CXI Dirks Overview:
Commodore Applied Technologies, Inc. (CXI)
Analysts: Ray Dirks & Bob Brisotti
October 17, 1996
Summary and Recommendation
We strongly recommend the purchase of the common stock and warrants of
Commodore Applied Technologies, Inc. National Securities Corporation
managed the initial public offering which became effective on June 28,
1996, raising gross proceeds of $35 million.
An Acquisition and A Joint Venture:
Early Success in the Commercialization Strategy
Advanced Sciences, Inc. Acquisition: On September 30 the Company completed
its acquisition of Advanced Sciences, Inc. (ASI) for 900,000 shares of its
common stock. It was a major initiative for Commodore; an engineering
services and environmental marketing company like ASI provides Commodore
with an immediate market for its proprietary technologies. ASI has been
generating revenues of about $25 million annually. We believe the
introduction of Commodore's SET process will lead to additional revenues
for ASI, probably in the $10 million to $15 million range for 1997. The
Company continues to pursue acquisitions of profitable companies with
meaningful revenue bases.
The Teledyne-Commodore Joint Venture: Commodore Applied Technologies, Inc.
blossomed into a fully operational company on August 9 when it formed a
50-50 joint venture with Teledyne Industries, Inc.-now Allegheny
Teledyne-to pursue chemical demilitarization (chem demil) on a worldwide
basis. Teledyne already possessed the first and only Defense Department
contract to manage the destruction of domestic non-stockpile chemical
warfare agents-the U.S. market is projected to be $17 billion over the next
decade. What Teledyne desired was a universal technology capable of
destroying all chemical warfare agents.
The Teledyne-Commodore chem demil program is also needed urgently elsewhere
in the world. Congress and the Defense Department both recognize the
enormity of the danger. For example, an August 11, 1996 The New York Times
article first detailed the severe illnesses plaguing large numbers of U.S.
Army troops who were exposed to chemical warfare agents during Desert
Storm. This exposure apparently came from the U.S. destruction of an Iraqi
bunker, not willful deployment by the Iraqis. With more than 100,000 tons
of different chemical warfare agents-nerve and blister gases in various
places around the world, the prospect of leakage or terrorist access is
frightening. This explains Congress' decision to help pay for the
destruction of the Russian stockpile. It is also a major reason why the
Senate is now expected to ratify the Chemical Weapons Convention (CWC)
treaty. Once effective, probably in early 1997, the CWC treaty calls for
the destruction of all chemical weapons within ten years and six months, or
by 2007.
To date, Commodore's SET process is the only mobile, non-thermal technology
proven effective for neutralizing what are estimated to be about $60
billion of chemical warfare agents worldwide. In the U.S.,
Teledyne-Commodore expects that success in the non-stockpile destruction
program will lead to Defense contracts to destroy some portion of the
"stockpiles," the eight Army depots where about 40,000 tons of chemical
warfare agents are stored. This stockpile destruction program alone is
estimated to cost about $13 billion over,the next 10 or more years.
Teledyne-Commodore is targeting 15 to 20 % of the U.S. chemical weapons
demilitarization market. In addition, Teledyne-Commodore anticipates
several substantial international contracts.
What this all means to Commodore is that it should share equally in the
profits of what should be a billion-dollar-a-year business. We anticipate
revenues from the Teledyne-Commodore joint venture to approximate $10
million in 1997, then ramping up sharply in successive years.
Company Overview: Management
The Company's recent appointment of Thomas E. Noel as President and Chief
Executive Officer is significant. Mr. Noel brings experience and talent
rarely enjoyed by such a young company. We view his decision to join
Commodore as a major endorsement of the SET process. We believe that his
experience at companies like Technologies where he was responsible for
operations producing $1.5 billion in annual revenues, and previously as
Assistant Secretary of the Department of Energy, will enable him to help
the Company achieve its goals. Commodore now has a management team in place
fully capable of managing the projected growth.
Commercial Opportunities
Commodore's patented solvated electron technology (SET) process represents
the safest and most cost-effective means of neutralizing hazardous
substances, including polychlorinated biphenyl's (PCB's), pesticides and
dioxins, ozone depleting chlorofluorocarbons (CFC's), and most chemical
warfare agents (including mustard and "blister" gases). The process is
applicable for contaminated soils, sediments, oils and surfaces. Other
processes, most of which involve thermal treatment, are more dangerous
because of emission and handling problems. Also, these other processes are
infinitely more expensive relative to energy usage, transportation expense
and capital requirements. As a result, Commodore's operations could create
a billion-dollar business by the year 2000.
