UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11871
Commodore Applied Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-3312952
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150 East 58th Street, Suite 3238
New York, New York 10155
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 308-5800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common stock, par value $0.001 per share NASD Over the Counter Bulletin Board (OTCBB)
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Non-affiliates of the registrant held shares of common stock as of
April 9, 2003 with an aggregate market value of approximately $1,228,371.05
(based upon the last sale price of the common stock on April 9, 2003 as reported
by the NASD Over the Counter Bulletin Board).
As of April 9, 2003; 79,732,852 shares of the registrant's common stock
were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
COMMODORE APPLIED TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PART 1.........................................................................2
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ITEM 1. BUSINESS...........................................................2
General............................................................2
Soil Decontamination--Commodore Solution Technologies,
Inc............................................................3
Environmental Management - Commodore Advanced Sciences,
Inc............................................................8
Environmental Insurance Claim Resolution - Dispute
Resolution Management, Inc....................................11
Markets and Customers.............................................12
Raw Materials.....................................................14
Backlog...........................................................14
Research and Development..........................................14
Intellectual Property.............................................15
Competition.......................................................15
Environmental Regulation..........................................17
Employees.........................................................19
ITEM 2. PROPERTIES........................................................19
ITEM 3. LEGAL PROCEEDINGS.................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............20
PART II.......................................................................21
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...........................................21
Market Information................................................21
Dividend Information..............................................22
Recent Sales of Unregistered Securities...........................23
ITEM 6. SELECTED FINANCIAL DATA............................................28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................29
Overview..........................................................29
Results of Operations.............................................29
Liquidity and Capital Resources...................................33
Net Operating Loss Carryforwards..................................37
New Accounting Pronouncements.....................................37
Forward Looking Statements........................................38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...................................................39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................39
i
PART III......................................................................40
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............40
Executive Officers and Directors..................................40
Key Employees.....................................................42
Board Committees..................................................43
Compensation of Directors.........................................43
Compliance with Section 16(a) of the Exchange Act.................44
ITEM 11. EXECUTIVE COMPENSATION...........................................45
Summary Compensation..............................................45
Stock Options.....................................................47
Employment Agreements.............................................48
Compensation Committee Interlocks and Insider
Participation.................................................49
Report of the Compensation Committee on Executive
Compensation..................................................49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................53
Security Ownership of Certain Beneficial Owners...................53
Security Ownership of Management..................................55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................57
Organization and Capitalization of the Company....................57
Services Agreement................................................62
ITEM 14. CONTROLS AND PROCEDURES...........................................63
PART IV.......................................................................64
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 10-K..................................................64
SIGNATURES....................................................................74
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CERTIFICATIONS................................................................75
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SUPPLEMENTAL INFORMATION......................................................79
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ii
Preliminary Note Regarding Certain Risks and Forward-Looking Statements
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This Annual Report on Form 10-K contains "forward-looking statements."
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company's projected future results, future plans, objectives or
goals or future conditions or events are also forward-looking statements. Actual
results are inherently difficult to predict. Any such forward-looking statements
are subject to the risks and uncertainties that could cause actual results of
operations, financial condition, acquisitions, financing transactions,
operations, expenditures, expansion and other events to differ materially from
those expressed or implied in such forward-looking statements. Any such
forward-looking statements would be subject to a number of assumptions
regarding, among other things, future economic, competitive and market
conditions generally. Such assumptions would be based on facts and conditions as
they exist at the time such statements are made as well as predictions as to
future facts and conditions, the accurate prediction of which may be difficult
and involve the assessment of events beyond the Company's control.
