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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission File No. 0-21042
MOLTEN METAL TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1659959
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
400-2 Totten Pond Road,
Waltham, MA 02154
(Address of principal executive offices) (Zip Code)
Area Code (617) 487-9700
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $.01 par value
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
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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 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. X
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The aggregate market value of Registrant's voting stock held by non-affiliates
of the Registrant at March 11, 1996 was approximately $550 million, based on the
closing bid price of such stock on such date as reported by the NASDAQ National
Market ($35.00 per share). On March 11, 1996, 22,898,890 shares of the
Registrant's Common Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1996 Annual Meeting of Stockholders of the Registrant to
be held on May 8, 1996. Certain information therein is incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
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Molten Metal Technology, Inc. ("MMT" or the "Company") is an
environmental technology company engaged in the commercialization and continued
development of its innovative, proprietary processing technology known as
Catalytic Extraction Processing ("CEP"). The core of CEP is a molten metal bath
operating at approximately 3,000(degree)F into which feedstocks and selected
chemicals ("reactants") can be introduced. The catalytic and solvent effect of
the molten metal bath causes feedstocks to dissociate into their constituent
elements and dissolve into the molten metal. The addition of various reactants
to the molten metal enables reformation and recovery of products ("Elemental
Recycling[TradeMark]") for re-use as a raw material by the feedstock generator
or for sale to other users. The CEP system largely consists of process,
instrument and control components currently used widely in the metallurgical
and chemical industries.
MMT believes that a wide variety of chemical intermediates, by-products
and wastes, both organic and inorganic, can be processed by CEP. Liquids, gases
or solids can be introduced into the CEP system through either bottom or top
addition. Within the CEP system, the elemental constituents of the feedstock and
reactants separate and can be recovered from three distinct phases: (i) gases
which rise above the molten metal bath; (ii) molten ceramic products which form
a separate layer on top of the liquid metal; and (iii) metallic elements which
dissolve and collect in the liquid metal bath.
Recovered products can be re-used as raw materials in the production
process or sold to other industrial customers. For example, it is expected that
most gaseous components can be used as fuels or chemical feedstocks; ceramic
materials can be recovered and used as specialty chemicals, ceramic substitutes
or abrasives; and metallic components can be removed and granulated or cast as
ingots for sale.
The Company currently is developing various applications for its CEP
technology. Quantum-CEP[TradeMark] (or Q-CEP[TradeMark]) has been developed to
process radioactive wastes and mixed wastes (containing both radioactive and
hazardous constituents). Current commercialization programs for Quantum-CEP are
focused on applications for low-level radioactive and mixed waste. Quantum-CEP
dissociates hazardous and toxic materials, while separating and containing
radioactive elements in a stable, self-shielding form suitable for storage or
final disposal. This results in a substantial reduction in the volume of
radioactive materials requiring storage or disposal, in addition to the
potential recycling benefits. The Company also is developing additional
applications to its CEP technology to process particular classes of wastes,
including Cerex-CEP[TradeMark] for the processing of halogenated inorganic
waste streams and the recovery of metals, Hyco-CEP[TradeMark] for the
conversion of organic waste streams into industrial gasses, and
Halo-CEP[TradeMark] for the processing of halogenated organic waste streams and
the recovery of acids. In each case, these CEP applications use a molten metal
bath to separate waste compounds into their elemental constituents and
reconfigure the elements into potential gaseous, ceramic, and metal products.
MMT believes that the primary market for the Company's CEP(1)
technology will be on-site systems integrated into existing commercial and
government facilities. MMT intends primarily to own and operate commercial CEP
systems either by itself or through joint ventures, and to license its
technology to industrial partners, commercial customers, and government
agencies under arrangements which provide for up-front license fees and
on-going tolling or license fees based upon the volume of feedstocks processed
and the sale of recovered products.
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(1) Unless otherwise noted, references to "CEP" within this document refer to
both the core CEP technology and its applications.
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MARKET OVERVIEW
Currently, the most common methods of treatment and disposal of
hazardous and non-hazardous wastes and industrial by-products include
landfilling, deep-well injection, incineration, plasma, vitrification and other
thermal treatment methods, on-site containment (including industrial lagoons)
and release into the environment. Most of these methods have transportation,
treatment and safety risks. In addition, certain of these treatment and disposal
methods result in production of residual waste that may require further
treatment prior to disposal. As a result, many of these methods are being met
with increasing public resistance and more stringent regulations, which may lead
to an increased cost of compliance.
MMT believes the primary factors that create demand for CEP include the
need for prospective customers to comply with environmental regulations in a
cost-effective manner and the ability of CEP to process radioactive, hazardous
and non-hazardous wastes and industrial by-products while recovering products
for re-use or sale. In addition, compared to conventional treatment methods, MMT
believes that CEP can be utilized in a manner which minimizes or eliminates the
creation of residual waste, thereby reducing the costs and risks associated with
residual waste disposal.
MMT Target Markets
For the initial commercialization of CEP, MMT has identified three
markets where it believes CEP offers the greatest immediate value and meets
pressing customer needs: (i) commercial low-level radioactive waste; (ii) U.S.
government waste; and (iii) industrial hazardous waste, including applications
for chlorinated waste streams and the conversion of waste streams into
industrial gasses. In each of these markets, MMT has formed, and is in the
process of forming, relationships with market leaders to deliver initial CEP
systems.
In the commercial low-level radioactive waste sector, MMT estimates
that over three million cubic feet of waste is generated annually in the United
States by more than 1,300 generators, including nuclear power plants and medical
and research facilities. These generators seek technological solutions to
effectively process their waste into a reduced and stable, self-shielding form,
suitable for long-term storage or disposal. This volume reduction lengthens the
useful life of current and future radioactive waste repositories. The Company
expects that international markets also will provide increasing opportunities
for radioactive waste management as the foreign nuclear industry grows.
In the government market, MMT estimates that the United States
Department of Energy ("DOE") and the Department of Defense ("DoD") together
spend nearly $8 billion annually on waste management and cleanup programs,
making the U.S. government the world's largest consumer of environmental goods
and services. Priority wastes requiring treatment at over 30 DOE sites include
mixed hazardous and radioactive waste, waste from the demilitarization of
nuclear weapons, and wastes generated during the remediation of large-scale
decontamination and decommissioning projects. The major focus of the DoD
environmental restoration effort is on munitions demilitarization, destruction
of chemical weapons, and remediation of sites contaminated with these priority
wastes. Another government entity, the United States Enrichment Corporation
("USEC"), annually produces approximately 15 million kilograms of depleted
uranium hexafluoride ("DUF6"), a by-product generated through the conversion of
uranium isotopes into highly enriched uranium. In addition, the DOE has stored
approximately 500 million kilograms of DUF6.
The industrial waste sector includes hazardous wastes as well as
non-hazardous wastes and byproducts. Based on data obtained from the United
States Environmental Protection Agency ("EPA"), MMT estimates that over 300
million tons of waste generated annually in the United States are classified as
hazardous or toxic under the Resource Conservation and Recovery Act of 1976, as
amended ("RCRA"), or the Toxic Substance Control Act ("TSCA") (EPA's Biennial
RCRA Hazardous Waste Report dated September 1994). Target markets for CEP
include wastes from the chemical and petrochemical industries,
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the metal processing and mining industries, wastes currently processed by
hazardous and municipal waste incinerators and post-consumer plastics.
Regulatory Determinations
Environmental regulations promulgated by the EPA require that
processing of hazardous waste that is to be disposed of on land be accomplished
using the Best Demonstrated Available Technology ("BDAT"). In February 1996, EPA
promulgated a BDAT equivalency determination for CEP for all RCRA-listed waste
streams which were previously required to be incinerated. In connection with an
earlier equivalency determination dated July 17, 1995 for chlorinated organic
wastes, the EPA noted that dioxin, a toxic and harmful substance, was not
detected at EPA-promulgated regulatory levels in CEP demonstrations. The EPA's
BDAT equivalency determinations confirmed that CEP is fundamentally different
from incineration, and further confirms that use of CEP supports the EPA's
efforts to minimize cross-media contamination (transfer of contaminants to air
and water from solid wastes) and to reduce the quantity of residuals for land
disposal. In addition, in February 1996, the Texas Natural Resource Conservation
Commission determined that CEP is distinct from incineration and other
combustion and thermal treatment processes, and approved CEP as a RCRA-exempt
recycling technology in connection with the Company's proposed CEP facility to
be located at the Hoechst Celanese Corporation's chemical plant in Bay City,
Texas.
COMMERCIALIZATION AND SALES STRATEGY
In order to accelerate the commercialization of CEP, MMT intends to own
and operate, by itself or through joint ventures, its initial commercial CEP
facilities. Over the longer term, MMT also intends to operate by licensing its
technology to industrial customers, joint ventures and government agencies under
arrangements which provide for any or all of the following: (i) upfront license
fees; (ii) technology transfer fees; (iii) ongoing tolling and license fees
based upon the volume of feedstocks processed or the sale of recovered products;
(iv) service fees for project development, design, engineering, and construction
management; and (v) supply of critical or proprietary CEP components.
The Company's strategy is to address the demand for a cost-effective
method of processing waste materials while maintaining environmental standards.
It is the Company's intent to install CEP systems on-site at customers'
industrial facilities in order to (i) integrate systems on-site to enable
existing facilities to comply with recycling exemptions applicable to materials
that are reclaimed and returned to the manufacturing process that generated such
materials ("closed-loop recycling") and (ii) reduce costs and potential
liability associated with existing treatment methods, including transportation
and off-site disposal. The Company's business strategy includes maintaining
collaborative arrangements with industry leaders to aid in the technical
development, sales, marketing, design and engineering of CEP systems. In
addition, the Company's commercialization and sales strategy includes
identifying industrial market leaders as initial customer prospects and
performing Technical Development Programs ("TDPs") to demonstrate CEP's
commercial applicability to a variety of customers and waste streams. Such
activities are intended to keep the technical development of CEP focused on
market opportunities.
The Company believes that its commercialization and sales strategy must
be flexible to adapt to a number of factors that may change over time as the
market for CEP systems and any competing technologies evolve. These factors
include, but are not limited to, the relative attractiveness of target markets
based on the customer demand for CEP systems within each of the Company's target
markets as compared to applicable competing methods of recycling, treatment or
disposal; any changes in environmental regulations and their effect on the
Company's operations and various target markets; and the ability of the Company
to successfully permit and build CEP systems on a timely basis within its target
markets. Accordingly, the Company anticipates that its commercialization and
sales strategy may change over time.
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COMMERCIAL DEVELOPMENTS
The Company has entered into a number of agreements or letters of
intent relating to the development of CEP systems for commercial use in each of
the Company's target market segments. During 1996, the Company is developing the
CEP systems contemplated by the arrangements described below and is seeking to
enter into new agreements to develop additional CEP systems. However, there can
be no assurance as to the successful and timely development of the CEP systems
described below or any additional CEP systems.
Commercial Radioactive Waste Market
Scientific Ecology Group, Inc. In the first quarter of 1994, MMT began
a TDP in conjunction with Scientific Ecology Group, Inc. ("SEG"), a wholly-owned
subsidiary of Westinghouse Electric Corporation, to investigate the application
of Quantum-CEP technology to radioactively contaminated ion exchange resins
generated by the nuclear power industry. In December 1994, MMT and SEG entered
into an agreement to build a commercial Quantum-CEP facility to be located at
SEG's Oak Ridge, Tennessee facility. This Quantum-CEP facility was commissioned
in December 1995 and is designed to have the capacity to process up to 130,000
cubic feet per year of ion exchange resins. This facility is jointly owned and
financed by MMT and SEG. SEG is responsible for the operation and performance of
the overall facility, and MMT is responsible for operation of the Quantum-CEP
processing systems. The agreement also sets forth the terms under which MMT and
SEG may commercialize the use of Quantum-CEP facilities for the treatment of ion
exchange resins and potentially other hazardous and radioactive wastes on a
world-wide basis.
U.S. Government Market
Partnership with Lockheed Martin Corporation. On August 9, 1994, the
Company entered into a series of related agreements with Martin Marietta
Corporation. Martin Marietta has since merged into Lockheed Martin Corporation
("LMC"), with LMC as the surviving entity. Pursuant to these agreements (the
"LMC Agreements"), the Company and LMC formed M4 Environmental L.P., a Delaware
limited partnership ("M4"), to commercialize CEP to service the environmental
remediation, waste management, decontamination, decommissioning, chemical and
biological demilitarization, pollution prevention and waste minimization needs
of the DoD, the DOE, and USEC (collectively, the "M4 Market"). The Company and
LMC, through wholly-owned subsidiaries, each holds a 49.5% limited partnership
interest in M4, and a 50% interest in the corporate general partner of M4, which
holds a 1% interest in M4. During 1995, revenue from M4 accounted for
approximately 69% of the Company's total revenue. The Company anticipates that a
substantial portion of its revenue for 1996 also will be from M4 and variations
from this expectation could have a material effect on 1996 revenue.
M4's strategy is to address the requirements of DOE, DoD and USEC for
cost-effective processing of waste materials associated with the remediation and
decommissioning of federal facilities and the demilitarization of chemical and
biological weapons. Initially, M4 has targeted the following market segments:
(i) low-level radioactive waste; (ii) high-level radioactive waste; (iii)
chemical weapons demilitarization; (iv) DUF6 ; (v) DoD hazardous wastes; and
(vi) mixed waste. In its project development efforts, M4 has agreed to purchase
certain technical services and certain CEP components from MMT. Within the M4
Market, M4 intends to pursue the privatization of CEP systems. Such arrangements
are anticipated to be structured so that M4 will be responsible for funding the
design, construction, start-up and operation of CEP systems that will be
dedicated to processing specified types and quantities of wastes under
commercial-type contracts with the DOE, the DoD and USEC. M4 believes that its
ability to privatize systems will provide it with a competitive advantage and
accelerate the introduction of CEP into the M4 Market.
M4 TECHNOLOGY CENTER. In February 1995, M4 began construction
of its Technology Center in Oak Ridge, Tennessee (the "M4 Technology Center").
In October 1995, M4 commissioned its first CEP system, a demonstration facility
for DUF6, at the M4 Technology Center. In December 1995, M4
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commissioned a commercial facility to process mixed hazardous and radioactive
waste for both DOE and commercial customers. The Company expects that M4 will
commission a second, larger commercial system at the M4 Technology Center in
1996. In addition to these systems, the M4 Technology Center is expected to
contain other systems to demonstrate CEP's applicability to various DOE and DoD
wastes.
DUF6 AGREEMENT. In May 1995, M4 entered into a contract with
USEC to construct the DUF6 demonstration unit located at the M4 Technology
Center. Under the terms of the contract, M4 will provide USEC with results from
the demonstration program by July 1996. If USEC elects to proceed, USEC and M4
intend to form a joint venture to recycle DUF6 generated and stored by USEC. M4
would be responsible for the design and construction of a commercial-scale
processing system to be located at a USEC site, and USEC would agree to furnish
DUF6 to the joint venture under a 10-year supply agreement.