Recent Milestone Achievements
* March 15, 1996: The U.S. Environmental Protection Agency granted its
first-ever nationwide permit to Commodore's SET process for disposal of
PCB's from soils and metallic surfaces. The SET process is the only
technology that has been issued a portable, non-thermal, nationwide permit
for PCB destruction by the EPA.
* April 30, 1996: At a special White House technology conference, the
Clinton Administration announced that Commodore's SET process would be one
of nine environmental technologies in its Rapid Commercialization
Initiative (RCI). The program is designed to streamline the process of
moving U.S. based environmental services and technologies to national and
international markets by abolishing government red tape. This will enable
agencies like the Departments of Energy and Defense to realize cost-
effective efficiencies and step up the implementation of state of the art
technologies. On September 30 Commodore completed its RCI demonstration for
the Defense Department at the Navy's Port Hueneme, California facility. The
Defense Department is expected to forward successful findings to RCI
officials in mid November.
* May, 1996: In tests conducted by Geomet Laboratories in Maryland and
Calspan Laboratories in Buffalo, NY (Federally licensed independent
laboratories), Commodore's SET process successfully destroyed most chemical
warfare agents, including mustard and blister gases. In one of the
independent laboratories, more than pound quantities (a commercial
benchmark) were destroyed.
* June, 1996: In tests on PCB contaminated soil at the Super Fund site in
New Bedford harbor, where Ebasco Services (a Foster Wheeler subsidiary) is
the general contractor to the EPA, Commodore's technology demonstrated that
the SET process can effectively and economically eliminate PCB'S.
Commodore's technology is one of the three options being considered for a
follow-on contract which can develop into a billion dollar business at New
Bedford and many other harbor sites in the U.S. and abroad.
* June 28, 1996: Commodore Applied Technologies completed its initial
public offering of common stock at a price of $6.00 and of 5-year
redeemable warrants at a price of ten cents, raising $35 million. Security
Capital Trading, Inc. Corp. managed the underwriting.
* July 2, 1996: At a NATO workshop in Prague, an independent U.S. testing
laboratory presented results of Commodore's SET process. These results
demonstrated that the SET process could effectively destroy chemical
warfare agents including Lewisite, the principal chemical warfare agent of
the former Soviet Union.
* July 15, 1996: Tom J. Fatjo, Jr., founder of both Browning-Ferris
Industries, Inc. and Republic Waste Industries, Inc. and C. Thomas
McMillen, Co-Chair of the President's Council on Physical Fitness and
Sports and a former three-term Congressman from Maryland, were named to
Commodore's Board of Directors. As a member of Congress, Mr. McMillen
sponsored the 1992 bill that created the alternative (to incineration)
technologies program for chemical demilitarization.
* August 9, 1996: A Teledyne subsidiary formed a 50-50 joint venture with
Commodore under which Commodore's technology will be used to destroy
chemical warfare agents on a worldwide basis.
* September 30, 1996: Commodore completed its acquisition of Advanced
Sciences, Inc. for 900,000 common shares.
* October 1, 1996: Thomas E. Noel became Commodore's President and Chief
Executive Officer. Paul E. Hannesson assumed the position of Chairman of
the Board, replacing Bentley J. Blum who remains on the board.
* October 8, 1996: The Commodore RCI demonstration unit visits a special
U.S. EPA-RCI conference at McClellan Air Force Base, Sacramento,
California. Significantly, the RCI official announced that the purpose was
to demonstrate a successful RCI technology.
Our confidence in the SET process is enhanced by independent verification
of its effectiveness by U.S. government licensed laboratories.
Additionally, successful participation in the White House sponsored Rapid
Commercialization Initiative (RCI) program will accelerate the introduction
and development of SET process applications.
Since huge quantities of contaminants are in our environment and
containment sites, commercial hazardous waste destruction will take place
on an industrial scale and could result in a number of billion dollar
businesses that utilize the SET process. Commodore's business strategy
involves establishing several business entities to handle specific areas of
contaminant destruction. Among these businesses are partnerships and joint
ventures with certain industrial leaders to take advantage of the partner's
established business relationships and access to capital. Described below
in greater detail are the business partnerships for clean-up of PCB
contaminated harbor sludge, destruction of chemical warfare agents,
clean-up and decontamination of PCB fire retarding paint found in naval
vessels, remediation of dioxin contaminated soils and electric utility PCB
contamination from transformer oils.
The Technology
The SET process is based upon solvated electron chemistry, which has been
known for over a century. The process involves dissolving certain alkali or
alkaline-earth metals (such as lithium, sodium, potassium, magnesium or
calcium) in anhydrous liquid ammonia. Under these conditions, powerful
reducing agents are formed that can break up the halogenated molecules that
form a wide variety of environmental pollutants rendering them
environmentally safe. The process has extensive patent protection, although
the knowledge in making the process work on a commercial scale lies with
the scientists at Commodore who have engineered the process reaction
vessels and operating parameters that make the process work efficiently.
