
destruction of PCBs requires a permit from the EPA.
Currently, Applied has a valid nationwide permit
related to the treatment of PCBs in certain substances.
The current permit expires in March 2001. If this
permit is not renewed, Applied will not be permitted to
service any contracts which utilize Applied's
separation and destruction technology related to the
treatment of PCB's. Presently, there is no information
to suggest that the EPA will not renew the Applied's
permit or grant them the requested revision.
- --------------------------------------------------------------------------------
F-55
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
2. SUMMARY OF IMPAIRMENT OF LONG-LIVED ASSETS
SIGNIFICANT
ACCOUNTING Applied reviews its long-lived assets for impairment
POLICIES whenever events or changes in circumstances indicate
CONTINUED that the carrying amount of the assets may not be
recoverable through undiscounted future cash flows. If
it is determined that an impairment loss has occurred
based on expected cash flows, such loss is recognized
in the statement of operations.
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 in the Statement of Operations.
Provisions for depreciation are computed on the
straight-line method based on the estimated useful
lives of the 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 CASI (see Note 5).
Goodwill is being amortized on a straight line basis
over its estimated 30 year life. Completed technology
represents certain technology and related patents
acquired in connection with the purchase of third-party
interests in Commodore Laboratories, Inc. ("Labs") (see
Note 5). Completed technology and patents are being
amortized on a straight line basis over their estimated
7 and 17 year lives, respectively. Applied annually
evaluates the existence of impairment on the basis of
whether the goodwill, patents and completed technology
are fully recoverable from the projected undiscounted
net cash flows of the assets to which they relate.
- --------------------------------------------------------------------------------
F-56
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
2. SUMMARY OF INCOME TAXES
SIGNIFICANT
ACCOUNTING Income taxes are determined in accordance with
POLICIES Statement of Financial Accounting Standards ("SFAS")
CONTINUED 109, which requires recognition of deferred income tax
liabilities and assets for the expected future tax
consequences of events that have been included in the
financial statements or tax returns. Under this method,
deferred income tax liabilities and assets are
determined based on the difference between financial
statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the
differences are expected to reverse. SFAS 109 also
provides for the recognition of deferred tax assets if
it is more likely than not that the assets will be
realized in future years.
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. Accounts receivable, notes
receivable, cash equivalents, long term debt and the
line of credit are financial instruments that are
subject to possible material market variations from the
recorded book value. The fair value of these financial
instruments approximate the recorded book value as of
December 31, 1999 and 1998.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified
to conform with the current year presentation.
- --------------------------------------------------------------------------------
F-57
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
2. SUMMARY OF STOCK-BASED COMPENSATION
SIGNIFICANT
ACCOUNTING Compensation costs attributable to stock option and
POLICIES similar plans are recognized based on any difference
CONTINUED between the quoted market price of the stock on the
date of the grant over the amount the employee is
required to pay to acquire the stock (in the intrinsic
value method under Accounting Principles Board Opinion
25). SFAS 123, "Accounting for Stock-Based
Compensation," requires companies electing to continue
to use the intrinsic value method to make pro forma
disclosures of net income and earnings per share as if
the fair value based method of accounting had been
applied. Applied has adopted the disclosure only
provisions of SFAS 123.
SEGMENT INFORMATION
In 1998, Applied adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information."
SFAS 131 provides that the internal organization that
is used by management for making operating decisions
and assessing performance is the source of Applied's
reportable segments. SFAS 131 also requires disclosure
about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect the
results of operations or financial position of Applied
(see Note 4).
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standard Board
issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for fiscal
years beginning after June 15, 1999. SFAS 133 is not
expected to have a material effect on the financial
position or results of operations of Applied.
- --------------------------------------------------------------------------------
F-58
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
3. EARNINGS PER All earnings per share amounts reflect the
SHARE implementation of SFAS 128 "Earnings per Share". 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.
Diluted earnings per share are computed using the
weighted average number of shares determined for the
basic computations plus the number of shares that would
be issued assuming all contingently issuable shares
having a dilutive effect on earnings per share were
outstanding for the period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss before extraordinary item $ (3,985) $ (7,427) $ (15,694)
Preferred stock dividends (63) (14) (240)
Dividends on Series A Preferred Stock
(not declared) -- -- (26)
---------- ---------- ----------
Net loss applicable to common
shareholders before extraordinary item (4,048) (7,441) (15,960)
Extraordinary item - gain on troubled
debt restructuring -- 1,892 --
---------- ---------- ----------
Net loss available to common
shareholders $ (4,048) $ (5,549) $ (15,960)
========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
F-59
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
3. EARNINGS Weighted average common shares
PER SHARE outstanding (basic) 24,819,000 23,194,000 21,844,000
CONTINUED Series A Convertible Preferred Stock
(Note 13) -- -- (*)
Series B Convertible Preferred Stock
(Note 13) -- (*) --
Series C Convertible Preferred Stock
(Note 13) -- (*) --
Series D Convertible Preferred Stock
(Note 13) -- (*) --
Series E Convertible Preferred Stock
(Note 13) (*)
Employee Stock Options (Note 14) (*) (*) (*)
Warrants issued in connection with
various transactions (Note 14) (*) (*) (*)
-------------- -------------- --------------
Weighted average common shares
outstanding (diluted) 24,819,000 23,194,000 21,844,000
============== ============== ==============
Net loss per share before extraordinary
item - basic and diluted $ (.16) $ (.32) $ (.73)
Extraordinary item per share -
basic and diluted -- .08 --
-------------- -------------- --------------
Net loss per share - basic and diluted $ (.16) $ (.24) $ (.73)
============== ============== ==============
</TABLE>
(*) Due to Applied's loss from continuing operations in
1999, 1998 and 1997, the incremental shares issuable in
connection with these instruments are anti-dilutive and
accordingly not considered in the calculation.