CHEMICAL WEAPONS DEMILITARIZATION. Also in 1995, M4 began a
demonstration program related to CEP's ability to process bulk chemical agents
stockpiled by the U.S. Army. The chemical agent demonstration program is
directed at developing CEP to process stockpiled chemical agents beginning with
mustard gas and nerve agent. M4's demonstration program, which includes teaming
with Bechtel National Inc. and Batelle Memorial Institute ("Batelle"), has
included processing surrogates for mustard gas in response to a request by the
Army to review detailed information on possible alternative technologies. As a
result of these trials, M4 was selected as one of three providers of possible
alternative technologies. The National Research Council, on behalf of the Army,
will perform a more detailed review of these technologies which would determine
whether the results from the research and development programs warrant
proceeding to pilot testing. This review is expected to be completed in October
1996. As part of its continued efforts in this program, M4 has constructed a
demonstration unit to process live chemical agents at a Batelle lab. In tests
conducted in March 1996 using this demonstration unit, mustard and nerve agents
supplied by the Army were successfully processed with CEP. These tests resulted
in greater than 99.999999 percent destruction of these agents.
COMMERCIAL MIXED WASTE. In December 1995, MMT and M4 entered
into an agreement to expand M4's processing rights to include mixed radioactive
and hazardous waste generated by commercial customers in the United States. In
March 1996, M4 entered into the first agreement to process commercial mixed
waste at the M4 Technology Center with Duke Power Company. Under this agreement,
M4 will process various types of mixed waste, including various freon wastes and
sludges, batteries and halogenated solvents.
EXPANSION OF M4. In March 1996, MMT and LMC executed an
agreement to expand M4 through the acquisition by M4 of the Retech division of
Lockheed Environmental Systems & Technologies Co., a wholly-owned subsidiary of
LMC. The Retech division designs and manufactures metallurgical equipment and
waste processing systems that utilize a plasma technology. Under this agreement,
LMC will contribute approximately half of the assets of the Retech division to
M4, and MMT will purchase substantially all of the remaining assets of the
Retech division for approximately 308,000 shares of its common stock, and then
immediately contribute these assets to M4. In addition, MMT and LMC agreed to
restructure certain aspects of their relationship to M4. LMC has increased its
equity commitment to M4 from $50 million to $75 million, has agreed to provide
up to $150 million in project debt guarantees for M4 CEP projects through 2004,
subject to various conditions, and has agreed to provide a $15 million working
capital facility to M4. The expanded M4 Partnership will continue to be owned by
MMT and LMC on a 50/50 basis. As part of this restructuring, M4 and LMC have
agreed to "team" in response to certain major DOE, DoD and USEC procurement
opportunities. Under this teaming arrangement, LMC, through its Energy and
Environmental Sector ("LMC/EES"), would serve as the prime contractor, with
responsibility for overall contract management and customer interface, and M4
would be responsible for providing and managing all waste processing
technologies necessary to perform the teamed project. Also, M4 will have the
right to fulfill LMC's other waste processing requirements, subject to certain
limitations. LMC/EES currently is responsible for a waste processing subcontract
at a DOE site in Idaho known as Pit 9 (the "Pit 9 Contract"). When certain
milestones in the performance of that contract are met, LMC/EES and M4 will
agree upon terms whereby M4 will assume operational responsibility for the Pit 9
Contract. In addition, LMC/EES has the obligation to offer the infrastructure
and future business
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opportunities generated by the Pit 9 Contract to M4 upon the earlier of
completion of or a material addition to the Pit 9 Contract.
United States Department of Energy. In September 1992, MMT submitted a
three-phased proposal under the DOE's Planned Research and Development
Announcement program (the "PRDA Program"). On January 19, 1993, MMT received a
favorable determination regarding a $1.2 million cost-sharing contract for a
portion of the proposed PRDA program. The terms of the contract were finalized
in September 1993. Under the contract, MMT has conducted trials and related
activities at its research, development, testing and demonstration facility in
Fall River, Massachusetts to demonstrate the applicability of CEP to
contaminated scrap metals. In November 1993, the DOE requested that the Company
provide a proposal to enhance certain aspects of the existing statement of work
to provide for delivery of a more comprehensive final report of technical
results. The Company responded and negotiations were concluded with the DOE
which resulted in additional funding of $9 million, increasing the total value
of the DOE funding under the contract to $10.2 million. In February 1995, the
DOE issued a unilateral change order to increase the funding for an undetermined
amount with an initial ceiling of $5 million. In June 1995, the DOE extended its
contract for demonstrating CEP. The modification to the PRDA Program increased
DOE's funding to a total of $25.2 million. Activities under this new enhanced
effort are expected to be completed in 1996. MMT has contributed a total of
$15.3 million in connection with the cost-sharing contract. During 1995, revenue
from the DOE accounted for approximately 30% of the Company's total revenue, and
the Company anticipates that a substantial portion of its revenue for 1996 also
will be from the DOE. Failure to reach agreement with the DOE regarding
additional funding could have a material effect on 1996 revenue.
United States Department of Defense. In September 1994, the U.S. Army
Armament, Research Development and Engineering Center at Picatinny Arsenal, New
Jersey awarded the Company $420,000 to fund demonstration of CEP's applicability
to conventional weapons components. The Picatinny Arsenal project is MMT's first
contract with a DoD agency. Trials under this contract demonstrated that the
processing of conventional munitions, smoke and dye agents and propellants in
the CEP system resulted in the destruction of the hazardous constituents to high
environmental standards and the partitioning of the elements into recoverable
materials. Activities under this contract are expected to be completed in 1996.
The Company's existing government contracts can generally be canceled,
delayed or modified at the sole option of the government and are generally
subject to annual funding limitations and public sector financing constraints.
The Company believes that any future government contracts will be structured
similarly. In addition, under the terms of future government contracts, if any,
the Company may be required to grant the federal government greater rights with
respect to the Company's intellectual property than the Company would grant
private parties. As a result of engaging in the government contracting business,
the Company has been and will in the future be subject to audits, and may be
subject to investigation, by government agencies. The Company also faces the
risks associated with such contracting, which could include substantial civil
and criminal fines and penalties. In addition to potential damage to the
Company's business reputation, the failure by the Company to comply with the
terms of any of its government contracts could result in the Company's
suspension or debarment from future government contracts for a significant
period of time. All of the foregoing risks associated with government
contracting may also apply to M4.
Commercial Industrial Waste Market
Hoechst Celanese Corporation. In February 1994, MMT and Hoechst
Celanese Corporation ("HCC"), one of the largest U.S. based chemical companies,
signed a letter of intent to construct a CEP system to process and recycle
manufacturing wastes at an HCC chemical production plant on the Texas Gulf
Coast. In May 1995, HCC and MMT finalized a contract to construct this CEP
system at HCC's Bay City, Texas facility. The facility will be constructed,
owned, and operated by MMT. The facility, initially contemplated to have a
capacity of up to 13,000 tons, will be designed to recycle up to 24,000 tons of
hazardous and non-hazardous waste feedstocks from HCC's Texas plants and
third-party generators.
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The CEP facility will produce synthesis gas, a carbon-rich product to be used by
HCC in its chemical processing. The Company has received the initial major
regulatory approvals for this facility from the State of Texas and has begun the
design of the facility. Substantial development activities are occurring, with
the fabrication and assembly of the initial CEP system expected to be completed
in 1996, and the facility expected to be operational in 1997. There can be no
assurances as to the successful or timely deployment of this facility.
Celanese Mexicana, S.A. de C.V. In January 1996, MMT and Celanese
Mexicana, S.A. de C.V. ("CelMex"), Mexico's largest private sector chemical
company, signed a letter of intent to construct a CEP system to process and
recycle manufacturing wastes at CelMex's chemical production facility in
Veracruz, Mexico. The proposed CEP system will be designed to process wastes
produced by CelMex and other Mexican companies. CelMex will purchase the
synthesis gas produced by the CEP system as a raw material in its chemical
manufacturing processes. Under the letter of intent, CelMex would provide the
site and infrastructure for the CEP system and MMT would construct, own and
operate the facility. Development of the CEP system pursuant to this letter of
intent is subject to a number of conditions, including the completion of a
market feasibility study and the negotiation and execution of definitive
agreements. There can be no assurances that CelMex will elect to pursue
development of the proposed facility after the market feasibility study is
completed or that the parties will be able to negotiate mutually acceptable
agreements to develop the proposed facility.
Nichimen Corporation and NKK Plant Engineering Corporation. In February
1996, MMT, Nichimen Corporation, one of Japan's major trading companies
("Nichimen"), and NKK Plant Engineering Corporation, one of Japan's largest
engineering providers of municipal waste systems ("NKK"), signed a letter of
intent to create a joint venture to process Japanese municipal solid waste
incinerator fly ash. Once formed, the joint venture would employ MMT's
proprietary Cerex-CEP technology to recycle incinerator ash to recover ceramic
and metal products. It is anticipated that the joint venture would sell,
license, own, and operate Cerex-CEP facilities in the Japanese market. The joint
venture would be obligated to purchase from MMT approximately 40 Cerex-CEP
systems over the first ten years of operations, starting with a commercial-scale
demonstration system expected to be ordered when definitive joint venture
agreements are finalized. Under the letter of intent, MMT would own 49% of the
joint venture and Nichimen and NKK would collectively own the remaining 51%. The
establishment of the joint venture and the development of the demonstration
Cerex-CEP system pursuant to this letter of intent are subject to a number of
conditions, including the negotiation and execution of definitive agreements.
There can be no assurances that the parties will be able to negotiate mutually
acceptable terms to implement the letter of intent.
COMMERCIAL DEVELOPMENTS -- ONGOING RELATIONSHIPS
Since the Company's formation it has entered into several strategic
alliances with companies that have specialized expertise. The Company believes
that these relationships assist the Company in its planned commercialization of
CEP, either by assisting the Company in marketing to particular industry
groups, or by providing key services in connection with the Company's
development and application of its CEP technology, such as assistance with
obtaining insurance or project finance, or the provision of engineering and
construction expertise. The Company may enter into similar long-term
relationships in the future.
The Electric Power Research Institute ("EPRI"). In November 1995, MMT
entered into an agreement with EPRI to support the application of CEP. Over the
five-year term of the agreement, EPRI, in conjunction with numerous utilities
and their process industry customers, plans to develop collaborative programs
for CEP demonstrations. EPRI will fund up to $25 million in matching research
grants made to member utilities working with industrial process customers in
their service areas to demonstrate CEP. In exchange for this commitment, EPRI
received a warrant to purchase up to 100,000 shares of MMT common stock at an
initial exercise price of $23.375. The warrant will vest in increments upon the
closing of contracts for CEP plants for which EPRI has provided minimum levels
of funding and upon customer acceptance of such plants. The Company expects that
the EPRI relationship will assist the Company in marketing its CEP technology to
utilities and process industry customers.
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American Re-Insurance Company and Am-Re Services. In May 1993, MMT
entered into a set of related agreements with American Re-Insurance Company and
its affiliate, Am-Re Services, Inc. ("Am-Re Services"). In addition, MMT was
obligated to perform certain services for Am-Re Services through December 31,
1993. Pursuant to these agreements, American Re-Insurance Company purchased
438,885 shares of MMT's unregistered Common Stock, $.01 par value per share,
for $5.0 million and Am-Re Services agreed to provide services to MMT relating
to obtaining environmental impairment liability insurance and project financing
for the first five commercial CEP facilities to be developed by MMT. In
exchange for these services, and subject to certain vesting requirements, Am-Re
Services was granted warrants to purchase an aggregate of 375,000 shares of
Common Stock. To date, none of these warrants have vested because the Company
has not obtained environmental impairment liability insurance or project
financing with the assistance of Am-Re Services. The Company expects that, as
it develops additional CEP plants, Am-Re Services will provide assistance with
respect to the Company obtaining environmental impairment liability insurance
and project financing for such CEP plants.
Fluor Daniel. In September 1992, MMT entered into a Development
Services Agreement with Fluor Daniel Environmental Services, Inc. ("Fluor
Daniel"), an affiliate of Fluor Daniel, Inc., an international engineering and
construction firm. Under the terms of the agreement, Fluor Daniel agreed to
provide $1.2 million in feasibility studies, designs, cost estimations and
other services in support of commercial plant evaluations, designs, front-end
engineering and other services for potential CEP applications. As of December
31, 1993, all of these services had been performed, and during 1994 Fluor
Daniel exercised its option to invest the $1.2 million in shares of Common
Stock at an agreed upon price of $10.56 per share. During 1994, Fluor Daniel
and MMT amended the agreement to extend its term for up to five years. Pursuant
to the agreement, as amended, Fluor Daniel provided an additional $4.0 million
in services to MMT during 1994 and 1995. In consideration for such services,
Fluor Daniel received additional shares of Common Stock at a price equal to the
average market price of the stock in the 10 trading days prior to the end of
each calendar quarter during which the services were provided. In addition,
during the term of the agreement, Fluor Daniel shall be the primary provider of
engineering, procurement, construction and implementation services for CEP
plants owned and operated by the Company and shall be entitled to receive
project fees based upon the cost of such services for specific CEP facilities
managed by Fluor Daniel. The Company will be obligated to pay Fluor Daniel 2%
of certain licensing fees and royalty payments received by MMT during the term
of the agreement, and for a period of three years thereafter, as a result of
the licensing of CEP technology during the term of this agreement. During 1995,
Fluor Daniel provided substantial engineering and construction services to MMT
for the M4 Technology Center. In addition, Fluor Daniel provided engineering
services on the Q-CEP facility jointly owned with SEG and other Company
projects.
Uhde GmbH. In December 1995, MMT entered into a letter of intent with
Uhde GmbH ("Uhde") which is expected to form the basis for the execution of a
non-exclusive sales representative agreement. Uhde, based in Dortmund, Germany,
is one of the world's leading engineering and construction companies. Under the
proposed agreement, MMT and Uhde would collaborate to market CEP to Uhde's
worldwide customer base. Uhde would undertake to identify and sell a minimum of
nine CEP projects outside the United States over a four-year period. Uhde would
provide facility engineering and design site construction, equipment
installation and project management, and MMT would provide marketing assistance,
CEP system design and fabrication, operator training and ongoing operational
support, as needed, to Uhde's customers. Uhde and MMT have agreed to focus their
joint efforts on addressing a wide range of markets including chlorinated
organic chemical wastes, chemical weapons demilitarization projects,
post-consumer plastics and electronic components, municipal waste water
treatment sludges and waste incinerator ash. Uhde and MMT also have agreed to
discuss the possibility of Uhde making an equity investment in MMT.
Implementation of the relationship between MMT and Uhde contemplated by the
letter of intent is subject to a number of conditions, including the negotiation
and execution of definitive agreements. There can be no assurances that the
parties will be able to negotiate mutually acceptable terms to implement the
letter of intent.
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<PAGE> 10
OTHER COMMERCIAL DEVELOPMENTS
Rollins Environmental Services, Inc. In 1991, the Company entered into
a joint development and commercialization agreement with Rollins Environmental
Services, Inc. ("Rollins"). The agreement provided that the Company would
analyze the application of CEP to specific Rollins waste streams for fees based
on the hours worked by the Company.