In commercial applications, the SET process involves placing liquefied
ammonia into a pressurized reaction chamber, adding the appropriate metal
to create the solvated electron solution (the reducing agent), followed by
addition of the pollutant (e.g., PCB's). In the case of soil remediation,
the soil is placed in the chamber prior to the addition of liquefied
ammonia. The neutralization reaction, which is monitored by calorimetric
sensors, will result in virtually total reduction of the pollutant to a
safe material. Heat generated during the reaction is used to drive off the
ammonia which is recycled for future use. The reaction chambers and
supporting equipment can be made in various sizes from table top models to
mobile units the size of a cement mixer. The chemicals used in the
reaction, ammonia and alkaline and alkaline-earth metals are readily
available. Therefore, the costs to set up a SET processing unit are much
lower than establishing incineration plants or molten metal facilities,
possibly as little as one-third. Since the reaction chambers are mobile,
they can be moved from one site to another, reducing the risk of further
environmental contamination that is the risk of transporting pollutants to
treatment sites.
Commodore's SET process is applicable to the destruction of a variety of
contaminants including destroying PCB'S, pesticides, dioxins, ozone
depleters (CFC's), and chemical warfare agents. The process can be used for
contaminated soils, sediments, oils and surfaces.
Business Opportunities
Commodore is actively pursuing opportunities, nationally and
internationally, notably:
New Bedford harbor: New Bedford, MA, harbor and waterfront is heavily
contaminated by PCB's and in 1982 was placed on EPA's Superfund national
priorities list. Ebasco Services, Inc., a subsidiary of Foster Wheeler
Corp., is managing the project, and selected the SET process as a possible
non-thermal method for PCB destruction.
Advanced Sciences, Inc. acquisition: This acquisition of an engineering
services company greatly accelerated the Company's ability to produce
significant revenues.
Teledyne-Commodore Joint Venture: The Company has formed a 50-50 joint
venture relationship with Teledyne Brown to market the SET process to
military establishments worldwide for the destruction of chemical warfare
agents.
Sverdrup Joint Venture: The Company has a non-binding memorandum of
understanding to establish one or more joint ventures or related
arrangements to utilize the SET process as the enabling technology in
decontamination of PCB's and other toxic substances. One prime target is
the Navy Department for base clean-up and decontamination of submarines.
PCB's were extensively used in submarines as a fire retardant in paint and
insulation.
Sharp & Associates: The Company has a non-binding memorandum of
understanding to explore the application of the SET process for remediation
of dioxin contaminated soils.
ESEERCO Project: This project involves a demonstration of the SET process's
effectiveness in treating PCB contamination at electric utility sites in
New York State. The proposal was submitted by the Company and Groundwater
Technology (a subsidiary of Fluor Daniel) to the Empire State Electric
Energy Research Corporation.
Others: The Company has several other opportunities, including a program to
degrade Freon gas refrigerants and plastic expansion agents that are
believed to contribute to ozone depletion. These gases are
chlorofluorocarbons and therefore can be decomposed by solvated electron
technology. Additionally, the SET process is being considered as an
effective means to eliminate the large quantities of waste uranium
hexafluoride that is created to separate fissionable uranium isotopes from
the more abundant non-fissionable ones.
Management and Board of Directors:
Paul E. Hannesson, Chairman of the Board of Directors. Prior to the IPO,
Mr. Hannesson had been President, Chief Executive Officer, and a Director
of Commodore Environmental Services, Inc. since 1993.
Thomas E. Noel, President, Chief Executive Officer and Director. Mr. Noel
concluded his 14-year Army career as an aide to General Creighton Abrams,
Army Chief of Staff. Mr. Noel then became the first director of the Federal
Petroleum Reserve before being appointed an Assistant Secretary of Energy.
He later was Senior Vice President, Operations, at WMX Technologies.
Bentley J. Blum, Director. Mr. Blum has been actively engaged in real
estate acquisitions and currently is the sole stockholder and director of a
number of corporations which hold real estate interests, oil drilling
interests, and other corporate interests. He is the controlling stockholder
of Commodore.
Kenneth L. Adelman, Ph.D. Director. Dr. Adelman served in the Reagan
Administration with responsibility for arms control. From 1983 to 1987 he
was Director of the United States Arms Control and Disarmament Agency and
negotiated with Soviet diplomats on nuclear and chemical weapons control
issues. He has been an independent consultant on international issues to
various corporations, including Lockheed Martin Marietta Corporation and
Loral Corporation.