- --------------------------------------------------------------------------------
F-60
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
4. SEGMENT Using the guidelines set forth in SFAS No. 131,
INFORMATION "Disclosures About Segments of an Enterprise and
Related Information," Applied has identified three
reportable segments in which it operates based on the
services it provides. The reportable segments are as
follows: Commodore Advanced Sciences ("CASI"), which
primarily provides various engineering, legal, sampling
and public relations services to Government agencies on
a cost plus basis; Solution, which is developing and
constructing equipment to treat mixed and hazardous
waste through a patented process using sodium and
anhydrous ammonia; and through September 28, 1998,
Separation, which provides water and contaminant
separation by use of a patented process. Common
overhead costs are allocated between segments based on
a record of time spent by executives. Applied evaluates
segment performance based on the segment's net income
(loss). The accounting policies of the segments are the
same as those described in the summary of significant
accounting policies. Applied's foreign and export sales
and assets located outside of the United States are not
significant. Summarized financial information
concerning Applied's reportable segments is shown in
the following table. Effective September 28, 1998,
Applied sold its investment in Separation to Commodore,
and accordingly, the summarized information for
Separation is only included through the date of sale.
- --------------------------------------------------------------------------------
F-61
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 CORPORATE
OVERHEAD
TOTAL CASI SOLUTION & OTHER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 18,147 $ 17,973 $ 174 $ --
Costs and expenses:
Cost of sales 16,127 15,865 262 --
Research and development 1,145 -- 1,145 --
General and administrative 4,037 1,428 175 2,434
Depreciation and
amortization 696 64 247 385
Minority interest -- -- -- --
---------- ---------- ---------- ----------
Total costs and expenses 22,005 17,357 1,829 2,819
---------- ---------- ---------- ----------
Income (loss) from operations (3,858) 616 (1,655) (2,819)
Interest income 39 -- -- 39
Interest expense (166) (103) (63) --
Equity in losses of
unconsolidated subsidiary -- -- -- --
Income taxes -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) $ (3,985) $ 513 $ (1,718) $ (2,780)
========== ========== ========== ==========
Total assets $ 16,047 $ 4,108 $ 2,035 $ 11,713
========== ========== ========== ==========
Expenditures for long-lived
assets $ 353 $ 12 $ 337 $ 4
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
F-62
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 SEPARATION
(THROUGH CORPORATE
SEPTEMBER 28, OVERHEAD
TOTAL CASI 1998) SOLUTION & OTHER
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 17,470 $ 17,346 $ 18 $ -- $ 106
Costs and expenses:
Cost of sales 15,421 14,986 -- 375 60
Research and development 2,722 -- 1,169 1,320 233
General and administrative 8,188 1,835 1,896 440 3,947
Depreciation and
amortization 1,150 103 287 422 338
Minority interest 300 -- 300 -- --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 27,711 16,924 3,652 2,557 4,578
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (10,241) 422 (3,634) (2,557) (4,472)
Gain on sale of affiliate 4,664 -- -- -- 4,664
Interest income 337 1 94 -- 242
Interest expense (1,066) (125) -- -- (941)
Equity in losses of
unconsolidated subsidiary (2,383) -- -- -- (2,383)
Income tax benefit (1,262) -- -- -- 1,262
------------ ------------ ------------ ------------ ------------
Income (loss) before
extraordinary item (7,427) 298 (3,540) (2,557) (1,628)
Extraordinary item - gain on
troubled debt restructuring 1,892 -- -- -- 1,892
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (5,535) $ 298 $ (3,540) $ (2,557) $ 264
============ ============ ============ ============ ============
Total assets $ 15,617 $ 3,506 $ $- 1,932 $ 10,179
============ ============ ============ ============ ============
Expenditures for long-lived
assets $ 2,704 $ 135 $ 762 $ 1,669 $ 138
============ ============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
F-63
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 CORPORATE
OVERHEAD
TOTAL CASI SEPARATION SOLUTION & OTHER
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 19,493 $ 19,468 $ -- $ -- $ 25
Costs and expenses:
Cost of sales 16,325 15,763 -- 358 154
Research and development 3,074 -- 1,440 1,189 495
General and administrative 12,196 3,019 3,697 1,766 3,714
Depreciation and
amortization 1,282 103 233 567 379
Minority interest (82) -- -- -- (82)
------------ ------------ ------------ ------------ ------------
Total costs and expenses 32,795 18,885 5,370 3,880 4,660
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (13,302) 583 (5,370) (3,880) (4,635)
Interest income 745 -- 294 32 419
Interest expense (1,310) (437) (8) -- (865)
Equity in losses of
unconsolidated subsidiary (1,827) -- -- -- (1,827)
Income taxes -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (15,694) $ 146 $ (5,084) $ (3,848) $ (6,908)
============ ============ ============ ============ ============
Total assets $ 29,696 $ 3,916 $ 6,396 $ 984 $ 18,400
============ ============ ============ ============ ============
Expenditures for long-lived
assets $ 1,810 $ -- $ 1,226 $ 427 $ 157
============ ============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
F-64
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
5. SIGNIFICANT 1999
TRANSACTIONS
SERIES E CONVERTIBLE PREFERRED STOCK
In November 1999, Applied completed $2.5 million in
financing through a private placement. The Company
issued 335,000 shares of a new Series E Convertible
Preferred Stock, convertible into the Company's common
stock at the market price, after April 30, 2000 and up
through April 30, 2003 at which time it automatically
converts to the Company's common stock. The Series E
Convertible Preferred Stock has a variable rate
dividend averaging 8.15% over the term of the
securities. The Company reserved the right to redeem
all of the Series E preferred stock on or before April
30, 2000 by payment of $2,800 plus any accrued
dividends.
The Series E Convertible Preferred Stock has a
liquidation preference of $10 per share. In addition,
the Company issued warrants to purchase 572,500 shares
of common stock at a purchase price equal to 110% of
the market price on the date of closing ($1.20). These
warrants expire on November 4, 2004.
The entry to record this transaction is as follows:
<TABLE>
<S> <C>
Cash $ 2,500
Commission and buyer's legal cost (410)
Value assigned to warrants (60)
----------
$ 2,030
==========
</TABLE>
1998
INTERCOMPANY NOTE
In February, 1998, Commodore provided a $5,450
uncollaterized loan to Applied, evidenced by Applied's
8% non-convertible note (the "1998 Intercompany Note").