In 1992, the agreement was superseded. Under the revised terms, Rollins
agreed to pay the Company $50,000 per month for two years beginning September 1,
1992, all of which had been paid by August 1994. In consideration for these
payments, the Company provided research and development and other services to
Rollins and Rollins obtained an option to license the Company's technology for
CEP systems at any of Rollins' three waste processing facilities existing on
September 1, 1992. If Rollins decides to license a CEP system at any of these
existing facilities, Rollins will be entitled to set off against payments due to
the Company all amounts paid under the original and amended agreements, provided
that in any year no reduction shall exceed 25% of the amounts payable by Rollins
to the Company. Such right of set off is conditioned on the commercialization
and licensing of a CEP system at one of Rollins' three facilities existing on
September 1, 1992.
In June 1994, the Company and Rollins signed a letter of intent to
construct an initial CEP system at one of Rollins' sites in 1996. The letter of
intent also outlined Rollins' long-term objective of constructing up to seven
additional CEP systems which would be sited at existing or future Rollins sites.
Development of the CEP system pursuant to this letter of intent is subject to a
number of conditions, including the negotiation and execution of definitive
agreements.
The Company had expected to enter into definitive agreements with
Rollins for an initial CEP system in 1995. However, due primarily to weak
conditions in the central hazardous waste market, the Company and Rollins have,
for the foreseeable future, deferred their plans to proceed with the
development of the CEP system contemplated by this letter of intent.
TECHNOLOGICAL DEMONSTRATIONS AND TESTING OF CEP
In order to further demonstrate CEP's Elemental Recycling capability on
a variety of prospective customer feedstocks, MMT has constructed an 86,000
square foot research, development, testing and demonstration facility in Fall
River, Massachusetts that is equipped with several commercial-scale CEP systems
(the "Fall River Facility"). Since February 1993, through internally and
customer-funded TDPs, the Company has demonstrated CEP's ability to dissociate
feedstocks and recover products in laboratory, bench-scale, pilot-scale and
commercial-scale trials in its Fall River Facility. These pre-operational tests
and commercial-scale demonstrations on feedstock samples representative of those
of prospective customers from the chemical, petrochemical and environmental
services industries and the DOE and DoD have shown the safety and reliability of
CEP and feedstock conversion meeting or exceeding regulatory standards for a
wide range of chemical components and physical forms.
CEP and its underlying technologies have been demonstrated in tests on
many materials from simple compounds, such as paraffins and alcohols, from which
fundamental information is generated, to complex materials containing toxic
metals, alkali metals, halides, cyanides, fluorinated species and polyaromatic
hydrocarbons (including PCBs), from which the operability of the technology is
demonstrated. These demonstrations have included wastes that are classified as
hazardous or toxic under RCRA (including chemical weapons agents), low level
radioactive wastes, mixed radioactive and hazardous wastes, and surrogate
hazardous wastes in the form of gases, liquids, slurries, suspensions, pumpable
sludges, and solids. MMT has successfully completed customer-sponsored
reliability and operability trials in which numerous customer-established
success criteria for closed-loop recycling were met or surpassed.
The Company's technological demonstrations are complemented by
additional external research programs, many of which are conducted by members of
MMT's Technical Advisory Board.
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<PAGE> 11
In addition to the operating demonstrations described above, MMT has
developed physical models and computer simulations that are used to model CEP
systems functions such as feed addition, molecular dissolution, refractory wear,
vitreous material characteristics and reactor design. Prior to running
experimental trials on particular feedstock, MMT uses such models to predict
capital and operating costs and system performance.
To date, the testing of CEP largely has been limited to trials
conducted under controlled testing conditions. Certain commercial-scale tests of
CEP have been conducted and the Company has developed computer simulations which
it uses to model and predict various CEP system functions. The Company currently
is conducting start-up operations and testing at the SEG facility in Oak Ridge,
Tennessee and at the M4 Technology Center. However, no demonstration has yet
been made that a commercial CEP system, once installed and operated at a
customer's location, will process such customer's feedstock and recover
commodity and specialty products of commercial quality and in significant
quantities.
The Company is continuing in its research and development efforts to
enhance the functionality of its CEP systems, especially in areas such as bulk
feeding and ceramic tapping, with the goal of making CEP systems more efficient
for processing a wide range of wastes and waste forms. During the fiscal years
ended December 31, 1995, 1994 and 1993, the Company spent $25.3 million, $25.2
million and $13.0 million, respectively, on research and development, of which
$11.0 million, $14.4 million and $10.8 million, respectively, was funded by the
Company.
The Fall River Facility
The primary use of MMT's Fall River Facility is to perform TDPs that
demonstrate CEP's Elemental Recycling capability on a variety of feedstocks,
including samples of customers' materials. MMT believes that the Fall River
Facility will serve to further the development of CEP technology and MMT's
associated intellectual property estate and will assist in facilitating
favorable customer and regulatory acceptance of the process. The Fall River
Facility also is used to conduct training programs for MMT employees and
customers.
The 86,000 square foot Fall River Facility contains a 48,000 square
foot recycling area which includes a materials preparation area, feedstock
storage, raw material storage, recovered material storage and a test laboratory.
The Fall River Facility houses commercial-, pilot- and bench-scale CEP units
which are used for treatability and feasibility studies, and also houses
physical models of CEP units which contain water and other fluids. These models
are used to analyze injection patterns and to simulate flow dynamics and various
reaction patterns within the molten metal bath.
Recoverable Products
Laboratory, bench-scale, pilot-scale and commercial-scale trials,
including trials conducted at the Company's Fall River Facility, have
demonstrated that CEP has the potential, through Elemental Recycling, to recover
commodity and specialty products, such as industrial gases, ceramics and metals,
from feedstocks. During demonstration and treatability trials, MMT has validated
CEP's potential to recover commodity and specialty products by performing
detailed material balance analysis and product characterization. Based upon
these test results and commercial specifications for CEP products, the
Massachusetts Department of Environmental Protection ("MADEP") has issued MMT
recycling certifications for CEP of heterogeneous inorganic and organic waste
streams, including RCRA-listed waste streams. In each of these demonstrations,
greater than 90% of the feed was shown to be recyclable into valuable products.
Based on the elemental composition of particular feedstocks, MMT has
demonstrated that CEP systems can be customized to make specific products by
adding different reactants or by varying the composition of the molten metal
bath. CEP is designed to permit recovered products to be re-used as raw
materials by the feedstock generator in potential closed-loop applications or to
be sold to other industrial customers.
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<PAGE> 12
Some materials produced using CEP may have little to no commercial
value, and may be considered wastes. Such waste may be classified as a hazardous
or low-level radioactive waste (and may need to be handled as such) under
current United States environmental regulations. Based on experimental trials,
MMT anticipates that the volume of any such unsaleable materials will be a small
portion of the initial feedstock volume and will be substantially less than the
residual waste (including ash) generated by alternative technologies. With
respect to the processing of radioactive wastes utilizing Q-CEP, the Company
does not expect that the relative volume of reusable products will be similar to
other applications of CEP. Experimental trials have shown, however, that CEP
does substantially decrease the volume of such radioactive wastes and contains
the radioactive elements in a stable, self-shielding form.
Applications for CEP
The Company currently is developing various applications for its CEP
technology. Q-CEP has been developed to process radioactive wastes and mixed
wastes (containing both radioactive and hazardous constituents). Current
commercialization programs for Q-CEP are focused on applications for low-level
radioactive and mixed waste. Q-CEP dissociates hazardous and toxic materials,
while separating and containing radioactive elements in a stable,
self-shielding form suitable for storage or final disposal. This results in a
substantial reduction in the volume of radioactive materials requiring storage
or disposal, in addition to the potential recycling benefits. The Company's
Q-CEP technology will be used at the facility which the Company built with SEG
to process radioactively contaminated ion exchange resins generated by the
nuclear power industry. Q-CEP also will be used to process mixed radioactive
and hazardous waste at the M4 Technology Center. The Company also is developing
additional applications to its CEP technology to process particular classes of
wastes, including Cerex-CEP[TradeMark] for the processing of halogenated
inorganic waste streams and the recovery of metals, Hyco-CEP[TradeMark] for the
conversion of organic waste streams into industrial gasses, and
Halo-CEP[TradeMark] for the processing of halogenated organic waste streams and
the recovery of acids. In each case, these CEP applications use a molten metal
bath to separate waste compounds into their elemental constituents and
reconfigure the elements into potential gaseous, ceramic, and metal products.
Although the Company believes that each of these applications of its CEP
technology could be material in the future, until a CEP plant embodying a
particular application has operated in the commercial environment for some
time, the Company will not know the relative economic success of such
application as compared to any competing technologies now in existence or
developed in the future, and in light of the other market conditions prevailing
at that time.
INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY
MMT has a comprehensive program for the protection of its intellectual
property. This program includes, among other things: established procedures and
notebooks and forms for documenting, evidencing and disclosing all MMT
inventions to management; an Intellectual Property Committee which meets
regularly to discuss intellectual property issues; a system for continuously
monitoring patents issued to, and patent applications filed by, relevant third
parties; a program of seminars for employees on intellectual property topics; a
recognized intellectual property law firm on retainer; a patent administrator
and other personnel dedicated to assisting in the preparation and prosecution of
MMT's patents; personnel policies and agreements requiring disclosure by
employees of all inventions and protection of confidential information; and
agreements with all technical and scientific employees providing for the
assignment of inventions made by such employees to MMT.
As of December 31, 1995, MMT owned 67 United States and foreign
patents, and had filed 106 additional United States, international, European and
foreign national patent applications relating to CEP. MMT also has many
invention disclosures describing inventions by employees, many of which may be
the basis for future patent applications.
MMT's intellectual property estate also contains a number of
sophisticated computer models used to predict the thermodynamic, kinetic and
physical transport properties of the CEP system,
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<PAGE> 13
including tuyere injection, multiphase jet flow and turbulent diffusion,
equilibrium partitioning and kinetic limitations, product formation and system
design. Some of such computer models include components which are the subject of
non-exclusive licenses from computer software vendors. MMT's computer models are
used to identify optimal designs and operating conditions for specific
processing applications. MMT has validated the accuracy of many of these
computer models through actual experimentation.
To protect its trade secrets and other unpatented proprietary
information in its product development activities, MMT's employees, consultants
and contractors are required to enter into agreements providing for
confidentiality and MMT's ownership of such trade secrets and other unpatented
proprietary information originated by them while in MMT's employ.
There can be no assurance that any patents will issue on any of MMT's
patent applications, nor can there be any assurance that any of MMT's
confidential non-disclosure agreements will provide meaningful protection of
MMT's confidential or proprietary information in the case of unauthorized use or
disclosure.
The Company has six service marks or trademarks registered, and several
applications to register, with the U.S. Patent and Trademark Office for terms
used in conjunction with MMT's services in material processing, hazardous and
non-hazardous waste treatment, and resource recovery. Registered marks include:
MMT(R), The Elemental Solution(R), Elemental Solution(R), MMT Catalytic
Extraction Processing(R), and the design of certain MMT logos. Applications for
service marks or trademarks include: Molten Metal Technology(TM), Elemental
Recycling(TM), Quantum-CEP(TM), Q-CEP(TM), Hyco-CEP(TM), Cerex-CEP(TM), Resource
Fractionator(TM), and the MMT logo including text.
ENVIRONMENTAL MATTERS
Environmental Laws and Regulations Creating a Need for CEP
Various environmental protection laws have been enacted and amended
during recent decades in response to public concern over the environment. MMT's
operations and those of its customers are subject to these evolving laws and the
implementing regulations. MMT believes that the obligations to comply with the
requirements of these laws contribute to the demand for its services.
The environmental legislation and policy which the Company believes are
potentially applicable to CEP operations in the United States include RCRA,
TSCA, the Federal Water Pollution Control Act of 1972, the Clean Air Act of
1970, as amended, the Hazardous and Solid Waste Amendments of 1984, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, the Superfund Amendments and Reauthorization Act and the Pollution
Prevention Act of 1990, and various state analogs to these federal laws.
Additional provisions which may be applicable to Quantum-CEP technology include
the Atomic Energy Act of 1954, the Federal Facility Compliance Act of 1992, the
Low-Level Radioactive Waste Policy Amendments Act of 1985, the Department of
Energy Orders, Policy and Guidance, the Nuclear Regulatory Commission Regulatory
Policy and Guidance, and their state analogs These provisions regulate the
management and disposal of radioactive, hazardous and non-hazardous wastes,
control the discharge of pollutants and radionuclides into the air, land and
water, provide for the investigation and remediation of contaminated land and
groundwater resources and establish a pollution prevention program. Many of
these laws have international counterparts, particularly in Europe and elsewhere
in North America.
Environmental Permitting Implications
To maximize the market acceptance of CEP technology, MMT has chosen to
focus certain initial project efforts on the development of systems whose
feedstocks and designs are most likely to qualify for exemptions or favorable
regulatory treatment. These projects involve: (i) systems for treatment of
virgin materials that are not classified as hazardous wastes and are not subject
to RCRA permitting
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requirements; (ii) systems that handle secondary materials in a manner that may
qualify such materials for exclusions from RCRA regulation (e.g., a closed-loop
process whereby secondary materials will be returned to the original
manufacturing process in which they were generated); (iii) systems that may
qualify for an exemption from RCRA permitting requirements (e.g., processing of
waste materials as feedstocks to manufacture valuable products); (iv) systems
involving bona fide recycling of hazardous wastes; (v) systems that provide for
significant volume reduction and stable final form for low-level radioactive
waste to allow for increased disposal capacity or a more manageable form for
storage, or both; and (vi) systems that provide for volume reduction, stable
final form and recycling for mixed waste streams. MMT would also consider use of
CEP as part of the treatment train in previously permitted RCRA treatment
facilities for which MMT believes that only a permit modification would be
required.
The permitting burden on a facility utilizing CEP will depend on the
nature of the feedstock (including whether it is classified as a solid waste or
hazardous waste), the configuration of the process at the particular facility,
the manner in which product is recovered from the waste and the type of waste
residuals created by the process.
Research Facility License
On February 27, 1995, the MADEP issued a Research Facility License for
recycling activities (the "License") that regulates hazardous waste recycling
research activities at the Fall River Facility. The License became effective on
March 20, 1995, and replaced the original R&D Recycling Permit for the Fall
River Facility, which was issued in September 1993. The License has a term of
five years.
Under the terms of the License and the Demonstration Permit for solid
wastes which was issued in September 1993 (the "Permit"), most solid and
hazardous wastes, including RCRA-listed hazardous wastes, may be stored and
processed at the Fall River Facility, subject to limits and conditions specified
in the License and the Permit. The License requires MMT to provide a notice to
the MADEP, the Fall River Fire Department and the Fall River Board of Health at
least 14 days prior to conducting hazardous waste recycling demonstrations
greater than 250 kilograms/day. This notice must contain a summary of applicable
treatability study data and other information. The Permit requires review and
approval by the MADEP prior to solid waste recycling demonstrations.