Herbert A. Cohen, Director. Mr. Cohen has been a practicing negotiator
acting in an advisory capacity in hostage negotiations and crisis
management and was an advisor to Presidents Carter and Reagan in the
Iranian hostage crisis, the government's response to the skyjacking of TWA
Flight 847 and the seizure of the Achille Lauro.
David L. Mitchell, Director. He is president and Co-founder of Mitchell &
Associates and formerly was a Managing Director of Shearson/American
Express Inc., a Managing Director of First Boston Corporation and a
Managing Director of the investment banking firm of S.G. Warburg & Company.
Tom J Fatjo, Jr., Director. He was founder of both Browning-Ferris
Industries, Inc. and Republic Waste Industries, Inc. He currently serves as
Chairman of TransAmerican Waste Industries, Inc., a Houston based solid
waste management company which he founded in 1991.
C Thomas McMillen, Director. Co-Chair of the President's Council on
Physical Fitness and Sports and a former three-term Congressman from
Maryland. While in Congress, Mr. McMillen served on both the Energy and
Commerce Committee and the Science, Space and Technology Committee. He is
currently Chairman and CEO of Complete Wellness Centers, Inc.
Ed L. Romero, Director. Mr. Romero remains as Chairman and Chief Executive
Officer of Advanced Sciences, Inc., Commodore's first acquisition. Mr.
Romero is President of the Hispanic Cultural Foundation and a member of the
Democratic National Committee's Finance Committee.
Advisory Board
Noel Brown, Ph.D. Dr. Brown serves as President of the Friends of the
United Nations, a non-governmental organization committed to supporting the
United Nations and explaining its activities to citizens' organizations
worldwide. He was formerly the regional director of the United Nations
Environmental Program for North America and represented that program at the
United Nations Conference on Science and Technology in Vienna.
Olivier Giscard DEstaing. A former Minister of the French Parliament, Mr.
D'Estaing is the former chairman of the European Center for International
Cooperation and currently serves as Chairman of The European League for
Economic Cooperation and Chairman of the United Nations committee working
on international economic matters. Mr. D'Estaing is the founder and Deputy
Chairman of the European Institute of Business Administration. and a member
of the Board of Directors of IBM France, Generale France and Societe
Internationale de Technologie.
Misha Krakowsky. He is the Managing Director and Chief Executive Officer of
Allied Pacific Group, Ltd, a business and investment company based in Hong
Kong which focuses on infrastructure projects and privatization
opportunities involving state-owned enterprises in China and throughout
Southeast Asia. Mr. Krakowsky was formerly the Managing Director of the
Eisenberg Group of Companies, one of the largest investment conglomerates
in The People's Republic of China.
Edward L. Rowny. Dr. Rowny is currently head of International Negotiating
Consultants, Inc. a consulting fin-n that advises government officials and
the private sector on military affairs and in establishing businesses in
Japan, Poland and certain of the Russian Republics. He previously served as
Special Advisor to the President and Secretary of State for arms control
matters in both the Reagan and Bush administrations.
Investment Conclusion:
Commodore Applied Technologies is rapidly becoming known as a technology
leader in the neutralization/destruction of PCBS, pesticide and dioxin
contamination, CFC'S, and chemical warfare agents. The Company's solvated
electron technology (SET) is portable, non-thermal, effective and
economically competitive with existing technologies. Furthermore, the
process is an enabling technology that can be applied to a variety of
environmental pollution problems. The process can destroy PCB's or other
contaminants to nearly undetectable levels that fall into the EPA's
accepted range. Perhaps most importantly, from an environmental viewpoint,
the SET process does not create other environmental problems, such as
release of toxic substances into the air or water. The adaptability of the
SET process opens a wide variety of opportunities for the Company to
pursue. There are so many potential opportunities that we believe that the
Company will have to increase its numbers of qualified personnel to
effectively pursue all of these options. With the successful completion of
the recent IPO, the Company now has the financial resources and is
demonstrating its ability to recruit additional personnel to allow for
effective penetration into these many markets.
The availability of capital has also brought the Company to a significant
crossroads in its transition from a development company to a commercially
viable one. The issue is to what extent the Company should put its future
in the hands of its potential joint venture partners or whether it should
concentrate on its own internal development through its own direct
marketing of SET process units for the destruction of PCB's in contaminated
oils and other applications. The latter option, evidenced by the ASI
acquisition, allows the Company to be more in control of its own destiny,
making it less dependent on its joint venture partners. The former
strategy, such as the joint venture with Teledyne, offers access to markets
more quickly by taking advantage of the more established business
relationships and greater infrastructure of the larger partner. We believe
that a mix of internally and externally controlled projects would be the
prudent approach to offer diversification of opportunities. Any one of the
identified opportunities would itself make the Company an outstanding stock
performer.
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