Pursuant to the terms of the 1998 Intercompany Note,
interest on the unpaid principal balance was payable at
the rate of 8% per annum semiannually in cash. The
unpaid principal amount of the 1998 Intercompany Note
was due and payable, together with accrued and unpaid
interest, on December 31, 1999, or earlier under
certain circumstances.
- --------------------------------------------------------------------------------
F-65
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
5. SIGNIFICANT INTERCOMPANY NOTE - CONTINUED
TRANSACTIONS
CONTINUED In connection with the loan, Applied amended 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 at an exercise price of $10.00 per
share. The new warrant and the modification of the
existing warrant issued in connection with this
transaction were valued at $1,369 in the aggregate and
recorded as additional paid-in capital. Through the
date of the extinguishment of this note, the discount
associated with this allocation was being recognized
using the effective interest rate method over the term
of the loan. Amortization of the discount for 1998 was
$542.
As of September 28, 1998, the balance and carrying
values of the 1997 (described in succeeding paragraphs)
and 1998 Intercompany Notes were as follows:
<TABLE>
1997 1998
NOTE NOTE TOTAL
------- ------- -------
<S> <C> <C> <C>
Principal balance $ 2,000 $ 4,622 $ 6,622
Accrued interest 40 94 134
------- ------- -------
Total face value 2,040 4,716 6,756
Unamortized discount (269) (827) (1,096)
------- ------- -------
Carrying value $ 1,771 $ 3,889 $ 5,660
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
F-66
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
5. SIGNIFICANT On September 28, 1998, Applied repaid all amounts owed
TRANSACTIONS to Commodore by exchanging i) its 87% interest in the
CONTINUED Common Stock of Separation, ii) 20,909 shares of newly
created Series B Convertible Preferred Stock, iii)
10,189 shares of newly created Series C Convertible
Preferred Stock, iv) 20,391 shares of newly created
Series D Convertible Preferred Stock, v) a $357
receivable from Separation and vi) a modification of
the new warrants granted in connection with the 1998
Intercompany Notes reducing the exercise price to
$1.50. The value of the consideration given was less
than the carrying amount of the Intercompany Notes.
Accordingly, a $3,154 gain on troubled debt
restructuring was recognized as follows:
<TABLE>
<S> <C>
Carrying value of Intercompany Notes $ 5,660
-------
Value of 87% interest in a receivable
from Separation 500
Value of Series B Convertible Preferred Stock 813
Value of Series C Convertible Preferred Stock 396
Value of Series D Convertible Preferred Stock 792
Value of modification warrant 5
-------
Value of consideration given (2,506)
-------
Gain on troubled debt restructuring $ 3,154
=======
</TABLE>
The value of the 87% interest in and receivables from
Separation, Preferred Stock and modification of the
warrant were determined by independent appraisal.
The gain on troubled debt restructuring, net of
applicable taxes, has been recorded as an extraordinary
item on the accompanying statement of operations.
As of the date of the transaction, the carrying value
of Applied's 87% interest in the Common Stock of
Separation and Applied's $357 receivable from
Separation was $(4,164). Accordingly, a $4,664 gain
(representing the difference between the book value and
the fair value of Applied's investment in Separation)
on the sale of affiliate was also recorded in
connection with the transaction.
- --------------------------------------------------------------------------------
F-67
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
5. SIGNIFICANT 1997
TRANSACTIONS
CONTINUED REDEEMABLE PREFERRED STOCK (SERIES A PREFERRED STOCK)
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 had a
liquidation preference of $100 per share plus
accumulated and unpaid dividends (the "Liquidation
Preference") and paid a 7% annual cumulative dividend.
The Series A Preferred Stock was convertible by
investors into that number of shares of Common Stock
equal to the Liquidation Preference divided by the
Conversion Price. The Conversion Price was defined as
the amount equal to the lesser of (i) $4.64,
representing 100% of the average of the closing sale
prices of the Common Stock for the five consecutive
trading days preceding the issuance date of the Series
A Preferred Stock, or (ii) 88% of the average of the
closing sale prices of the Common Stock for the five
consecutive trading days immediately prior to the date
of conversion (beneficial conversion feature). The
Conversion Price was subject to certain floors based
upon the trading price of Applied Common Stock.
The Series A Preferred Stock was subject to mandatory
redemption at the Liquidation Preference upon certain
events, including (i) the average share price for any
sixty consecutive days was less than $2.00, (ii)
Applied's Common Stock was not listed on any exchange
or over-the-counter market for fifteen consecutive
trading days, or (iii) Applied was required to obtain
stockholder approval under exchange regulations in
order to issue shares of Common Stock and failed to
obtain such approval within ninety calendar days.
After cash transaction costs of $132, Applied received
net proceeds of $1,668 from the sale of the Series A
Preferred Stock. Of this total, $25 was allocated to
paid-in capital related to warrants issued to the
placement agent in connection with the transaction and
$216 was recorded as paid-in capital related to the
beneficial conversion feature. The remaining $1,427 was
recorded as mandatorily redeemable preferred stock. The
$216 beneficial conversion feature was charged to
income available to common shareholders over the
earliest possible conversion period of five months.
- --------------------------------------------------------------------------------
F-68
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
5. SIGNIFICANT REDEEMABLE PREFERRED STOCK (SERIES A PREFERRED STOCK) -
TRANSACTIONS CONTINUED
CONTINUED
In December 1997, stockholders owning 8,400 shares of
the Series A Preferred Stock elected to convert their
shares to Common Stock based upon conversion prices
ranging from $2.00 to $2.29 per share. At the time of
conversion, Applied recorded $24 of preferred dividends
related to the accumulated and unpaid dividends on
shares converted. The conversions resulted in the
issuance of 416,000 new shares of Common Stock valued
at $790, the carrying value of the underlying Preferred
Stock at the time of conversion.