In November 1995, the EPA granted an approval to allow the Company to
perform testing on wastes containing polychlorinated biphenyls ("PCBs") pursuant
to the EPA's authority under TSCA. Also, in November 1995, the MADEP modified
certain of the permits for the Fall River Facility to allow the Company to store
and process PCBs. MMT operates the Fall River Facility pursuant to all necessary
permits as well as an Agreement with the City of Fall River (the "Fall River
Agreement"), which first became effective on March 17, 1993. In April 1995, the
Fall River Agreement was modified and amended to reflect the requirements of the
License. In November 1995, the Fall River Agreement was further amended to add
provisions related to the processing of PCBs.
Permits for Commercial Facilities
With respect to the first commercial facilities constructed by the
Company, the Company's partners and customers have been successful in obtaining
the permits necessary to construct and operate these facilities. In the case of
the Quantum-CEP facility constructed by MMT and SEG, the Tennessee Department of
Environment and Conservation ("TNDEC") issued to SEG an air permit in May 1995
(as amended in October 1995) which allowed the installation and initial
operation of the CEP equipment and related air pollution control devices at the
facility. In addition, in November 1995, SEG received a radioactive materials
license from TNDEC that allows the possession, use and storage of radioactive
materials at the Quantum-CEP facility.
In September 1995, TNDEC issued a similar air permit to M4 which
allowed the installation and initial operation of the CEP systems at the M4
Technology Center. In addition, in November 1995,
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<PAGE> 15
TNDEC issued a radioactive materials license to M4 that allows the possession,
use and storage of radioactive materials at the M4 Technology Center.
COMPETITION
MMT defines the market for its CEP technology as the recycling,
processing and volume reduction of certain radioactive, hazardous and
non-hazardous wastes and industrial by-products. MMT is aware of some
competition from companies recycling hazardous wastes, but its primary
competition comes from companies that provide radioactive and hazardous waste
treatment and disposal services. Many technology developers have begun to focus
on the government markets as new opportunities continue to evolve. Some of these
technologies may also be applied to the commercial radioactive waste and
hazardous waste markets. The government is investigating a wide variety of
technologies, with the objective of identifying alternatives that offer benefits
over conventional methods, such as incineration. The predominant waste treatment
and disposal methods include landfilling, deep-well injection, incineration,
plasma, vitrification, or other thermal treatment methods, on-site containment
(including industrial lagoons), and release into the environment. The hazardous
waste treatment and disposal industries are fragmented and characterized by a
number of large and small companies. Competition is based primarily on cost,
regulatory and permit restrictions, technical performance, dependability and
environmental integrity. The Company believes that CEP will be able to compete
favorably on the basis of these factors. Many of MMT's competitors have
substantially greater financial and technical resources than MMT.
CEP is designed to provide recovery of products and re-use by
generators or sale of such products to other commercial and government
customers. CEP's potential cost advantage over conventional waste treatment and
disposal methods is dependent, in part, on such re-use or sale. MMT anticipates
that the price of such products will be established on the basis of competition
with other large or small producers of raw materials and recycled products which
may have greater financial resources and experience in connection with the
production and marketing of such materials and products than MMT or its
customers.
EMPLOYEES
As of December 31, 1995, the Company had 284 full-time employees. The
Company believes that it has been successful in attracting experienced and
capable process development, engineering, operations and management personnel.
The Company's growth and expansion plans depend in large part upon its ability
to continue to attract and retain highly skilled scientific, managerial,
manufacturing, operations and marketing personnel.
All of the Company's employees have entered into agreements with the
Company requiring them not to disclose the Company's proprietary information,
assigning to the Company all rights to inventions made during their employment
and prohibiting them from competing with the Company.
None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) Financial Statements
1. The financial statements set forth in the list below are filed as part of
this report on pages F-1 through F-18.
Report of Independent Accountants
Consolidated Balance Sheet at December 31, 1995 and 1994
Consolidated Statement of Operations for the years ended December 31,
1995, 1994 and 1993
Consolidated Statement of Changes in Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows for the years ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1995.
(c) Exhibits
3.1 - Amended and Restated Certificate of Incorporation of the
Registrant. *4* (3.1).
3.2 - Amended and Restated By-Laws of Registrant. *4* (3.2)
4.1 - Specimen Certificate for Shares of the Registrant's Common Stock,
$.01 par value. *1* (4.1)
u 10.1 - Pilot Plant Agreement dated as of October 25, 1991 between the
Registrant and E.I. du Pont de Nemours and Company, as amended by
the Pilot Plant Funding Agreement Addendum dated as of February
10, 1992. *1* (10.2)
10.2 - Agreement dated as of December 20, 1991 between the Registrant
and L'Air Liquide S.A. *1* (10.4)
* 10.3 - Lease dated as of March 4, 1996 for 400-2 Totten Pond Road,
Waltham, Massachusetts.
10.4 - Lease dated as of July, 1993 for Two University Office Park,
Waltham, Massachusetts. #2# (10.8)
10.5 - Lease dated as of June 29, 1992 between the Greater Fall River
Development Corporation and the Registrant for the property
located at 421 Current Road, Fall River, Massachusetts. *1*
(10.6)
10.6 - Strategic Alliance and Investment Agreement dated as of May 3,
1993 between the Registrant and Am-Re Services, Inc. #1# (19(a))
10.7 - Environmental Impairment Insurance Common Stock Warrant issued by
the Registrant to Am-Re Services, Inc. #1# (19(b))
10.8 - Project Financing Common Stock Warrant issued by the Registrant
to Am-Re Services, Inc. #1# (19(c))
10.9 - Registration Rights Agreement dated as of May 3, 1993 among the
Registrant, Am-Re Services, Inc. and American Reinsurance
Company. #1# (19(d))
u 10.10 - Asset Purchase Agreement dated as of July 7, 1992 between the
Registrant and IPS Interproject Service AB and IPS Interproject
Processteknik AB. *2* (10.8)
10.11 - Technology Assignment Agreement dated as of May 31, 1990 between
the Registrant and Christopher J. Nagel and Robert D. Bach, as
clarified by the Clarification Agreement dated as of May 31, 1990
and as amended by the Amendment to Technology Assignment
Agreement dated as of October 12, 1990. *1* (10.9)
- - 10.12 - Employment Agreement dated as of June 30, 1990 between the
Registrant and William M. Haney, III. *1* (10.11)
- - 10.13 - Letter Agreement dated as of October 1, 1991 from the Registrant
to William M. Haney, III regarding employment. *1* (10.12)
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<PAGE> 17
- - 10.14 - Employment Agreement dated as of May, 1993 between the Registrant
and Eugene Berman. *4* (10.16)
- - 10.15 - Registrant's Amended and Restated 1989 Long Term Incentive
Compensation Plan, as amended effective March 2, 1995.
- - 10.16 - Registrant's 1993 Employee Stock Purchase Plan. *3* (28.2)
- - 10.17 - Registrant's 1992 Restricted Common Stock Award Plan. *1* (10.14)
10.18 - Form of Employee Non-Disclosure, Development and Non-Competition
Agreement of the Registrant. *1* (10.16)
10.19 - Loan Agreement dated February 4, 1993 between the Registrant and
Jobs for Fall River, Inc. *1* (10.18)
10.20 - $1,800,000 Promissory Note, dated February 4, 1993, made by the
Registrant in favor of Jobs for Fall River, Inc. *1* (10.19)
10.21 - $50,000 Promissory Note, dated February 4, 1993, made by the
Registrant in favor of Jobs for Fall River, Inc. *1* (10.20)
10.22 - $150,000 Promissory Note, dated February 4, 1993, made by the
Registrant in favor of Jobs for Fall River, Inc. *1* (10.21)
10.23 - Security Agreement dated February 4, 1993 between the Registrant
and Jobs for Fall River, Inc. *1* (10.22)
10.24 - Letter Agreement dated February 4, 1993 between the Registrant
and Jobs for Fall River, Inc. regarding security for loan made by
Jobs for Fall River, Inc. to the Registrant. *1* (10.23)
10.25 - Contract No. DE-AC21-9MC30171 dated September 30, 1993 between
the Registrant and the United States Department of Energy,
Morgantown Energy Technology Center. *4* (10.31)
v 10.26 - Modification to Contract No. DE-AC21-9MC30171 dated March 24,
1994 between the Registrant and the United States Department of
Energy, Morgantown Energy Technology Center. #3# (10.32)
10.27 - First Amendment to Lease, dated September 21, 1994, between the
Registrant and Connecticut General Life Insurance Company. #5#
(10.1)
10.28 - Lease dated as of July 1, 1994 by and between the Registrant and
the Greater Fall River Development Corporation. #5# (10.2)
w 10.29 - Master Agreement For Government Market Development and
Commercialization of CEP Technology, dated as of August 9, 1994,
between the Registrant and Martin Marietta Corporation. #5#
(10.3)
10.30 - Loan Agreement, dated as of August 1, 1994, between the
Registrant and the Massachusetts Industrial Finance Agency. #5#
(10.4)
10.31 - Underwriting Agreement dated as of August 26, 1994, between the
Massachusetts Industrial Finance Agency and CS First Boston
Corporation, and approved by the Registrant. #5# (10.5)
10.32 - Letter of representation dated as of August 26, 1994 from Molten
Metal Technology, Inc. to the Massachusetts Industrial Finance
Agency and CS First Boston Corporation. #5# (10.6)
x 10.33 - Master Services Agreement, dated November 30, 1994 between the
Registrant and Fluor Daniel Environmental Services, Inc. #6#
(10.43)
x 10.34 - Master Agreement, dated December 2, 1994 between the Registrant
and Scientific Ecology Group, Inc. #6# (10.44)
y 10.35 - Development Agreement dated as of May 3, 1995 between the
Registrant and Hoechst Celanese Chemical Group, Inc. ("HCC"). #7#
(10.1)
y 10.36 - Feedstock Supply Agreement dated as of May 3, 1995 between the
Registrant and HCC. #7# (10.2)
y 10.37 - Synthesis Gas Purchase and Sale Agreement dated as of May 3, 1995
between the Registrant and HCC. #7# (10.3)
*z10.38 - Commercial Mixed Waste Processing Agreement dated as of December
12, 1995 between the Registrant and M4 Environmental L.P.
* 11 - Computation of Primary, Fully Diluted and Supplementary Net
Income (Loss) Per Share
* 21 - Subsidiaries of the Registrant.
17
<PAGE> 18
+ 23.1 - Consent of Price Waterhouse LLP
+ 23.2 - Consent of Coopers & Lybrand L.L.P.
- ----------
* Originally filed with the Company's Form 10-K on April 1, 1996.
+ Filed herewith.
- - Management contract or compensatory plan filed pursuant to item 14(c) of
Form 10-K.
u An unexpired order granting confidential treatment to deleted portions of
Exhibits 10.1 and 10.10 was issued on February 9, 1993.
v An unexpired order granting confidential treatment to deleted portions of
Exhibit 10.26 was issued on May 11, 1994.
w An unexpired order granting confidential treatment to deleted portions of
Exhibit 10.29 was issued on January 6, 1995.
x An unexpired order granting confidential treatment to deleted portions of
Exhibits 10.33 and 10.34 was issued on May 22, 1995.
y An unexpired order granting confidential treatment to deleted portions of
Exhibits 10.35, 10.36 and 10.37 was issued on October 20, 1995.
z Confidential treatment has been requested for deleted portions of Exhibit
10.38.
*1* Incorporated by reference to the designated exhibit to the Registration
Statement on Form S-1 of the Registrant (Registration No. 33-56392) filed
on December 24, 1992.
*2* Incorporated by reference to the designated exhibit to Amendment No. 3 to
the Registration Statement on Form S-1 of the Registrant (Registration No.
33-56392) filed on February 8, 1993.
*3* Incorporated by reference to the designated exhibit to the Registration
Statement on Form S-8 of the Registrant (Registration No. 33-65688) filed
on July 6, 1993.
*4* Incorporated by reference to the designated exhibit to Amendment No. 1 to
the Registration Statement on Form S-1 of the Registrant (Registration No.
33-70210) filed on November 30, 1993.
#1# Incorporated by reference to the designated exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.
#2# Incorporated by reference to the designated exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
#3# Incorporated by reference to the designated exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993.
#4# Incorporated by reference to the designated exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
#5# Incorporated by reference to the designated exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
#6# Incorporated by reference to the designated exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
#7# Incorporated by reference to the designated exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(d) Financial Statement Schedules
1. The financial statements of M4 Environmental L.P. set forth in the list
below are filed as part of this report on pages F-19 through F-29.
Report of Independent Accountants
Balance Sheet at December 31, 1995 and 1994
Statements of Operations for the period from inception (August 8,
1994) through December 31, 1995 and at December 31, 1995 and 1994
Statements of Changes in Partners' Capital for the period from
inception (August 8, 1994) through December 31, 1995 and at
December 31, 1995 and 1994
Statements of Cash Flows for the period from inception (August 8,
1994) through December 31, 1995 and at December 31, 1995 and 1994
Notes to Financial Statements
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment to its Annual Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
MOLTEN METAL TECHNOLOGY, INC.