Further, the Company's business is subject to a number of risks and
uncertainties that would affect any such forward-looking statements. These risks
and uncertainties include, but are not limited to:
o the Company's critical need for additional cash to sustain
existing operations and meet existing obligations and capital
requirements;
o the ability to generate profitable operations from a large scale
remediation project;
o the ability of the Company to renew its nationwide permit to treat
PCBs;
o the ability of the Company to implement its waste processing
operations, including obtaining commercial waste processing
contracts and processing waste under such contracts in a timely
and cost effective manner; the timing and award of contracts by
the U.S. Department of Energy for the cleanup of waste sites
administered by it;
o the Company's ability to integrate acquired companies;
o the acceptance and implementation of the Company's waste treatment
technologies in the government and commercial sectors;
o the Company's ability to obtain and perform under other large
technical support services projects; developments in environmental
legislation and regulation;
o the ability of the Company to obtain future financing on favorable
terms; and
o other circumstances affecting anticipated revenues and costs.
These risks and uncertainties could cause actual results of the Company
to differ materially from those projected or implied by such forward-looking
statements.
1
PART I
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ITEM 1. BUSINESS
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GENERAL
Commodore Applied Technologies, Inc. (the "Company") is an
environmental solutions company offering a range of engineering and technical
services to the public and private sectors related to (i) remediating
contamination in soils, liquids and other materials and disposing of or reusing
certain waste by-products by utilizing our Solvated Electron Technology
("SET(TM)"), and (ii) providing services related to, environmental management
for on-site and off-site identification, investigation remediation and
management of hazardous, mixed and radioactive waste.
We believe that SET is the only patented, non-thermal, portable and
scalable process that is currently available for treating and decontaminating
soils, liquids and other materials containing PCBs, pesticides, dioxins,
chemical weapons and warfare agents and other toxic contaminants.
The Company's corporate mission is to serve the environmental
remediation market from its primary operating center to profitably provide
government and industry with engineering and remediation solutions to legacy
waste environmental problems. Our strategy will focus the Company on the unique
and high profit niches of hazardous materials conversion and waste remediation.
Demand for our environmental technologies is anticipated to arise
principally from the following sources:
o the need for alternative environmental treatment and disposal
methods for toxic substances (such as the SET technology), which
involve limited safety risks with respect to air pollution and
transportation of hazardous materials and do not result in large
volumes of residual waste that require further treatment prior to
disposal;
o stricter legislation and regulations mandating new or increased
levels of air and water pollution control and solid waste
management; and
Our business strategy is to expand our environmental technologies
businesses by:
o implementing the SET technology in selected niche markets within
certain strategic environmental market segments, such as
government mixed waste remediation and chemical weapons
demilitarization, where we believe SET offers the greatest value
and meets pressing customer needs; and
o establishing additional collaborative joint working and marketing
arrangements with established engineering and environmental
service organizations to pursue commercial opportunities in the
public and private sector.
2
The Company currently has identified two operating segments. These two
segments are as follows: Commodore Advanced Sciences, Inc., which primarily
provides various engineering, legal, sampling, and public relations services to
Government agencies on a cost plus basis; and Commodore Solutions, Inc., which
is commercializing technologies to treat mixed and hazardous wastes.
Through Dispute Resolution Management, Inc. (DRM), a subsidiary
acquired August 30, 2000, the Company provided a package of services to help
companies recover financial settlements from insurance policies to defray costs
associated with environmental liabilities. As of May 16, 2002, the Company no
longer owns an 81% interest in DRM. The loss from the disposition of DRM is
recorded at $4,134,000 to Applied.
The Company's loss of the DRM subsidiary may have a material adverse
effect on the financial condition of the Company and its cash flow problems. The
Company currently requires additional cash to sustain existing operations and to
meet current obligations and ongoing capital requirements. The Company's current
monthly operating expenses exceed cash revenues by approximately $80,000 at
December 31, 2002.
Additional information regarding the business of each segment is set
forth below, and the information in Note 18 to the Company's Consolidated
Financial Statements included in this Annual Report on Form 10-K is incorporated
into this Part I by reference.