The $876 December 31, 1997 carrying value was not
accreted to the $986 liquidation value because of the
uncertainty associated with the redemption features.
In 1998, the remaining 9,600 shares of Series A
Preferred Stock were converted into 337,000 shares of
Common Stock based upon conversion prices ranging from
$2.48 to $3.69 per share. At the time of conversion,
Applied recorded $14 of preferred dividends related to
the accumulated and unpaid dividends on shares
converted.
INTERCOMPANY CONVERTIBLE NOTE
In September 1997, Commodore provided a $4,000, 8%
convertible uncollateralized loan to Applied (the "1997
Intercompany Note"). Interest on the 1997 Intercompany
Note was payable quarterly and the unpaid principal
amount was payable on August 31, 2002. As previously
discussed, this Note was extinguished in September
1998. Commodore had the right to convert the loan into
shares of Common Stock at a conversion price of $3.89
per share, a 16% discount from the market price at the
date of closing (beneficial conversion feature),
subject to adjustment based on a number of factors. In
connection with the 1997 Intercompany Note, 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.
- --------------------------------------------------------------------------------
F-69
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
5. SIGNIFICANT Applied recorded the $750 value of the beneficial
TRANSACTIONS conversion feature as additional paid-in capital,
CONTINUED offset by an immediate recognition of the $750 as
interest expense. The warrants issued in connection
with this transaction were valued at $660 in the
aggregate and recorded as additional paid-in capital.
Through the date of extinguishment, the original issue
discount associated with this allocation was recognized
using the effective interest rate method over the term
of the loan. Amortization of this discount for 1998 and
1997 totaled $19 and $42, respectively.
PRIVATE PLACEMENT OF COMMON STOCK
In October 1997, Applied sold 700,000 shares of Common
Stock (of which 600,000 shares were sold at $3.68 per
share and 100,000 shares were sold at $3.93 per share)
for an aggregate purchase price of approximately
$2,600. Transaction costs on this sale totaled $256.
Additionally, affiliates of the placement agent
received warrants to purchase an aggregate of 60,000
shares of Common Stock at $3.675 per share.
The sales agreement related to these shares specified
certain twelve-month price reset provisions in the
event that new Common shares were sold or issued in
connection with the exercise of warrants at a per share
price less than the original sales price. At the end of
the twelve-month period, the price reset features
expired. At the option of the Company, the liability
under the price reset feature could be satisfied by
issuing new Common Stock (at a price equal to the reset
price) up to an aggregate of 5% of the total Common
Stock of the Company (including the original shares and
the shares issued in connection with the price reset);
any excess price reset liabilities were required to be
paid in cash.
At December 31, 1997, the aggregate price reset
liability was $1,198. This amount was recorded as an
adjustment to the original purchase price and accrued
as a liability. In 1998, Applied issued 599,063
additional shares of Common Stock in fulfillment of
this liability.
- --------------------------------------------------------------------------------
F-70
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
5. SIGNIFICANT COMMODORE SEPARATION TECHNOLOGIES, INC.
TRANSACTIONS
CONTINUED On December 2, 1996 Applied purchased Separation,
Commodore CFC Technologies, Inc. ("CCFC") and CFC
Technologies, Inc. ("CFC") from Commodore 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 1998 Intercompany Note). The
acquisition was accounted for as a transaction between
entities under common control. Applied recorded its
investment in Separation, CFC and CCFC as $753, equal
to Commodore's historical basis in these subsidiaries.
The difference between this amount and the $5,400 paid
to Commodore was recorded as a direct reduction in the
paid-in capital of Applied.
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. Applied's $3,927 gain on this
transaction was recorded as additional paid-in capital.
Minority interests in Separation at December 31, 1997
consisted 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 Applied. For the period
January 1, 1998 to September 28, 1998 and the year
ended December 31, 1997, Separation paid dividends to
its Preferred shareholders of $300 and $438,
respectively.
- --------------------------------------------------------------------------------
F-71
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
6. RECEIVABLES The components of Applied's trade receivables are as
follows as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Contract receivables:
Amounts billed $ 3,637 $ 3,132
Retainages 25 142
Unrecovered costs and estimated
profits subject to future negotiation -
not billed 8 (14)
------- -------
3,670 3,260
Less: Allowance for doubtful accounts
and potential disallowances 118 118
------- -------
Total receivables - net $ 3,552 $ 3,142
======= =======
</TABLE>
The balances billed but not paid by customers pursuant
to retainage provisions are due upon completion and
acceptance of the contracts.
Unbilled receivables include current and prior year
costs and fees billable upon specified events
(including settlement of prior years' government
audits). All such amounts have been classified as
current assets although certain amounts may not be
collected within one year depending on when the
conditions are satisfied.
Substantially all of trade receivables are pledged to
collateralize its line of credit (see Note 10).
- --------------------------------------------------------------------------------
F-72
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
7. OTHER On August 6, 1996, Applied and Teledyne Environmental,
INVESTMENTS 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 of 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. In 1998, Applied
contributed an additional $2,581 to the LLC. Applied
recognized a liability for $176 at December 31, 1999 to
properly record a capital contribution made in January
2000. This investment is accounted for under the equity
method.
Summarized information of the LLC's net assets and
results of operations was as follows at December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current assets $ 1,988 $ 2,049 $ 1,701
Non-current assets 903 1,549 1,312
Current liabilities 2,679 3,873 1,771
Revenues 35 1,788 510
Expenses 1,108 6,467 4,163
Investment in LLC:
Opening balance $ -- $ 554 $ 658
Capital contribution 176 2,581 1,000
Advances to LLC, net of repayments -- (752) 723
Loss reserve (176) (43) --
Equity in net loss -- (2,340) (1,827)
------- ------- -------
Net amount $ -- $ -- $ 554
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
F-73
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
7. OTHER Due to uncertainties over the success of various claims
INVESTMENTS made by the LLC against various government agencies,
CONTINUED Applied recorded a reserve of $43 in the fourth quarter
of 1998 to reduce its investment to $0 at December 31,
1998. Applied committed to invest $176 in 1999 to cover
expenses by the LLC. Due to the uncertainty of
recovering this investment, Applied fully reserved for
this investment in 1999. Applied did not record its
equity in the losses of the LLC in 1999 as the LLC
agreement states that members of the LLC can only be
asked to fund approved capital calls and Applied has no
obligation to fund these 1999 losses.
8. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
<TABLE>
<CAPTION>
AVERAGE DECEMBER 31
USEFUL LIFE 1999 1998
----------- ------ ------
<S> <C> <C> <C>
Machinery and equipment 10 $1,010 $1,119
Furniture and fixtures 5 64 61
Computer equipment 4 476 359
Leasehold improvements 5 44 44
Equipment construction in progress 1,550 1,208
------ ------
3,144 2,791
Less: accumulated depreciation
and amortization 900 589
------ ------
Total property and equipment $2,244 $2,202
====== ======
</TABLE>
Substantially all property and equipment is pledged to
collateralize its line-of-credit term loan (see Note
10).
- --------------------------------------------------------------------------------
F-74
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
9. OTHER Other accrued liabilities consist of the following:
ACCRUED
LIABILITIES
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Compensation and employee benefits $ 668 $ 718
Severance Payments 171 486
Loss reserve 357 405
Accrued compensation 325 --
Other 734 574
------ ------
$2,255 $2,183
====== ======
</TABLE>
10. LINE OF At December 31, 1999 and 1998, CASI had a $948 and $361
CREDIT AND outstanding balance, respectively, on various revolving
TERM LOAN lines of credit. In August 1998 CASI refinanced their
line of credit. The line of credit is not to exceed 75%
of eligible receivables or $2,000 and is due August 4,
2000 with interest payable monthly at prime plus 1.5
percent (10.0 percent as of December 31, 1999). The
credit line is collateralized by the assets of CASI and
is guaranteed by Applied. The line of credit contains
certain financial covenants and restrictions including
minimum ratios that CASI must satisfy.
- --------------------------------------------------------------------------------
F-75
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
10. LINE OF This line of credit was amended July 15, 1999 to
CREDIT AND include a promissory note of $1,000,000 secured by
TERM LOAN substantially all the property and equipment of the
CONTINUED Company. This increased the total facility to a maximum
of $3,000,000, including $2,000,000 revolving credit
loans and the $1,000,000 1999 term loan. The term loan
is payable at $16,667 per month plus interest. The term
loan has the following scheduled maturities:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C> <C>
2000 $ 200
2001 200
2002 200
2003 200
2004 116
-----
916
Less current portion of long-term debt (200)
-----
$ 716
=====
</TABLE>
11. NON-CASH 1999
INVESTING
AND In 1999, 51,489 shares of Series B, C and D Preferred
FINANCING Stock held by Commodore with an aggregate value of
ACTIVITIES $2,001 were converted into common stock (Note 5).
1998
In February 1998, Commodore provided a $5,450 loan to
Applied. In connection with the loan, Applied issued
new and amended warrants valued at $1,369 in the
aggregate and recorded as additional paid-in capital
(Note 5).
In February 1998, Applied transferred a receivable from
an affiliate with a carrying value of $830 to Commodore
for debt reduction. In connection with the transaction,
Applied issued a warrant to Commodore with a fair value
of $340 which was recorded as additional paid-in
capital (Note 5).
- --------------------------------------------------------------------------------
F-76
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
11. NON-CASH 1998 - CONTINUED
INVESTING
AND In September 1998, Applied repaid Intercompany Notes
FINANCING with a carrying value of $5,660 through the exchange of
ACTIVITIES 87% interest in the Common Stock of Separation and
CONTINUED receivable from Separation with a value of $500,
issuance of Preferred Stock with a value of $2,001 and
modification of a warrant with a value of $5 (Note 5).
In October 1998, Applied satisfied a price reset
liability with an aggregate balance of $1,198, recorded
as an accrued liability at December 31, 1997, through
the issuance of additional shares of Common Stock Note
5).
In 1998, 9,600 shares of Series A Preferred Stock with
an aggregate value of $876 were converted into Common
Stock (Note 5).
1997
In August 1997, Applied sold 18,000 shares of Series A
Preferred Stock for net proceeds of $1,668. Of this
total, $242 was allocated to additional paid-in capital
related to the fair value of warrants issued and the
beneficial conversion feature. The remaining $1,427 was
recorded as mandatorily redeemable preferred stock. As
of December 31, 1997, 8,400 shares of Series A
Preferred Stock with an aggregate value of $550 were
converted into Common Stock (Note 5).
In September 1997, Commodore provided a $4,000 loan to
Applied. In connection with the loan, Applied issued a
new warrant valued at $660 in the aggregate which was
recorded as additional paid-in capital. In addition,
Applied recorded $750 in connection with a beneficial
conversion feature of the loan as additional paid-in
capital, offset by an immediate recognition of the $750
as interest expense (Note 5).
In October 1997, Applied sold 700,000 shares of Common
Stock that included a price reset feature. The
aggregate price reset liability of $1,198 was recorded
as an adjustment to the original purchase price and an
accrued liability (Note 5).