By: /s/ Benjamin T. Downs
----------------------------------------------------
Benjamin T. Downs
Executive Vice President and Chief Financial Officer
Date: November 18, 1996
19
<PAGE> 20
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Molten Metal Technology, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14 (a) (1) on page 19 present fairly, in all material respects, the
financial position of Molten Metal Technology, Inc. and its subsidiary at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
March 5, 1996
F-1
<PAGE> 21
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED BALANCE SHEET
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,644,856 $ 12,063,883
Short-term investments 79,631,394 88,132,592
Accounts receivable 1,917,858 1,938,197
Accounts receivable from affiliate 15,412,196 218,965
Prepaid expenses and other current assets 2,309,398 1,697,785
------------ ------------
Total current assets 105,915,702 104,051,422
Restricted cash and investments 7,432,817 9,871,450
Fixed assets, net 34,679,390 18,120,231
Intangible assets, net 3,501,680 2,402,009
Other assets 1,806,412 1,096,412
------------ ------------
$153,336,001 $135,541,524
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 195,043 $ 480,225
Accounts payable 9,827,490 1,656,693
Accrued expenses 1,713,557 1,330,445
Accrued interest 789,455 805,838
Deferred revenue from affiliate 4,083,334 4,583,333
------------ ------------
Total current liabilities 16,608,879 8,856,534
------------ ------------
Long-term debt 22,883,962 23,075,147
------------ ------------
Due to related parties 1,474,586 1,474,586
------------ ------------
Deferred income from affiliate 2,459,918 --
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, 3,000 shares authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value, 40,000,000 shares authorized; shares
issued and outstanding: 22,746,854 at December 31, 1995 and
22,165,963 at December 31, 1994 227,469 221,660
Additional paid-in capital 146,641,721 141,309,037
Valuation allowance for short-term investments (311,163) (2,328,784)
Accumulated deficit (36,638,947) (36,993,736)
------------ ------------
109,919,080 102,208,177
Less: Deferred compensation (10,424) (72,920)
------------ ------------
Total stockholders' equity 109,908,656 102,135,257
------------ ------------
Commitments and contingencies (Notes 4, 5 and 13)
$153,336,001 $135,541,524
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 22
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue:
Service fees $13,613,416 $ 11,263,197 $ 4,721,953
Service and construction fees from affiliate 21,567,982 218,965 --
License fees from affiliate 9,000,000 2,916,667 --
----------- ------------ ------------
44,181,398 14,398,829 4,721,953
----------- ------------ ------------
Operating expenses:
Cost of revenue - service 13,699,110 10,838,198 2,205,316
Cost of revenue - service and construction from affiliate 21,202,794 218,965 --
Research and development 10,986,234 14,417,327 10,837,484
Selling, general and administrative 2,877,371 7,132,256 5,661,953
----------- ------------ ------------
48,765,509 32,606,746 18,704,753
----------- ------------ ------------
Loss from operations (4,584,111) (18,207,917) (13,982,800)
----------- ------------ ------------
Other income (expense):
Interest income 5,559,690 4,376,403 1,861,077
Interest expense (1,455,084) (737,741) (160,233)
Equity income from affiliate 834,294 -- --
----------- ------------ ------------
4,938,900 3,638,662 1,700,844
----------- ------------ ------------
Net income (loss) $ 354,789 $(14,569,255) $(12,281,956)
=========== ============ ============
Net income (loss) per share $ 0.01 $ (0.67) $ (0.69)
=========== ============ ============
Weighted average common
shares outstanding 24,710,423 21,904,213 17,811,830
=========== ============ ============
Supplementary net loss per share $ (0.67)
============
Supplementary weighted average
common shares outstanding 18,293,320
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 23
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------- -----------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 7,272,727 $ 72,727 10,794,972 $107,950
Issuance of Series C convertible
preferred stock 4,310,582 43,106
Issuance of common stock pursuant
to initial public offering 3,450,000 34,500
Conversion of preferred stock into
common stock (11,583,309) (115,833) 4,050,468 40,504
Issuance of common stock 438,885 4,389
Issuance of common stock pursuant
to subsequent public offering 2,909,021 29,090
Issuance of stock pursuant to
exercise of options 97,581 976
Compensation expense related to
common stock option
Net loss
----------- --------- ---------- --------
Balance at December 31, 1993 -- -- 21,740,927 217,409
Issuance of common stock 148,719 1,488
Issuance of stock pursuant to
exercise of options 276,317 2,763
Compensation expense related to
common stock option
Valuation allowance for
short-term investments
Net loss
----------- --------- ---------- --------
Balance at December 31, 1994 -- -- 22,165,963 221,660
Issuance of common stock 139,098 1,391
Issuance of stock pursuant to
exercise of options 424,793 4,248
Issuance of stock pursuant to
employee stock purchase plan 17,000 170
Compensation expense related to
common stock options
Valuation allowance for
short-term investments
Net income
----------- --------- ---------- --------
Balance at December 31, 1995 -- $ -- 22,746,854 $227,469
=========== ========= ========== ========
<CAPTION>
ADDITIONAL TOTAL
PAID-IN VALUATION ACCUMULATED DEFERRED STOCKHOLDERS'
CAPITAL ALLOWANCE DEFICIT COMPENSATION EQUITY
------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 15,428,118 $ -- $(10,142,525) $(201,591) $ 5,264,679
Issuance of Series C convertible
preferred stock 14,209,810 14,252,916
Issuance of common stock pursuant
to initial public offering 44,049,187 44,083,687
Conversion of preferred stock into
common stock 75,329 --
Issuance of common stock 4,995,611 5,000,000
Issuance of common stock pursuant
to subsequent public offering 59,619,468 59,648,558
Issuance of stock pursuant to
exercise of options 301,948 302,924
Compensation expense related to 62,500 62,500
common stock option
Net loss (12,281,956) (12,281,956)
------------ ----------- ------------ --------- ------------
Balance at December 31, 1993 138,679,471 -- (22,424,481) (139,091) 116,333,308
Issuance of common stock 1,998,067 1,999,555
Issuance of stock pursuant to
exercise of options 631,499 634,262
Compensation expense related to
common stock option 66,171 66,171
Valuation allowance for
short-term investments (2,328,784) (2,328,784)
Net loss (14,569,255) (14,569,255)
------------ ----------- ------------ --------- ------------
Balance at December 31, 1994 141,309,037 (2,328,784) (36,993,736) (72,920) 102,135,257
Issuance of common stock 3,199,056 3,200,447
Issuance of stock pursuant to
exercise of options 1,785,843 1,790,091
Issuance of stock pursuant to
employee stock purchase plan 306,850 307,020
Compensation expense related to
common stock options 40,935 62,496 103,431
Valuation allowance for
short-term investments 2,017,621 2,017,621
Net income 354,789 354,789
------------ ----------- ------------ --------- ------------
Balance at December 31, 1995 $146,641,721 $ (311,163) $(36,638,947) $ (10,424) $109,908,656
============ =========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 24
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 354,789 $(14,569,255) $(12,281,956)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,874,191 3,694,839 1,702,748
Equity income from affiliate (834,294) -- --
Compensation expense related to common stock options 103,431 66,171 62,500
Decrease (increase) in accounts receivable 20,339 (220,818) (1,717,379)
Increase in accounts receivable from affiliate (15,193,231) (218,965) --
Increase in prepaid expenses and other current assets (611,613) (602,581) (805,717)
Decrease (increase) in other assets 74,009 399,500 (16,000)
Increase (decrease) in accounts payable 11,371,244 426,519 (28,996)
Increase in accrued expenses 383,112 774,900 333,435
Increase (decrease) in accrued interest (16,383) 733,259 67,565
Increase (decrease) in deferred revenue from affiliate (499,999) 4,583,333 (1,900,000)
Increase in deferred income from affiliate 2,459,918 -- --
----------- ------------ ------------
Net cash provided by (used in) operating activities 2,485,513 (4,933,098) (14,583,800)
----------- ------------ ------------
Cash flows from investing activities:
Expenditures for fixed assets (21,114,446) (7,518,420) (6,992,215)
Purchase of intangible assets (1,368,290) (644,630) (1,073,505)
Redemption (purchase) of short-term investments, net 10,518,819 (18,574,339) (69,978,279)
Decrease (increase) in restricted cash and investments 2,438,633 (9,285,850) (275,000)
----------- ------------ ------------
Net cash used in investing activities (9,525,284) (36,023,239) (78,318,999)
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuances of preferred stock, net -- -- 14,252,916
Proceeds from issuances of common stock, net 2,097,111 634,262 109,035,169
Proceeds from issuance of long-term debt, net -- 20,022,629 1,944,000
Principal repayments of long-term debt (476,367) (172,671) (118,638)
----------- ------------ ------------
Net cash provided by financing activities 1,620,744 20,484,220 125,113,447
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents (5,419,027) (20,472,117) 32,210,648
Cash and cash equivalents at beginning of year 12,063,883 32,536,000 325,352
----------- ------------ ------------
Cash and cash equivalents at end of year $ 6,644,856 $ 12,063,883 $ 32,536,000
=========== ============ ============
Additional disclosure of non-cash investing and financing activities:
Purchase of fixed assets under capital leases $ -- $ 453,555 $ --
=========== ============ ============
Issuance of common stock in exchange for engineering services $ 3,200,447 $ 1,999,555 $ --
=========== ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,759,770 $ 182,544 $ 92,668
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 25
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS
Molten Metal Technology, Inc. (the "Company") is an environmental technology
company commercializing pollution prevention and waste recycling methods that
are broadly applicable to a wide variety of hazardous, non-hazardous and
radioactive wastes. The Company developed its core technology, Catalytic
Extraction Processing ("CEP"), to dissolve waste compounds to their constituent
elements in a molten metal bath and reconfigure the elements into useful raw
materials. The Company has developed a number of CEP applications to address
specific waste problems and recently started up its first commercial facilities.
Revenue to date consists of fees charged for the engineering and construction of
CEP systems, for the performance of Technical Development Programs ("TDPs") and
from license fees. TDPs provide a customer with the opportunity to evaluate the
performance of CEP on a specific waste stream prior to commitment for a
full-scale CEP system.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, MMT Federal Holdings Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made for consistent presentation.
Use of Estimates
The preparation of 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 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 these estimates.
Cash Equivalents and Short-term Investments
The Company considers all investments purchased with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist of
investments in money market funds, U.S. treasury bills and high grade commercial
paper. Accordingly, these investments are subject to minimal credit and market
risk. At December 31, 1995 and 1994, all of the Company's cash equivalents are
classified as held to maturity and all costs approximate fair value.
Short-term investments consist of high grade commercial paper, U.S. government
securities and commercial bonds with original maturities of greater than three
months and mutual funds that invest in government securities. At December 31,
1995 and 1994, all of the Company's short-term investments are classified as
available-for-sale. Securities under this classification are recorded at fair
market value and unrealized gains and losses are recorded as part of
stockholders' equity. The following table summarizes short-term investments as
of December 31, 1995:
F-6
<PAGE> 26
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Amortized Cost Unrealized Losses Market Value
-------------- ----------------- ------------
<S> <C> <C> <C>
U.S. government securities
(Maturities less than 3 years) $37,735,706 $(214,553) $37,521,153
Commercial paper and corporate bonds
(Maturities less than 3 years) 42,206,851 (96,610) 42,110,241
----------- --------- -----------
$79,942,557 $(311,163) $79,631,394
=========== ========== ===========
</TABLE>
<TABLE>
The following table summarizes short-term investments as of December 31, 1994:
<CAPTION>
Amortized Cost Unrealized Losses Market Value
-------------- ----------------- ------------
<S> <C> <C> <C>
U.S. government securities
(Maturities less than 3 years) $49,212,579 $(1,321,891) $47,890,688
Corporate bonds
(Maturities less than 3 years) 41,248,797 (1,006,893) 40,241,904
----------- ----------- -----------
$90,461,376 $(2,328,784) $88,132,592
=========== ============ ===========
</TABLE>
The proceeds from sales of available-for-sale securities during the years ended
December 31, 1995 and 1994 were approximately $23 million and $2 million,
respectively. Gross realized gains or losses on these sales were immaterial.
Restricted Cash and Investments
Restricted cash and investments include certificates of deposit, money market
funds, treasury bills, commercial paper and U.S. government bonds that mature in
less than one year. At December 31, 1995 and 1994, the Company's restricted cash
and investments are classified as held-to-maturity and are recorded at amortized
cost which approximates fair value. At December 31, 1995 and 1994, the balances
in restricted cash and investments consist of $6,847,217 and $9,285,850,
respectively, held in trust funds required in connection with the issuance of
tax-exempt bonds (Note 5) and $585,600 required as security for letters of
credit (Notes 4 and 5).
Revenue Recognition
Revenue from TDPs and engineering and construction services is recognized as
services are rendered. Revenue from fixed fee contracts is recognized on a
percentage of completion basis, based on contract costs incurred to date
compared with total estimated contract costs. Revenue from license fees is
recognized when the Company becomes contractually entitled to receipt of the
fees and upon fulfillment of any significant obligations. Revenue under
cost-sharing contracts with the U.S. government is recorded as costs are
incurred and fees are earned. Payments received in excess of amounts recognized
as revenue are recorded as deferred revenue.
Accounts Receivable
Accounts receivable consist of amounts due to the Company under commercial and
government contracts. At December 31, 1995 and 1994, the balances include
$1,628,227 and $1,938,197 (of which $1,838,197 was unbilled at December 31,
1994), respectively, due from cost-sharing arrangements with the U.S.
government. Unbilled amounts represent the difference between revenue recognized
for financial reporting purposes and amounts contractually permitted to be
billed to the U.S. government as of December 31, 1994. These amounts became
billable in 1995 upon receipt of a unilateral change order from the U.S.
government.
F-7
<PAGE> 27
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization are provided
using the straight-line method based on estimated useful lives or, in the case
of leasehold improvements, over the lesser of the useful lives or the lease
terms. Maintenance and repair expenditures are charged to expense as incurred.
Intangible Assets
Intangible assets include costs associated with obtaining patents, trademarks,
permits and engineering drawings. These costs are amortized using the
straight-line method over the estimated useful lives or, in the case of patents,
trademarks and permits, over the shorter of the legal terms or the estimated
economic lives.
Impairment of Long-Lived Assets
The Company periodically assesses whether any events or changes in circumstances
have occurred that would indicate that the carrying amount of a long-lived asset
may not be recoverable. If such an event or change in circumstance occurs, the
Company will evaluate whether the carrying amount of such assets is recoverable
by comparing the net book value of the assets to estimated future undiscounted
cash flows, excluding interest charges, attributable to such assets. If it is
determined that the carrying amount is not recoverable, the Company will
recognize an impairment loss equal to the excess of the carrying amount of the
asset over the estimated future cash flows attributable to such assets.
Income Taxes
The Company utilizes the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under this method, deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Net Income (Loss) Per Share and Supplementary Net Loss Per Share
Net income (loss) per share is determined by dividing net income (loss) by the
weighted average number of common and common equivalent shares outstanding
during the period. Common share equivalents consist of common stock which may be
issuable upon exercise of outstanding stock options and warrants (Notes 7, 9 and
13). Common share equivalents have been excluded from weighted average number of
common shares in loss periods since their effect is anti-dilutive.
It was a condition of the Company's initial public offering that all the
preferred stock be converted into common stock. The net loss per share
information for the year ended December 31, 1993 has been calculated to reflect
the conversion of preferred stock as of its actual date of conversion.
Supplementary net loss per share information for the year ended December 31,
1993 is presented to reflect the conversion of preferred stock as if it occurred
on the later of the first day of the period or the date of issuance of the
preferred stock .
F-8
<PAGE> 28
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--FIXED ASSETS
<TABLE>
Fixed assets consist of the following:
<CAPTION>
December 31,
Estimated useful -------------------------------
life (years) 1995 1994
------------ ---- ----
<S> <C> <C> <C>
CEP units 5-7 $13,834,177 $12,464,231
Leasehold improvements 3-10 5,366,501 5,216,523
Furniture and equipment 5 5,385,923 3,823,668
Furniture and equipment held under capital leases 5 453,555 453,555
Machinery and equipment 5 1,336,442 1,125,933
Construction in progress - 17,769,631 64,452
----------- -----------
44,146,229 23,148,362
Less--Accumulated depreciation and amortization (9,466,839) (5,028,131)
----------- -----------
$34,679,390 $18,120,231
=========== ===========
</TABLE>
Costs of the construction of certain long-term assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
The Company capitalized interest costs of $482,149 in 1995.
Depreciation and amortization expense for the years ended December 31, 1995,
1994 and 1993 was approximately $4,555,000, $3,362,000 and $1,405,000,
respectively. Depreciation expense relating to furniture and equipment held
under capital leases for the years ended December 31, 1995 and 1994 was
approximately $91,000 and $45,000, respectively.
NOTE 4--INTANGIBLE ASSETS
<TABLE>
Intangible assets consist of the following:
<CAPTION>
Estimated December 31,
useful life --------------------------
(years) 1995 1994
------- ---- ----
<S> <C> <C> <C>
Patents and trademarks 10-17 $2,480,603 $1,935,667
Engineering drawings 1-2 69,178 311,889
Permits 1-10 1,455,589 632,236
---------- ----------
4,005,370 2,879,792
Less--Accumulated amortization (503,690) (477,783)
---------- ----------
$3,501,680 $2,402,009
========== ==========
</TABLE>
During 1993, the Company was granted a recycling permit for its research,
development, testing and demonstration facility in Fall River, Massachusetts
(the "Fall River Facility"). In conjunction with obtaining this permit, the
Company obtained a $100,000 letter of credit to cover potential environmental
liability, if any, incurred upon the closure of the Fall River Facility.