The Company was incorporated in Delaware in March 1996. As used in this
Annual Report, and except as the context otherwise requires, the "Company" means
Commodore Applied Technologies, Inc. and its subsidiaries, including Commodore
Solutions, Inc., Commodore CFC Technologies, Inc., and Commodore Advanced
Sciences, Inc. The Company's principal executive offices are located at 150 East
58th Street, Suite 3238, New York, New York 10155, and its telephone number at
that address is (212) 308-5800.
SOIL DECONTAMINATION--COMMODORE SOLUTION TECHNOLOGIES, INC.
The Company, through Commodore Solutions, Inc. ("Solutions"), has
developed and has commercialized its patented process known as SET. Based on the
results of its extensive testing and commercial processing activities, the
Company believes that SET is capable of effectively treating and decontaminating
soils and other materials, including sludges, sediments, oils and other
hydrocarbon liquids, metals, clothing and porous and non-porous structures and
surfaces, by destroying PCBs, pesticides, dioxins, chlorinated substances and
other toxic contaminants to an extent sufficient to satisfy current federal
environmental guidelines. The Company also believes that, based on the results
of additional tests, SET is capable of neutralizing substantially all known
chemical weapons materials and warfare agents, explosives and concentrating
certain radioactive wastes for more effective disposal.
The SET process was commercialized during the calendar year 2000. In
May 2000, the Company mobilized its S-10 system to Harrisburg, Pennsylvania to
begin processing PCB contaminated soils at the Pennsylvania Air National Guard's
base located at the Harrisburg International Airport (the "Initial Harrisburg
3
Contract"). The Company completed the contract in July 2001, remediating
approximately 340 tons of excavated soils to levels deemed unregulated for
disposal by the U.S. Environmental Protection Agency (the "EPA"). The Company
believes this is the first time a non-thermal process has treated
PCB-contaminated soils to levels allowing them to be replaced in the original
excavation.
Additionally, the Company performed several treatability studies for
third party customers during 2000, as well as continued internal testing and
process development. At Envirocare of Utah ("Envirocare"), the SET process
successfully treated water treatment sludge from a waste stream provided by the
Brookhaven National Laboratory (the "Envirocare Study"). Under current treatment
processes at Envirocare, this waste could not be treated to meet land disposal
regulation requirements. The waste stream was a laboratory mixed waste
(radioactive) sludge, contaminated with lead and high levels of RCRA organic
compounds. The Envirocare Study waste contained the hazardous waste codes F001,
F003, F005, and D008. The Envirocare Study waste stream also contained high
water content, approximately 75%. The Company successfully treated the material
such that it was suitable for land disposal. The results of the Envirocare Study
were presented to the participants of the Waste Management Conference in Tucson,
Arizona in February 2001. In the case of third party treatability studies,
customer location processing and new patent data set construction, all tests and
processing results were verified by independent laboratories agreed upon by the
Company and/or the respective client. In the case of internal Company process
development testing, results were verified with Company owned analytical
equipment in addition to periodic independent off-site testing.
In January 2001 the Company entered into a contract with Waste Control
Specialists, LLC ("WCS") for the treatment of various mixed waste streams stored
at the WCS facility near Andrews, Texas. This work employed the Company's SL-2
SET system and was completed in August 2001.
In November 2001 the Company entered into a contract with American
Ecology Recycle Center ("AERC", Oak Ridge, Tennessee) for the treatment of 32
drums of Freon still bottom mixed wastes, as well as consultation regarding the
regulatory requirements for the treatment. Work commenced in November, employing
the Company's SL-2 SET system, and was essentially completed in 2002. As an
adjunct to that work, the Company entered into a contract with the University of
California (prime contractor for the Department of Energy's Los Alamos National
Laboratory) to dispose approximately 12,000 pounds of activated sodium remaining
from tests involving the Clinch River Breeder Reactor performed by Rensselaer
Polytechnic Institute twenty five years ago. The Company believes this is the
first time activated sodium (Na22) has been employed as a reactant to treat
other regulated waste materials (the AERC still bottoms).