- --------------------------------------------------------------------------------
F-77
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
12. INCOME TAXES Applied 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 provision (benefit) for income taxes for the years
ended December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current tax benefit $(1,594) $(4,244) $(6,136)
Deferred tax expense 1,594 2,982 6,136
------- ------- -------
Provision (benefit) for income taxes
before extraordinary item -- (1,262) --
Tax from extraordinary item -- 1,262 --
------- ------- -------
Provision (benefit) for income taxes $ -- $ -- $ --
======= ======= =======
</TABLE>
The provision for income taxes for the year ended
December 31 results in an effective tax rate which
differs from federal income tax rates as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Expected tax benefit at federal
statutory rate $(1,355) $(1,882) $(5,336)
State income tax benefit, net of
federal income tax benefit (239) (332) (942)
Loss on sale of subsidiary -- (2,866) --
Loss of NOLs in connection with
sale of affiliate -- 3,689 --
Change in valuation allowance 1,594 476 5,694
Interest accretion -- 796 86
Beneficial conversion -- -- 300
Other -- 119 198
------- ------- -------
Income tax benefit $ -- $ -- $ --
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
F-78
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
12. INCOME TAXES The components of the net deferred tax as of December
CONTINUED 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Components of current deferred taxes, net:
Reserve for uncollectable
receivables and potential
disallowances $ -- $ 480 $ 492
Net operating loss carryforward 14,394 12,254 11,700
In process technology 837 903 969
------- ------- --------
15,231 13,637 13,161
Valuation allowance (15,231) (13,637) (13,161)
------- ------- --------
Net deferred taxes $ -- $ -- $ --
======= ======== ========
</TABLE>
Applied conducts a periodic examination of its
valuation allowance. Factors considered in the
evaluation include recent and expected future earnings
and Applied's liquidity and equity positions. As of
December 1999, 1998 and 1997, Applied has established a
valuation allowance for the entire amount of net
deferred tax assets.
Applied has net operating loss ("NOL") carryforwards at
December 31, 1999 of approximately $36,000 which expire
in years 2000 through 2018. The NOL carryforwards are
limited to use against future taxable income due to
changes in ownership and control.
13. STOCKHOLDERS' In 1997, Applied amended its Certificate of
EQUITY Incorporation authorizing up to 10,000,000 shares of
Preferred Stock, $.001 par value and increasing
authorized shares of Common Stock from 50,000,000 to
75,000,000. The certificate of Incorporation was again
amended in 1999, increasing authorized shares of common
stock from 75,000,000 to 100,000,000.
- --------------------------------------------------------------------------------
F-79
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
13. STOCKHOLDERS' CONVERTIBLE PREFERRED STOCK
EQUITY
CONTINUED Effective September 28, 1998, Applied authorized and
issued three new series of Preferred Stock. Series B, C
and D Preferred Stock were authorized up to 25,000,
15,000 and 25,000 shares, respectively, all at $.001
par value.
Each of the Series B, C and D Preferred Stock is
convertible into common shares of Applied; each has a
par value of $.001 and a stated value of $100 per
share; each carries a dividend rate of $6.00 per share
per annum from the date of issuance, payable quarterly
commencing December 31, 1998, when, and if declared by
the Board of Directors; and each has non-cumulative
dividends. Applied did not declare any dividend payment
as of December 31, 1998.
The Series B, C and D Convertible Preferred Stock is
convertible into Common Stock at any time prior to
redemption at a conversion rate of 142.9 shares of
Common Stock for each share of Series B and D
Convertible Preferred Stock and 133.3 shares of Common
Stock for each share of Series C Convertible Preferred
Stock (an effective conversion price of $.70 and $.75
per share of Common Stock, respectively). The
conversion price is subject to adjustment under certain
circumstances, including Applied taking action to
change the number of Common Shares outstanding, such as
declaring a stock dividend.
In November 1999, all of the Series B, C and D
Preferred Stock was converted into 7,258,533 shares of
common stock.
Effective November 4, 1999, Applied issued 335,000
shares of Series E convertible preferred stock with a
stated value of $10 per share. This stock carries a
divided rate of 12% per annum through April 30, 2000
and thereafter 5% per annum. In addition there is a
special dividend at the rate of 7.5% per annum which
will accrue commencing on May 1, 2000, payable on May
1, 2001. The special dividend will not be paid on any
Series E preferred share that is converted to common
stock on or before April 30, 2001.
- --------------------------------------------------------------------------------
F-80
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
13. STOCKHOLDERS' CONVERTIBLE PREFERRED STOCK - CONTINUED
EQUITY
CONTINUED The Series E convertible preferred stock is convertible
into common stock at any time following April 30, 2000
at a conversion price equal to the arithmetic mean of
the closing prices of our common stock as reported in
the American Stock Exchange for the ten trading days
immediately preceding the date of conversion.
The holders of Convertible Preferred Stock have the
right, voting as a class, to approve or disapprove of
the issuance of any class or series of stock ranking
senior to or on a parity with the Convertible Preferred
Stock with respect to declaration and payment of
dividends or the distribution of assets on liquidation,
dissolution or winding-up. Upon liquidation,
dissolution or winding up of Applied, holders of Series
E Convertible Preferred Stock are entitled to receive
liquidation distributions equivalent to $10.00 per
share before any distribution to holders of the Common
Stock or any capital stock ranking junior to the
Convertible Preferred Stock.
14. STOCK OPTIONS Applied has adopted the intrinsic value method of
AND STOCK accounting for stock options and warrants under APB 25
WARRANTS with footnote disclosures of the pro forma effects as
if the FAS 123 fair value method had been adopted.
Had compensation expense for Applied's employee stock
options been determined based on the fair value at the
grant date for awards in 1998 and 1997 consistent with
the provisions of FAS 123, Applied's net loss per share
would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Net loss - as reported $(3,985) $(5,535) $(15,694)
Net loss - pro forma $(6,335) $(7,931) $(17,742)
Loss per share - as reported $ (0.16) $ (.24) (0.73)
Loss per share - pro forma $ (0.26) $ (.34) (0.82)
</TABLE>
- --------------------------------------------------------------------------------
F-81
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
14. STOCK OPTIONS FAS 123 requires stock options to be valued using an
AND STOCK approach such as the Black-Scholes option pricing
WARRANTS model. The Black-Scholes model calculates the fair
CONTINUED value of the grant based upon the following assumptions
about the underlying stock: The expected dividend yield
of the stock is zero, the assumed volatility is 60
percent, the expected risk-free rate of return is 4.6 -
6.5 percent, calculated as the rate offered on U.S.
Government securities with the same term as the
expected life of the options, and the expected term is
the maximum possible term under the option.
STOCK OPTIONS
In December 1998, Applied adopted its 1998 Stock Option
Plan pursuant to which officers, directors, key
employees and/or consultants of Applied can receive
non-qualified stock options to purchase up to an
aggregate 5,000,000 shares of Applied's Common Stock.