F-9
<PAGE> 29
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--LONG-TERM DEBT
<TABLE>
Long-term debt consists of the following:
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Tax-exempt bonds $21,000,000 $21,000,000
Loan agreements 1,827,333 1,867,333
Notes payable 285,182
-
Capital lease obligations, including current portion
portion of $155,043 (Note 13)
251,672 402,857
----------- -----------
23,079,005 23,555,372
Less--Current portion (195,043) (480,225)
----------- -----------
$22,883,962 $23,075,147
=========== ===========
</TABLE>
The fair value of long-term-debt, including current portion, approximates the
carrying value at December 31, 1995 and 1994. Rates currently available to the
Company for debt with similar terms are used to estimate fair value of existing
debt.
Tax-Exempt Bonds
In 1994, the Company completed a tax-exempt bond financing in connection with
its Fall River Facility. Pursuant to the financing, the Company entered into a
loan agreement with the Massachusetts Industrial Finance Agency which issued
$21,000,000 aggregate principal amount of its Solid Waste Disposal Facility
Revenue Bonds. The bonds are payable in annual sinking fund installments
beginning in 1998 and ending in 2014 and bear interest at 8.25% per annum
payable semi-annually. The loan agreement requires compliance with certain
covenants which include restrictions on future indebtedness, profitability and
consolidations or mergers. In connection with the issuance, the Company has
received approximately $14,000,000 in cash for qualified expenditures through
December 31, 1995 and approximately $7,000,000 in restricted cash and short-term
investments that will be used to fund future qualified expenditures. Unamortized
debt issuance costs at December 31, 1995 and 1994 were $906,134 and $956,419,
respectively. These costs are being amortized over the term of the debt using
the effective interest rate method.
Loan Agreements
In 1993, the Company borrowed $1,944,000 from the Town of Fall River,
Massachusetts pursuant to certain loan agreements. The loans bear interest at an
effective annual rate of 8.5%, payable in monthly or semi-annual installments.
The loans are due in August 1997 and are secured by certain equipment and a
letter of credit in the amount of $210,000 (Note 2).
Notes Payable
In 1992, the Company purchased certain intangible assets, including patented
technology to be used in the Company's CEP technology, from a company for
$535,000, of which $259,000 was paid at the closing with the balance payable by
a non-interest bearing note which was paid in three annual installments ending
in June 1995. The related discount on the note payable of approximately $30,000
was amortized using the effective interest method over the term of the note. The
agreement also provides for a contingent payment of $500,000 (Note 13).
In 1993, the Company purchased additional patented technology for $325,000, of
which $100,000 was
F-10
<PAGE> 30
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
paid at the closing with the balance payable by a non-interest bearing note that
was paid in 1995. In connection with amounts that were due under the asset
purchase and consulting agreements, the Company obtained a $275,000 letter of
credit which expired in January 1996 (Note 2).
Maturities of Long-Term Debt
<TABLE>
The amount of long-term debt, including sinking fund installment requirements
and excluding capital lease obligations, maturing in the next five years is as
follows:
<S> <C>
1996 $ 40,000
1997 1,784,000
1998 603,333
1999 700,000
2000 700,000
</TABLE>
Line of Credit
In 1994, the Company entered into a revolving line of credit agreement with a
bank. The agreement provides for a maximum of $1.5 million to be borrowed and
repaid upon demand. Interest accrues at the bank's prime rate plus .50% and is
payable monthly. As of December 31, 1995, the Company has not borrowed against
the line of credit.
NOTE 6--RELATED PARTY TRANSACTIONS
Technology Purchase Agreement
During 1990, the Company purchased the rights to patented technologies related
to CEP from an employee and a member of the Company's Technical Advisory Board
for $1,500,000. The purchased technology was expensed as research and
development in process and the Company recorded a corresponding liability for
$1,500,000. The amount is payable in annual payments of 25% of the Company's
pre-tax profits, as defined; however, the Company may elect to accelerate the
payments.
NOTE 7--PREFERRED STOCK
Preferred stock may be issued at the discretion of the Board of Directors of the
Company (without stockholder approval) with such designations, rights and
preferences as the Board of Directors may determine from time to time. The
preferred stock may have dividend, liquidation, conversion, voting or other
rights which may be more expansive than the rights of the holders of the common
stock.
In connection with the issuance of preferred stock in 1993, the Company issued a
warrant to the placement agent to purchase up to 129,317 shares of Series C
convertible preferred stock at $3.52 per share. This warrant converted into a
warrant to purchase up to 43,105 shares of common stock at $10.56 per share upon
completion of the Company's initial public offering. This warrant expires in
January 1998.
NOTE 8--RETIREMENT SAVINGS PLAN
The Company has a retirement savings plan under Section 401(k) of the Internal
Revenue Code. This plan covers substantially all employees who meet minimum age
and service requirements and allows participants to defer a portion of their
annual compensation on a pre-tax basis. In addition, Company contributions to
the plan may be made at the discretion of the Board of Directors. No Company
contributions were authorized during the years ended December 31, 1995 , 1994
and 1993.
F-11
<PAGE> 31
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--STOCK OPTIONS AND STOCK AWARD PLAN
Nonqualified Stock Options
<TABLE>
Prior to 1995, the Company granted nonqualified stock options to members of its
Technical Advisory Board. Transactions relating to these options for the two
years ended December 31, 1995 are summarized as follows:
<CAPTION>
Number Price range
of shares per share
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1992 104,328 $3.00-$13.25
Exercised -- --
Outstanding at December 31, 1993 104,328 $3.00-$13.25
Exercised (21,499) $ 3.00
Outstanding at December 31, 1994 82,829 $3.00-$13.25
Exercised (8,416) $ 3.00
-------
Outstanding at December 31, 1995 74,413 $3.00-$13.25
=======
</TABLE>
At December 31, 1995 and 1994, options to purchase 71,496 and 68,245 shares,
respectively, were exercisable.
1989 Long-Term Incentive Plan
In 1989, the Company adopted the 1989 Long Term Incentive Plan (the "Plan"). The
Plan provides for the granting of incentive stock options, nonqualified stock
options, restricted stock and stock appreciation rights to employees, directors
and consultants of the Company. The Plan allows for the issuance of up to
8,299,383 shares of common stock through November 1999. The Board of Directors
determines the term of each option, option price, number of shares for which
each option is granted and the rate at which each option is exercisable. The
exercise price of incentive stock options shall not be less than 100% of the
fair market value of the common stock at the date of grant (110% for options
granted to holders of more than 10% of the voting stock of the Company).
During 1992, the Company granted options to a Director to purchase 208,333
shares of common stock at $0.60 per share under the Plan. The Company has
recorded deferred compensation expense based on the difference between the fair
value of the common stock, as determined by the Board of Directors on the date
of grant, and the exercise price. Deferred compensation related to the option is
being amortized over the vesting period.
In 1993, the Board of Directors of the Company amended the Plan to provide for
the automatic grant of stock options (the "Automatic Grants") to directors who
are not officers or employees of the Company ("Non-Employee Directors"). Each
Automatic Grant will be made to any Non-Employee Director who is elected or
reelected to the Board of Directors, will be for 25,000 shares of common stock,
will vest over 20 quarters and will be exercisable at the fair market value as
of the date of the Automatic Grant. Non-Employee Directors may not receive more
than one Automatic Grant pursuant to the Plan. Certain directors are not
eligible under the Plan to receive any Automatic Grants.
F-12
<PAGE> 32
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
A summary of option activity under the Plan is as follows:
<CAPTION>
Number Price range
of shares per share
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1992 4,741,190 $ 0.03-$ 6.90
Granted 556,730 $ 0.60-$26.50
Exercised (4,549) $ 0.60-$19.50
Canceled (59,314) $ 0.60-$20.50
Outstanding at December 31, 1993 5,234,057 $ 0.03-$26.50
Granted 923,169 $16.63-$29.00
Exercised (233,000) $ 0.03-$19.50
Canceled (101,162) $ 0.60-$28.68
Outstanding at December 31, 1994 5,823,064 $ 0.03-$29.00
Granted 591,886 $14.13-$38.50
Exercised (416,376) $ 0.03-$26.00
Canceled (179,193) $ 3.00-$27.75
---------
Outstanding at December 31, 1995 5,819,381 $ 0.03-$38.50
=========
</TABLE>
At December 31, 1995 and 1994, options to purchase 4,098,419 and 2,635,707
shares, respectively, were exercisable and options for 1,736,077 and 648,770
shares, respectively, were available for future grant under the Plan.
1992 Restricted Common Stock Award Plan
In 1992, the Company adopted the 1992 Restricted Common Stock Award Plan (the
"1992 Plan") which provides for the award of common stock to employees. The 1992
Plan provides for the issuance of up to 4,500 shares of common stock through
December 2002. The Board of Directors determines the number of shares awarded
and the vesting period. In December 1992, the Company granted awards totaling
4,355 shares of common stock pursuant to this plan. During 1993, 134 of these
shares were canceled and the remaining 4,221 shares became vested.
1993 Employee Stock Purchase Plan
In 1993, the Company adopted the 1993 Employee Stock Purchase Plan (the "1993
Plan"). Under the 1993 Plan, 500,000 shares of common stock are reserved for
issuance to eligible employees at a purchase price of 85% of the lower of the
closing price at the beginning or end of the one year option period. Stock
acquired through the 1993 Plan is subject to restrictions on transferability for
one year after issuance. Payment for the shares to be purchased is made through
payroll deductions, which may not exceed 15% of an employee's base compensation.
In addition, no employee may purchase shares in any one year having a market
value (determined at the beginning of the one year option period) greater than
$25,000. Pursuant to the 1993 Plan, 17,000 shares were purchased at $18.06 per
share during 1995 and 21,818 shares were purchased at $14.45 during 1994.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS 123"). The Company intends to adopt SFAS 123 through disclosure only in
1996.
NOTE 10--MAJOR CUSTOMERS
F-13
<PAGE> 33
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 1995, revenue from two different customers
totaled approximately $30,568,000 and $13,162,000, or approximately 69% and 30%
of revenue, respectively.
During the year ended December 31, 1994, revenue from two different customers
totaled approximately $10,838,000 and $3,136,000, or approximately 75% and 22%
of revenue, respectively.
During the year ended December 31, 1993, revenue from four different customers
totaled approximately $2,200,000, $1,228,000, $600,000 and $455,000, or
approximately 47%, 26%, 13% and 10% of revenue, respectively.
NOTE 11--INCOME TAXES
<TABLE>
Components of deferred taxes consist of the following:
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Assets:
Net operating loss and tax credit carryforwards $ 18,235,000 $ 16,413,000
Accrued expenses 405,000 92,000
Deferred compensation 121,000 96,000
Deferred revenue 2,617,000 1,833,000
Due to related parties
590,000 590,000
------------ ------------
Gross deferred tax asset 21,968,000 19,024,000
Deferred tax asset valuation allowance (20,972,000) (17,986,000)
------------ ------------
996,000 1,038,000
Liabilities:
Depreciation and amortization (996,000) (1,038,000)
------------ ------------
-- --
============ ============
</TABLE>
The Company has provided a full valuation allowance for deferred tax assets
since the realization of these future benefits cannot be reasonably assured as
of the end of each related year. The amount of the deferred tax asset considered
realizable is subject to change based on estimates of future taxable income
during the carryforward period. If the Company achieves sustained profitability,
these deferred tax assets would be available to offset future income taxes,
subject to potential limitation relating to ownership changes as discussed
below. The Company will assess the need for the valuation allowance at each
balance sheet date based on all available evidence.
<TABLE>
At December 31, 1995, the Company has net operating loss carryforwards available
to reduce taxable income and research and development tax credit carryforwards
available to reduce future tax liabilities which expire as follows:
<CAPTION>
Research and
Year of Net operating development tax
expiration loss carryforwards credit carryforwards
---------- ------------------ --------------------
<S> <C> <C>
2005 $ 349,000 $ 4,000
2006 103,000 20,000
2007 6,288,000 150,000
2008 16,569,000 355,000
2009 15,123,000 396,000
2010 4,059,000 314,000
----------- ----------
Total $42,491,000 $1,239,000
=========== ==========
</TABLE>
F-14
<PAGE> 34
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A portion of the net operating loss carryforward totaling approximately
$14,235,000, relating to deductions for incentive stock option disqualifying
dispositions and exercises of non-qualified stock options, will be credited to
additional paid-in capital upon realization. Ownership changes, as defined in
the Internal Revenue Code, resulting from the issuances of stock may limit the
amount of net operating loss and tax credit carryforwards that can be utilized
annually to offset future taxable income or tax liability. The amount of the
annual limitation is determined based upon the Company's value immediately prior
to the ownership change. Subsequent significant ownership changes could further
limit the utilization of these carryforwards in future years.
NOTE 12--INVESTMENT IN JOINT VENTURE
In 1994, the Company entered into a series of related agreements with Martin
Marietta Corporation ("MMC"). In 1995, MMC merged into Lockheed Martin
Corporation ("LMC") with LMC as the surviving corporation. Pursuant to these
agreements (the "LMC Agreements"), the Company and LMC formed a Delaware limited
partnership, M4 Environmental L.P., ("M4" or "affiliate") to commercialize CEP
to service the environmental remediation, waste management, decontamination,
decommissioning, chemical and biological demilitarization, pollution prevention
and waste minimization needs of the U.S. Department of Defense, the U.S.
Department of Energy and the United States Enrichment Corporation (the
"Market"). The Company and LMC, through wholly-owned subsidiaries, each own a
49.5% limited partnership interest in M4 and a 50% interest in the corporation
acting as the 1% general partner in M4. The Company is accounting for its
investments in the limited partnership and the corporation acting as the general
partner using the equity method.
Pursuant to the LMC Agreements, LMC has agreed, through its wholly-owned
subsidiary (the "LMC Subsidiary"), to fund M4's operations through August 1,
1999, including license fees payable to the Company and any equity required in
order to obtain project financing for a CEP plant. However, this funding
obligation is limited to $20,000,000 in any fiscal year and $50,000,000 over the
life of M4 (including the license payments to the Company guaranteed by LMC, as
described below). In addition, LMC has agreed, through the LMC Subsidiary, to
provide guaranties of any project or third party financing obtained for the
development of CEP plants by M4. M4 will pay the LMC Subsidiary an annual fee in
the amount of 2% of the average amount of guaranteed debt outstanding. The LMC
Subsidiary may, during an annual period relating to M4's review of its business
plan, terminate its obligation to provide additional debt guaranties. If the LMC
Subsidiary terminates this obligation, the Company has the right to terminate
M4.
Pursuant to the LMC Agreements, the Company has granted M4 an exclusive license,
subject to certain exceptions, to use the CEP technology for the Market and to
sublicense the CEP technology to qualified third parties for use in the Market
for a period of 25 years. In 1995 and 1994, M4 paid the Company $6,500,000 and
$7,500,000, respectively, in license fees. Due to obligations of the Company
pursuant to the LMC Agreements, the Company is recognizing revenue and income on
the $6,500,000 and $7,500,000 license fees over the two year period beginning in
August 1994, the period over which those obligations will be fulfilled. During
1995 and 1994, the Company recognized approximately $7,000,000 and $2,917,000,
respectively, in revenue relating to the license fees. M4 is also obligated to
pay $2,000,000 in license fees upon the start-up of each of the first three CEP
plants developed by M4 or its sublicensees. At December 31, 1995, the first
$2,000,000 license fee for the start-up of a CEP plant was earned and is
included in accounts receivable from affiliate. All of the foregoing license
fees have been guaranteed by LMC. In addition, M4 will pay the Company an
ongoing royalty of 2% (or, in certain limited cases, 3.5%) of M4's revenues from
activities related to CEP, with the total amount paid in any year not to exceed
50% of M4's cash flow (generally defined as net income or loss plus
amortization, depreciation and other non-cash charges and after reasonable
reserves), with any unpaid royalty to be deferred until M4 has sufficient cash
flow.
F-15
<PAGE> 35
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
The Company has also agreed to provide research and development and certain
other technical services to M4 and its sublicensees and to sell certain CEP
systems and components to M4 and its sublicensees, at specified rates. During
1995 and 1994, the Company recognized revenue of approximately $21,568,000 and
$219,000, respectively, relating to such services and sales which consist of the
following:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Engineering and construction services $20,265,000 $ --
Research, development and consulting services 1,303,000 $219,000
----------- --------
$21,568,000 $219,000
=========== ========
</TABLE>
<TABLE>
During 1995 and 1994, the Company recognized cost of revenue of approximately
$21,203,000 and $219,000, respectively, relating to such services and sales
which consist of the following:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Engineering and construction services $19,873,000 $ --
Research, development and consulting services 1,330,000 $219,000
----------- -------
$21,203,000 $219,000
=========== ========
</TABLE>
For items that are capitalized by M4, the portion of the gross profit
representing the Company's ownership interest related to such sales has been
deferred and will be recognized over the period the related assets are
depreciated by M4. At December 31, 1995, approximately $2,460,000 is recorded as
deferred income relating to such sales and is included in cost of revenue from
affiliate.
<TABLE>
The Company accounts for its investment in M4 using the equity method and at
December 31, 1995, the balance of the investment in M4 is approximately $834,000
and is included in other assets. Under the M4 limited partnership agreement, the
Company and LMC share equally in M4's revenues and other income and all expenses
are allocated to LMC until the capital accounts of the Company and LMC are
equal. Thereafter, as long as the capital accounts of the Company and LMC are
equal, the Company and LMC will share equally in the profits or losses of M4.
During 1995, the Company recognized approximately $834,000 in equity income from
M4, reflecting the Company's share of revenues earned by M4. Condensed financial
information of M4 at December 31, 1995 and for the year then ended is summarized
below:
<S> <C>
Current assets $ 4,529,000
Non-current assets $ 41,009,000
Total liabilities $ 19,344,000
Partners' capital $ 26,194,000
Revenue $ 1,510,000
Net loss $(11,993,000)
</TABLE>
M4's term is until July 1, 2019. However, M4 may be terminated by LMC in 1998 in
the event certain technical goals are not met and by the Company in 1998 in the
event certain commercial goals are not met.
NOTE 13--COLLABORATIVE AGREEMENTS AND COMMITMENTS AND CONTINGENCIES
Agreement with the Electric Power Research Institute, Inc.
In July of 1995, the Company entered into an agreement with the Electric Power
Research Institute, Inc. ("EPRI"), a nonprofit organization dedicated to
fostering research and development of technologies that support the electric
power industry. Pursuant to the agreement, EPRI agreed to fund certain research
and
F-16
<PAGE> 36
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
development programs and to provide marketing and financing support for future
CEP projects. In exchange for the marketing and financing support, EPRI received
a warrant to purchase up to 100,000 shares of the Company's common stock at an
exercise price of $23.375 per share. The warrant will vest in increments if, as
a result of the agreement with EPRI, the Company closes a contract for a CEP
plant for which EPRI has provided minimum levels of funding and upon customer
acceptance of such plants. The warrant expires on July 7, 2015.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
57 Topic 5-K, an expense is to be recorded by the Company in the amount equal to
the aggregate difference between the exercise price of the warrant and the
market price of the common stock as of the dates the warrant vests. This
expense, if any, will be recognized as the warrant vests. The Company has not
recorded any expense related to these warrants through December 31, 1995.
Collaborative Relationship with Rollins Environmental Services, Inc.
In 1991, the Company entered into a joint development and commercialization
agreement with Rollins Environmental Services, Inc. ("Rollins"). The agreement
provides that the Company will analyze the application of CEP to specific
Rollins waste streams for fees based on the hours worked by the Company.
In 1992, the agreement was superseded. Under the revised terms, Rollins agreed
to pay the Company $50,000 per month for two years beginning September 1, 1992.
In consideration for these payments, the Company provided research and
development and other services to Rollins and Rollins obtained an option to
license the Company's technology for CEP systems at any of Rollins' three waste
processing facilities existing on September 1, 1992. If Rollins decides to
license a CEP system at any of these existing facilities, Rollins will be
entitled to set off against payments due to the Company all amounts paid under
the original and amended agreements, provided that in any year, no reduction
shall exceed 25% of the amounts payable by Rollins to the Company. Such right of
set off is conditioned on the commercialization and licensing of a CEP system at
one of Rollins' three facilities existing on September 1, 1992. Revenue of
$400,000 and $600,000 was recognized under the revised agreement during 1994 and
1993, respectively.
Development Services Agreement with Fluor Daniel Environmental Services, Inc.
In 1992, the Company entered into a Development Services Agreement with Fluor
Daniel Environmental Services, Inc. ("Fluor Daniel"), an affiliate of Fluor
Daniel, Inc., an international engineering and construction firm. Under the
terms of the agreement, Fluor Daniel provided $1.2 million in feasibility
studies, designs, cost estimation and other services in support of commercial
plant evaluations, designs, front-end engineering and other services for
potential CEP applications during 1992 and 1993. During 1994, Fluor Daniel
exercised its option to invest the $1.2 million in shares of common stock, par
value $.01 ("Common Stock") of the Company at an agreed upon price of $10.56 per
share. Also during 1994, Fluor Daniel and the Company extended the agreement for
up to five years. Pursuant to this agreement, Fluor Daniel provided an
additional $4 million in services to the Company during 1994 and 1995. In
consideration for such services, Fluor Daniel received additional Common Stock
of the Company at a price equal to the average market price of the stock in the
10 trading days prior to the end of each calendar quarter during which the
services were provided. In addition, during the term of the agreement, Fluor
Daniel shall be the primary provider of engineering, procurement, construction
and implementation services for CEP plants owned and operated by the Company and
shall be entitled to receive project fees based upon the cost of such services
for specific CEP facilities managed by Fluor Daniel. The Company will be
obligated to pay Fluor Daniel 2% of certain licensing fees and royalty payments
received by the Company during the term of the agreement as a result of the
licensing of CEP technology.
F-17
<PAGE> 37
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 1995, 1994 and 1993, Fluor Daniel provided
$2,542,000, $1,158,000, and $1,310,000, respectively, in services to the Company
under this agreement. During the years ended December 31, 1995 and 1994, Fluor
Daniel received 139,098 and 148,719 shares of Common Stock of the Company,
respectively, for payment of services performed under the agreement.
Sales Representative Agreement with Am-Re Services, Inc.
In 1991, the Company entered into a sales representative agreement with Am-Re
Managers, Inc., which was assigned to and assumed by Am-Re Services, Inc.
("Am-Re Services"). Pursuant to this agreement, the Company appointed Am-Re
Services as its non-exclusive sales representative for a three-year term in
return for consulting fees of $100,000 per month. In consideration for these
fees, the Company provided support efforts to Am-Re Services in marketing the
Company's technology. Because the Company received consulting fees and was also
obligated to pay Am-Re Services a commission upon the sale of a CEP system to a
third party, the Company recorded the payments received as deferred revenue.
In 1993, the Company entered into a set of related agreements with American
Reinsurance Company and Am-Re Services. The new agreements supersede the
original Sales Representative Agreement between the Company and Am-Re Services
and relieved the Company from any sales commission liability to Am-Re Services,
and relieved Am-Re Services of the obligation to pay future consulting fees to
the Company. In addition, the Company was obligated to perform certain services
to Am-Re Services through December 31, 1993. The Company recognized the
previously deferred revenue as the services were performed. During 1993,
$2,200,000 was recognized as revenue in the accompanying statement of
operations.
Also pursuant to the new agreements, American Reinsurance Company purchased
438,885 shares of unregistered common stock for $5 million. In addition, Am-Re
Services agreed to provide services to the Company relating to obtaining
environmental impairment liability insurance and project financing for the first
five commercial CEP facilities to be developed by the Company. In exchange for
providing these services, and subject to certain vesting requirements, Am-Re
Services was granted a warrant (the "Insurance Warrant") to purchase up to
125,000 shares of common stock at $12.25 per share and a second warrant (the
"Project Finance Warrant") to purchase up to 250,000 shares of common stock (of
which 200,000 shares may be purchased at $12.25 per share and 50,000 shares at
$18.37 per share). The Insurance Warrant vests according to a schedule based
upon the Company obtaining acceptable environmental impairment insurance for the
first five CEP facilities developed by the Company. The Project Finance Warrant
vests according to a schedule based upon the Company obtaining acceptable
project financing by or through Am-Re Services for the first five CEP plants
which are developed by the Company and require project financing. The Insurance
Warrant and the Project Finance Warrant expire in 2013. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin No. 57 Topic 5-K,
an expense is to be recorded by the Company in the amount equal to the aggregate
difference between the exercise price of the warrants and the market price of
the common stock as of the dates the warrants vest. This expense, if any, will
be recognized over the term of the environmental impairment insurance or project
financing that causes vesting of the applicable warrant. The Company has not
recorded any expense related to these warrants through December 31, 1995.
Collaborative Relationship with E.I. Du Pont de Nemours and Company
Pursuant to an agreement dated October 25, 1991, E.I. Du Pont de Nemours and
Company ("Du Pont") agreed to provide $1,500,000 to the Company for the design
and development of the Fall River Facility.
In consideration for the funding provided, Du Pont has received a right for
priority usage of the facility for the five-year period beginning in September
1993. The Company will receive consideration from Du Pont at market rates for
such priority usage. Subject to the terms of the agreement, if the Company gains
F-18
<PAGE> 38
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or has gained a commercial installation for a specified waste stream with a
right to receive royalties, tolling income or their equivalent by December 31,
1997, the Company will be obligated to repay the $1,500,000.
The obligation of the Company to repay Du Pont is conditioned on the
commercialization and sale of CEP systems for specified waste streams. In the
event that such CEP systems are not commercialized, the Company shall have no
obligation to repay Du Pont.
Contingent Payment Related to Purchase of Intangible Assets
Pursuant to an agreement to purchase certain intangible assets (Note 5), if the
Company constructs and operates, or licenses to a third party to construct and
operate, a coal gasification system that uses a molten metal bath as the
reaction medium, then after the first year of profitable commercial operation of
such system, the Company will pay $500,000 to the seller of the intangible
assets. Such payment will be required only if the plant is completed prior to
December 31, 1998.
Leases
<TABLE>
The Company leases equipment and office space under noncancelable operating
leases which expire on various dates through 2004. The Company also leases
certain fixed assets under noncancelable capital leases which expire on various
dates through 1997. Future minimum payments under these leases are as follows:
<CAPTION>
Operating Capital
Year Leases Leases
- ---- ------ ------
<S> <C> <C>
1996 $ 2,525,000 177,000
1997 2,916,000 118,000
1998 2,943,000 -
1999 2,351,000 -
2000 2,045,000 -
Thereafter 6,589,000 -
----------- --------
Total minimum lease payments $19,369,000 295,000
===========
Less--Amount representing interest (43,000)
--------
Present value of minimum lease payments $252,000
========
</TABLE>
Total rent expense under noncancelable operating leases was $1,389,000,
$1,022,000 and $515,000 during the years ended December 31, 1995, 1994 and 1993,
respectively. In March 1996, the Company entered into an operating lease for
additional office space. Amounts representing future minimum payments under the
lease are included above.
F-19
<PAGE> 39
M4 ENVIRONMENTAL L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
WITH
REPORT OF INDEPENDENT ACCOUNTANTS
F-20
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
M4 Environmental L.P.
We have audited the accompanying balance sheets of M4 Environmental L.P. (a
development stage enterprise) as of December 31, 1995 and 1994, and the related
statements of operations, changes in partners' capital, and cash flows for the
period from inception (August 8, 1994) through December 31, 1995 (cumulative),
the year ended December 31, 1995 and the period from inception through December
31, 1994. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of M4 Environmental L.P. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the period from inception (August 8, 1994) through December 31, 1995
(cumulative), the year ended December 31, 1995 and the period from inception
through December 31, 1994, in conformity with generally accepted accounting
principles.
Knoxville, Tennessee
February 23, 1996, except for the second paragraph of Note 8
as to which the date is March 15, 1996
F-21
<PAGE> 41
M4 ENVIRONMENTAL L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,260,257 $ 31,600
Prepaid expenses and other current assets 225,147 13,703
Due from related parties 43,887 250,747
----------- -----------
Total current assets 4,529,291 296,050
----------- -----------
Property, plant and equipment, net 26,894,764 429,152
----------- -----------
Technology rights 16,000,000 14,000,000
Less accumulated amortization (1,885,714) (466,666)
----------- -----------
Net technology rights 14,114,286 13,533,334
----------- -----------
Total assets $45,538,341 $14,258,536
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 2,941,481 $ 227,920
Other accrued expenses 1,299,146 124,480
Due to related party 15,103,621 6,719,000
----------- -----------
Total liabilities 19,344,248 7,071,400
Partners' capital 26,194,093 7,187,136
----------- -----------
Total liabilities and partners' capital $45,538,341 $14,258,536
=========== ===========
</TABLE>
F-22
<PAGE> 42
M4 ENVIRONMENTAL L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 8, 1994) THROUGH DECEMBER 31, 1995 (CUMULATIVE),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1994
<CAPTION>
CUMULATIVE 1995 1994
<S> <C> <C> <C>
Revenue $ 1,510,000 $ 1,510,000 $ --
Operating expenses:
General and administrative 7,444,408 6,116,959 1,327,449
Research and development 5,856,169 5,856,169 --
Depreciation and amortization 2,188,513 1,696,341 492,172
----------- ----------- ----------
Loss from operations 13,979,090 12,159,469 1,819,621
Other expense (income):
Other expense 2,260 2,260 --
Interest income (175,443) (168,686) (6,757)
----------- ----------- ----------
Net loss $13,805,907 $11,993,043 $1,812,864
=========== =========== ==========
</TABLE>
F-23
<PAGE> 43
M4 ENVIRONMENTAL L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FORTHE PERIOD FROM INCEPTION (AUGUST 8, 1994) THROUGH DECEMBER 31, 1995 (CUMULATIVE),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1994
<S> <C>
Lockheed Martin Corporation, a 49.5% limited partner (Note 3)
September 1, 1994 $ 7,573,500
September 7, 1994 950,000
December 21, 1994 400,000
M4 Environmental Management Inc.