Exercise prices applicable to stock options issued
under this Plan represent no less than 100% of the fair
value of the underlying common stock as of the date of
grant. Stock options granted under the plan may vest
immediately or for any period up to five years.
Applied amended stock options to purchase 1,826,234
shares granted under the 1996 Stock Option Plan to
extend the term to 10 years and to change the exercise
price to $.44, 100% of the fair market value of
Applied's on the date of the amendment.
- --------------------------------------------------------------------------------
F-82
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
14. STOCK OPTIONS A summary of the status of options granted under the
AND STOCK Plan as of December 31, 1999 and 1998 and changes
WARRANTS during the periods then ended is presented below:
CONTINUED
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- --------------------- --------------------
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 4,155,012 $ 1.08 2,912,375 $ 6.06 1,994,875 $ 6.22
Granted 3,259,323 0.56 3,901,371 0.59 1,570,000 6.29
Exercised (2,142) 0.44 -- -- -- --
Forfeited (242,396) 4.86 -- -- (242,500) 6.19
Rescinded -- (2,658,734) 5.83 (410,000) 8.03
--------- ---------- ---------
Options outstanding -
end of year 7,169,797 0.61 4,155,012 1.08 2,912,375 6.06
========= ========== =========
</TABLE>
The following table summarizes information about
employee stock options outstanding at December 31,
1999:
<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>
$ 0.25 - $0.44 3,520,474 9 years $ 0.44 2,320,117 $ 0.44
$ 0.50 - $0.50 2,400,000 3.58 years $ 0.50 -- $ 0.50
$ 0.63 - $1.44 891,948 9 years $ 0.72 818,390 $ 0.69
$ 2.00 - $6.00 357,375 6.92 years $ 4.92 337,375 $ 5.03
--------- ---------
7,169,797 $ 0.61 3,475,882 $ 0.94
========= =========
</TABLE>
- --------------------------------------------------------------------------------
F-83
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
14. STOCK OPTIONS STOCK WARRANTS
AND STOCK
WARRANTS Outstanding warrants (vested and not vested) at
CONTINUED December 31, 1999 are as follows:
<TABLE>
<CAPTION>
GRANTED NUMBER OF CURRENT
1997 AND GRANTED GRANTED WARRANTS EXERCISE EXPIRATION
PRIOR 1998 1999 1999 PRICE DATE
---------- --------- --------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
500,000 -- -- 500,000 $ 7.20 August 2001
5,750,000 -- 2,547,959 8,297,959 5.82 June 2001
500,000 -- -- 500,000 13.86 August 2001
7,500,000 -- 3,405,444 10,905,444 6.88 December 2003
19,407 -- -- 19,407 5.80 August 2002
60,000 -- -- 60,000 3.68 September 2002
1,000,000 -- 356,092 1,356,092 3.71 August 2002
60,000 -- -- 60,000 5.00 November 2000
-- 514,000 148,267 662,267 3.49 March 2003
-- 1,500,000 266,861 1,766,861 1.27 February 2004
-- -- 312,500 312,500 1.20 November 2004
-- -- 250,000 250,000 1.20 November 2004
---------- --------- --------- ----------
15,389,407 2,014,000 7,287,123 24,690,530
========== ========= ========= ==========
</TABLE>
There were no warrants exercised in 1999, 1998 or 1997.
As of December 31, 1999 and 1998, 23,861,169 and
17,403,407, respectively, warrants were exercisable.
15. RELATED PARTY
TRANSACTIONS
During 1996, Applied advanced an aggregate amount of
$1.5 million to Lanxide Performance Materials, Inc.
("LPM"), a wholly-owned subsidiary of Lanxide Corp.
Lanxide is related to Commodore by substantial common
ownership. The promissory notes became due on February
28, 1998. At December 31, 1997 a $814 reserve against
this receivable existed, reducing the net receivable to
its estimated fair value. In March 1998, Applied
realized this receivable by exchanging it for amounts
due under the Intercompany Convertible Note (see Note
5). In connection with the exchange, Applied issued a
warrant to Commodore to purchase 514,000 shares of
Common Stock at exercise price of $4.50 expiring August
2001. The $340 fair value of the warrant was recorded
as additional paid-in capital.
- --------------------------------------------------------------------------------
F-84
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
15. RELATED PARTY CASI had a lease agreement with its Chairman under
TRANSACTIONS which CASI utilizes certain real estate for business
CONTINUED purposes. Rent of approximately $11 was paid for the
year ended December 31, 1997. No rent was paid in 1998
or 1999.
The Company has receivables from entities under common
control of $265 and $130 at December 31, 1999 and 1998,
respectively. The Company also has payables to related
parties of $165 at December 31, 1999 and 1998.
During the year ended December 31, 1997, Applied was
charged a management fee by Commodore of $640. This
management fee was based on allocated wages and
salaries, rent, insurance and other administrative
expenses relating to its executive offices in New York.
The management fees ended in August, 1997. Subsequent
to August 1997, Applied entered into a cost sharing
agreement with Commodore whereby all common costs were
accumulated and allocated based on various factors,
including executive time reports. Costs were allocated
on this basis between Applied, Commodore and a company
owned by a director of Applied.
16. COMMITMENTS OPERATING LEASES
AND
CONTINGENCIES Applied and its subsidiaries are committed under non
cancelable operating leases for office space and other
equipment. Future obligations under the leases are as
follows:
<TABLE>
<S> <C>
2000 $ 244
2001 149
2002 5
----------
$ 398
==========
</TABLE>
Rent expense approximated $332, $502 and $767 in 1999,
1998 and 1997, respectively.
- --------------------------------------------------------------------------------
F-85
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
16. COMMITMENTS EXECUTIVE BONUS PLAN
AND
CONTINGENCIES Applied has a five-year Executive Bonus Plan (the
CONTINUED "Bonus Plan") under which a number of executives and
employees of Applied are entitled to formula bonuses.
Applied paid $622 of 1997 executive bonuses in January
1998. No bonuses are accrued at December 31, 1999 and
1998.