September 1, 1994 76,500
Molten Metal Technology, Inc., a 49.5% limited partner (Note 3) -
------------
Total capital contributions 9,000,000
Net loss (1,812,864)
------------
Partners' capital, December 31, 1994 7,187,136
------------
Lockheed Martin Corporation, a 49.5% limited partnership (Note 3)
January 1, 1995 2,000,000
April 7, 1995 3,500,000
August 1, 1995 3,000,000
August 8, 1995 6,500,000
September 1, 1995 4,000,000
October 1, 1995 4,000,000
November 1, 1995 4,000,000
December 1, 1995 4,000,000
------------
Total capital contributions 31,000,000
Net loss (11,993,043)
------------
Partners' capital, December 31, 1995 $ 26,194,093
============
</TABLE>
F-24
<PAGE> 44
M4 ENVIRONMENTAL L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 8, 1994) THROUGH DECEMBER 31, 1995 (CUMULATIVE),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1994
<CAPTION>
CUMULATIVE 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(13,805,907) $(11,993,043) $(1,812,864)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,188,513 1,696,341 492,172
Changes in assets and liabilities:
Due from related parties (43,887) 206,860 (250,747)
Prepaid expenses and other current assets (225,147) (211,444) (13,703)
Accounts payable 3,160,481 2,713,561 446,920
Accrued expenses 1,299,146 1,174,666 124,480
Due to related parties (219,000) (219,000) --
------------ ------------ -----------
Net cash used by operating activities (7,645,801) (6,632,059) (1,013,742)
------------ ------------ -----------
Cash used by investing activities:
Acquisition of property, plant and equipment (14,093,942) (13,639,284) (454,658)
Purchase of technology rights (14,000,000) (6,500,000) (7,500,000)
------------ ------------ -----------
Net cash used by investing activities (28,093,942) (20,139,284) (7,954,658)
------------ ------------ -----------
Cash flows provided by financing activities:
Capital contributions 40,000,000 31,000,000 9,000,000
------------ ------------ -----------
Net increase in cash and cash equivalents 4,260,257 4,228,657 31,600
Cash and cash equivalents, at beginning of period -- 31,600 --
------------ ------------ -----------
Cash and cash equivalents, at end of period $ 4,260,257 $ 4,260,257 $ 31,600
============ ============ ===========
Noncash investing and financing activities:
Acquisitions through due to related party:
Technology rights $ -- $ 2,000,000 $ 6,500,000
Property, plant and equipment $ -- $ 13,103,621 $ --
Supplemental cash flow information:
Interest paid $ -- $ -- $ --
</TABLE>
F-25
<PAGE> 45
M4 ENVIRONMENTAL L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
M4 Environmental L.P. (the Partnership), a Delaware limited partnership,
was formed on August 8, 1994. The purpose of the Partnership is to
engineer, construct and operate facilities that will perform catalytic
extraction processing (CEP) on a commercial basis for the Department of
Defense, Department of Energy, and certain other markets. CEP is a
technology for processing certain radioactive, hazardous and mixed wastes.
The Partnership's activities to date relate primarily to obtaining capital,
developing a business plan, market development, and constructing CEP
facilities. Accordingly, for financial reporting purposes, the Partnership
is considered to be a development stage enterprise (see Note 8).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION - The Partnership's revenue in 1995 consisted of
contractual services performed primarily for one customer, United States
Enrichment Corporation (USEC). The contract related to the demonstration by
the Partnership of the feasibility of using CEP technology to treat certain
of USEC's radioactive waste stockpiles. Based on the terms of this specific
contract, the Partnership recognized revenue on a completion of milestone
basis. The costs incurred by the Company under this contract are reflected
in research and development expenses.
MANAGEMENT ESTIMATES - The preparation of 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 disclosures 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.
CASH AND CASH EQUIVALENTS - The Partnership considers all highly liquid
investments that are readily convertible to cash or that have a maturity
date of three months or less when purchased to be cash equivalents. Such
equivalents at December 31, 1995 and 1994, consist principally of overnight
repurchase agreements. All of the Partnership's cash deposits and
equivalents are maintained at local banks. The Partnership does not require
collateral on the excess of its cash deposits or repurchase agreements over
federal depository insurance coverage.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried
at cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, which range from five to seven years.
Leasehold improvements are being amortized over the minimum term of the
relevant lease. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in operations for the period. The cost
of major additions, replacements and improvements are capitalized; routine
maintenance and repairs are charged to expense as incurred.
CEP plant depreciable life is an estimate, and is based on management's
knowledge and expectations about the highly technical requirements and
anticipated useful life of such plant.
F-26
<PAGE> 46
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Construction in progress consists of expenditures for CEP facilities in Oak
Ridge, Tennessee. Such amounts include charges related to labor, materials
and other costs required for these constructed assets, most of which are
being supplied by MMT on a "turnkey" basis. A significant portion of the
construction of such facilities was performed by one of the Partnership's
limited partners.
TECHNOLOGY RIGHTS - Technology rights relate to CEP technology and are
recorded at cost. Such rights are being amortized using the straight-line
method over ten years, which is the estimated useful life of such rights.
Such useful life is an estimate and is subject to change based on, among
other things, the existence/emergence of competing technologies and the
perception/acceptance of the technology by the Partnership's targeted
customer markets.
IMPAIRMENT OF LONG-LIVED ASSETS - The Partnership periodically assesses
whether any events or changes in circumstances have occurred that would
indicate that the carrying amount of a long-lived asset may not be
recoverable. If such an event or change in circumstance occurs, the
Partnership will evaluate whether the carrying amount of such assets is
recoverable by comparing the net book value of the assets to estimated
future undiscounted cash flows, excluding interest charges, attributable to
such assets. If it is determined that the carrying amount is not
recoverable, the Partnership will recognize an impairment loss equal to the
excess of the carrying amount of the asset over the estimated future cash
flows attributable to such assets.
INCOME TAXES - Under present income tax regulations, the Partnership pays
no income taxes; any income or loss is included in the tax returns of the
partners.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are
expensed as incurred. The costs of providing services to USEC in 1995 are
reflected as research and development. Costs related to pilot, prototype or
other facilities that will provide future benefits to the Partnership are
capitalized as property, plant and equipment when incurred.
3. COLLABORATIVE AND PARTNERSHIP AGREEMENTS:
Lockheed Martin Corporation (LMC) and Molten Metal Technology, Inc. (MMT),
through their respective wholly-owned subsidiaries, each own a 49.5%
limited partnership interest in the Partnership and a 50% interest in M4
Environmental Management Inc. (INC), the 1% general partner in the
Partnership. LMC has agreed to certain funding of the Partnership's
activities through August 1, 1999; such funding is limited to $50,000,000
(see Note 8) over the life of the Partnership which, unless modified, will
end on July 1, 2019. LMC has contributed capital of $31,000,000 and
$8,923,500, in 1995 and 1994, respectively, while INC has contributed
$76,500. In return for its 49.5% limited partnership interest, MMT has
agreed to spend $30,000,000 (at its cost) for research and development
activities directed toward enhancing CEP, with the resulting benefits from
such research accruing to the Partnership with respect to the Partnership's
CEP applications, as discussed below. The Partnership may be terminated by
LMC or MMT in 1998 in the event certain technical or commercial goals are
not met, or by mutual consent of LMC and MMT.
3. COLLABORATIVE AND PARTNERSHIP AGREEMENTS, CONTINUED:
MMT has granted the Partnership an exclusive license, subject to certain
exceptions, to use the CEP technology for processing and recycling
radioactive, hazardous and mixed waste produced under U.S. Department of
Energy, U.S. Department of Defense, and United States Enrichment
Corporation
F-27
<PAGE> 47
programs. The license term is for 25 years and will end on July 1, 2019.
The Partnership may also, under certain conditions, sublicense the CEP
technology to qualified third parties. The Partnership has recorded
$16,000,000 in license fees to MMT for the aforementioned technology
rights. Of the $16,000,000, $2,000,000 was accrued at December 31, 1995,
which resulted from the purchase and start up of the first CEP plant built
for commercial processing. The Partnership must pay MMT an additional
$2,000,000 in license fees upon the start-up of each of the next two CEP
plants built for commercial and certain demonstration processing. In
addition, the Partnership will pay MMT an ongoing royalty of 2% or 3.5%
(depending on the market) of the Partnership's revenues from activities
related to CEP, with the amount paid in any year not to exceed 50% of the
Partnership's cash flow.
All of the Partnership's obligations for the aforementioned license fees
are guaranteed by LMC. LMC has also agreed to provide guaranties of any
project or third party financing obtained for the development of CEP plants
by the Partnership. In return for the guaranties, the Partnership will pay
LMC a fee of 2% of the average amount of guaranteed debt outstanding. If
LMC withdraws its guaranties under certain circumstances as allowed by the
Partnership agreement, MMT has the right to terminate the Partnership. When
the capital accounts applicable to the Partners are equal, net profits and
losses of the Partnership will generally be allocated in proportion to the
Partners' respective interests.
<TABLE>
MMT provides, under certain conditions, CEP plant, technical, facility
design and other services to the Partnership. Amounts incurred for such
services were approximately $21,568,000 and $219,000 in 1995 and 1994,
respectively, and consist of the following:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Engineering and construction services $20,265,000 $ --
Research, development and consulting services 1,303,000 219,000
----------- --------
$21,568,000 $219,000
=========== ========
</TABLE>
Amounts incurred for research, development and consulting services are
expensed as incurred and amounts related to engineering and construction
services are generally capitalized as plant and equipment.
F-28
<PAGE> 48
<TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31, consists of the following:
<CAPTION>
1995 1994
<S> <C> <C>
Leasehold improvements $ 521,161 $ 34,024
Office furnishings and equipment 780,646 200,970
Computer equipment and software 1,514,729 219,664
CEP plant 2,865,880 --
----------- --------
5,682,416 454,658
Less: Accumulated depreciation (302,799) (25,506)
----------- --------
5,379,617 429,152
Construction in progress 21,515,147 --
----------- --------
Property, plant and equipment, net $26,894,764 $429,152
=========== ========
</TABLE>
5. RELATED PARTY TRANSACTIONS:
INC's stated corporate purpose is to manage the business of the Partnership
and, as such, pays all liabilities on behalf of the Partnership. The
Partnership reimburses INC for all payments made on behalf of the
Partnership. Amounts reimbursed to INC were approximately $19,535,000 and
$1,450,000 in 1995 and 1994, respectively.
Advance payments of $31,160 and $193,822 in 1995 and 1994, respectively,
have been made by the Partnership to INC and are included in due from
related parties. Accounts payable and accrued expenses in the accompanying
balance sheet represent amounts payable to third party vendors, but for
which the actual payment to such vendors will be made on behalf of the
Partnership through INC.
6. LEASES:
<TABLE>
The Partnership and INC have operating leases for the Technical Center (the
site of CEP plant), office space, and office equipment. Rent expense under
these operating leases was $517,155 and $86,561 in 1995 and 1994,
respectively. Commitments under operating leases with terms in excess of
one year are as follows:
<S> <C>
1996 $ 770,153
1997 664,896
1998 657,208
1999 638,502
2000 619,170
Thereafter 963,072
----------
$4,313,001
==========
</TABLE>
7. 401(K) AND EQUITY APPRECIATION PLANS:
The Partnership and INC provide a 401(k) defined contribution retirement
plan for substantially all
F-29
<PAGE> 49
full-time employees. Contributions, if any, are at management's discretion.
There were no contributions in 1995 or 1994.
In 1995, INC and the Partnership established an Equity Appreciation Plan
(the Plan) whereby participants are compensated for the increase in the
fair value of a partnership unit over a specified base amount. Fair value
is determined annually by a compensation committee designated by the
executive committee of INC. The Plan awards units to participants which
vest ratably over a five year period from the date of grant. All outside
(as defined) directors and employees of the Partnership, INC and any
affiliate (as defined) are eligible to participate in the Plan. The maximum
number of units to be granted under the Plan is 600,000. A total of 221,950
units were granted during 1995 with no related compensation expense
incurred.
8. SUBSEQUENT EVENTS:
A resolution of the Industrial Development Board (IDB) of the City of Oak
Ridge, Tennessee was adopted April 12, 1995 authorizing, subject to the
submission of satisfactory implementing documents, the issuance of revenue
bonds or notes in an amount not to exceed $38,000,000 for the purpose of
financing the Partnership's acquisition, construction, and equipping of a
CEP facility in Oak Ridge, Tennessee. A significant amount of construction
related to this facility was performed in 1995. In January 1996, the
Partnership entered into a loan agreement to borrow up to the $38,000,000
amount to finance 1995 and expected 1996 construction expenditures.
Borrowings are required to be repaid in 2006, with interest payments at
variable rates due monthly beginning the first month after borrowings
commence in 1996.
On March 15, 1996, LMC and MMT entered into an agreement whereby MMT would
issue 307,735 shares of its publicly traded common stock to LMC in exchange
for certain assets of a division of LMC. LMC is to contribute the remaining
net assets of the division, and MMT is to contribute the acquired assets,
to the Partnership. The business of the division will then be operated as a
division of the Partnership. The division's primary business will continue
to be the manufacture and sale of products for the metallurgical and
environmental applications of commercial, Department of Defense related and
Department of Energy related waste markets. Based on the price of MMT's
common stock on March 15, 1996, the date of the agreement, the value of
this business combination will be approximately $23,383,000. In conjunction
with this agreement, LMC also agreed to increase its capital contribution
commitment to the Partnership by $25,000,000 to $75,000,000, to provide up
to $150,000,000 in Partnership CEP project debt guarantees through 2004
(subject to various conditions) and to provide a $15,000,000 working
capital facility to the Partnership.
9. CONTINGENCY:
The Partnership is currently undergoing an audit by the state of Tennessee
with regards to use tax on its capital assets. Management does not believe
an assessment, if any, will result in a material adverse impact on the
Partnership's financial position, capital, or results of operations.
F-30
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (nos. 33-65688 and 33-98852) and in the Prospectus
constituting part of the registration statements on Form S-3 (nos. 333-10949 and
333-12435) of Molten Metal Technology, Inc. of our report dated March 5, 1996
appearing on Page F-1 of this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
November 18, 1996
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the application of our report dated February 23, 1996, on our
audit of the financial statements of M4 Environmental Management, Inc., and on
our report dated February 23, 1996, except for the second paragraph of Note 8
as to which the date is March 15, 1996, on our audit of the financial
statements of M4 Environmental, L.P., included in the Annual Report on Form
10-K of Molten Metal Technology, Inc. for the year ended December 31, 1995, to
the amended Notes 2, 3 and 5 to the 1995 financial statements of M4
Environmental, L.P., which are included in this amendment on Form 10-K/A2.
/s/ Coopers & Lybrand LLP
COOPERS & LYBRAND LLP
Knoxville, Tennessee
November 18, 1996