LITIGATION
Applied has matters of litigation arising in the
ordinary course of business which in the opinion of
management will not have a material adverse effect on
its financial condition or results of operations.
U.S. DEPARTMENT OF LABOR PENALTIES
CASI has been notified by the U.S. Department of Labor
that it is being assessed penalties totaling $100,000
for failing to file reports of an independent qualified
public accountant for its 401(k) salary deferral trust
and Plan Annual Reports for 1996 and 1997. These
reports have since been filed. The delay was the result
of numerous problems with the Plan's former record
keeper. The Company hopes to settle these penalties for
less than the assessed amounts and/or recover the
amounts from the previous record keeper.
17. 401(K) The Company has adopted a 401(K) savings plan for all
SAVINGS PLAN employees who qualify as to age and service. The
Company made annual contributions to the plan of
approximately $91,000, $108,000 and $37,000 during the
years ended December 31, 1999, 1998 and 1997,
respectively.
- --------------------------------------------------------------------------------
F-86
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
- --------------------------------------------------------------------------------
18. SUBSEQUENT In March 2000, Applied completed $2.0 million in
EVENT financing through private placement. The Company issued
266,700 shares of a new Series F Convertible Preferred
Stock, Convertible into the Company's common stock at
any time on or after September 30, 2000. On Conversion
the investor will receive for each converted preferred
share the greater number of Company common shares as
determined by (1) the face per share ($10) plus accrued
dividend divided by the average of the closing prices
over a ten consecutive trading day period ending on the
Trading day immediately preceding the Conversion date,
or (2) $7.50 (the cash invested for each preferred
share) divided by $1.93875.
The Series F convertible preferred stock has a
liquidation preference of $10, per share. In addition,
the Company issued warrants to purchase 250,000 shares
of common stock at $1.93875 per share. This warrant
expires on March 16, 2005.
The Series F convertible preferred stock has an annual
dividend rate of 12% through September 30, 2000 and 5%
thereafter, paid quarterly. Transaction costs totaled
$230 resulting in net proceeds to the Company of $1.77
million.
- --------------------------------------------------------------------------------
F-87
<PAGE>
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)
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)
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Exhibits No. Description
- ------------ -----------
<S> <C>
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)
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 Form of Employment Agreement by and between the Company and Paul E. Hannesson. (8)
10.34 Agreement and Plan of Merger, dated November 13, 1996, by and among the Company, Lanxide
Corporation and COES Acquisition Corp. (9)
10.35 Line of Credit Agreement, dated November 13, 1996, by and between the Company and LPM. (9)
10.36 Line of Credit Promissory Note, dated November 13, 1996, by LPM in favor of the Company. (9)
10.37 Security Agreement, dated November 13, 1996, by and between the Company and LPM. (9)
10.38 Guarantee, dated November 13, 1996, by Lanxide Corporation in favor of the Company. (9)
10.39 Warrant, dated March 5, 1998, issued by Lanxide Corporation to the Company. (10)
10.40 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)
10.41 Amendment to Securities Purchase Agreement, dated March 5, 1998, by and between the Company
and Lanxide Corporation. (10)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Exhibits No. Description
- ------------ -----------
<S> <C>
10.42 License Agreement, dated as of March 5, 1998, by and among Commodore Polymer Technologies,
Inc., Lanxide Corporation and Lanxide Technology Company L.P. (10)
10.43 Debt Repayment Agreement, dated September 28, 1998, between the Company and Applied. (11)
16.1 Letter regarding change in certifying accountant. (12)
*21.1 Subsidiaries of the registrant.
*27.1 Financial Data Schedule.
----------------------------------
* Filed herewith.
</TABLE>
(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 in the Registrant's Form 10-K for
the fiscal year ended December 31, 1996 filed with the Commission on April
15, 1997.
(9) Incorporated by reference to Exhibits 1, 3, 4, 5 and 6 in the Registrant's
Form 8-K dated November 13, 1996.
(10) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K for
the fiscal year ended December 31, 1997 filed with the Commission on April
6, 1998.
(11) Incorporated by reference and filed as an Exhibit to the Registrant's Form
8-K dated December 25, 1998.
(12) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K filed with the Commission on August 23, 1999.
Reports on Form 8-K:
- --------------------
None
37
<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 12, 2000 COMMODORE ENVIRONMENTAL SERVICES, INC.
By:/s/ Bently J. Blum
-----------------------------------------
Bentley J. Blum
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.
/s/ Bentley J. Blum April 12, 2000
- ----------------------------------
Bentley J. Blum Chairman of the Board, President and
Chief Executive Officer (principal
Executive officer)
/s/ Jerry Karlik Director April 12, 2000
- ----------------------------------
Jerry Karlik
38
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation Percentage Owned
- ------------------------------------------------ ---------------------------------- ----------------------------------
<S> <C> <C>
Harvest American Corp. Delaware 100%
Commodore Polymer Technologies, Inc.* Delaware 100%
Commodore Oil & Gas Corporation Delaware 100%
Commodore Environmental Services, LLC Delaware 100%
Commodore Separation Technologies, Inc.** Delaware 87%
</TABLE>
- ----------
* Commodore Polymer Technologies was sold by the Company on March 6, 2000
**An indirect subsidiary 87% owned by Commodore Environmental Services, LLC
39
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES 10-K AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 30
<SECURITIES> 270
<RECEIVABLES> 10
<ALLOWANCES> 0
<INVENTORY> 519
<CURRENT-ASSETS> 829
<PP&E> 1,947
<DEPRECIATION> 1,211
<TOTAL-ASSETS> 5,134
<CURRENT-LIABILITIES> 8,885
<BONDS> 2,250
0
39
<COMMON> 628
<OTHER-SE> (6,991)
<TOTAL-LIABILITY-AND-EQUITY> 5,134
<SALES> 337
<TOTAL-REVENUES> 360
<CGS> 541
<TOTAL-COSTS> 3,098
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 520
<INCOME-PRETAX> (2,950)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,950)
<DISCONTINUED> (946)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,896)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