In July 2002 the Company acquired all the SET equipment formerly
associated with the Teledyne-Commodore LLC. The Company plans to utilize this
equipment for treating Department of Energy ("DOE") legacy mixed waste materials
for disposal at major DOE sites in the United States.
The Company has generated aggregate revenues of less than $900,000 from
the implementation of the SET technology since 1999.
4
The SET Technology
The SET technology, which is based upon solvated electron chemistry,
mixes anhydrous liquid ammonia and/or other similar solvents with reactive
metals and contaminated elements to effect the selective destruction or
neutralization of organic compounds (such as PCBs, pesticides and dioxins). The
Company has demonstrated that SET can achieve consistently high levels of
contaminant destruction when working with PCBs, dioxins and pesticides. SET has
treated soils containing up to 10,000 ppm of contaminants, and oils containing
up to 250,000 ppm, leaving residual soils and oils with contamination levels of
less than one ppm. In addition, SET has been successfully applied to other
PCB-contaminated surfaces such as concrete. The SET process can be used in
conjunction with selected post-treatment processes such that no hazardous or
toxic residues will result from the use of SET, nor will there be any toxic
emissions into the air, water, soils or other surfaces. For example, most
contaminated soils treated with SET can (subject, in some instances, to
re-blending the soil with organic matter) be used subsequently for planting or
for any other use for which non-contaminated soils are appropriate.
Equipment utilized in the SET process consists of tanks, pumps and
piping to handle anhydrous ammonia and other solvents in liquid and vapor forms,
and treatment vessels for holding contaminated materials and for the
introduction of solvating solutions. The system can be transported to field
sites and configured in numerous sizes.
The SET process requires placing the contaminated materials into a
treatment vessel where they are mixed with a solvent and charged with a base
metal (e.g. sodium). The chemical reaction produces metal salts such as calcium
chloride, calcium hydroxide and non-halogenated inert organics. The ammonia
within the treatment vessel is then removed to a discharge tank for later reuse.
The materials are removed, sampled for residual traces of PCB or other
halogenated organic compounds, and placed in storage for disposal. In many
cases, the decontaminated soil and metals can be replaced in their original
location, recycled or reused. The solvents do not enter the chemical reaction,
but merely serve as dissolving liquids for the solvated electron solution.
Operational Characteristics. Substantially all existing systems in use
for the destruction of PCBs and other halogenated compounds involve incineration
or other thermal processes, and either the permanent installation of highly
complex and expensive incinerators and waste disposal equipment at the affected
site, or the removal of contaminated materials to off-site facilities. The
Company believes that SET represents an approach to resolving serious
environmental remediation issues that does not create or entail the safety risks
of air pollution and transportation of hazardous materials. The Company believes
that SET is more effective than incineration and other destruction processes for
toxic substances in that:
o SET does not emit toxic fumes into the atmosphere, as is sometimes
the case with thermal or incineration methods;
o SET is portable and can be moved directly to the contaminated
site, thereby reducing the risk of off-site contamination;
5
o SET equipment can be customized and configured to address various
treatment applications;
o SET's reaction time is substantially less than that of alternative
processes, such as thermal destruction and other forms of chemical
treatment;
o SET equipment can be installed and operated inside industrial
plant facilities to treat hazardous wastes on line as a
continuation of the manufacturing process;
o SET, when used to treat soils, yields nitrogen-enriched soils that
can be reused on-site, avoiding replacement and the post-treatment
costs of off-site disposal; and
o SET has been shown to neutralize or destroy all chemical weapons
material and warfare agents in the United States stockpile, and
Lewisite (the primary chemical weapons material and warfare agent
of the former Soviet Union), in tests conducted by an independent,
federally certified surety laboratory.
The Company believes that SET is the only technology currently
available that possesses all of these features and is capable of treating a wide
variety of contaminants. The above characteristics (non-thermal, no air
emissions, mobile) are particularly applicable when dealing with mixed waste.
Wastes that contain radioactive material and hazardous waste regulated by RCRA
and TSCA are particularly difficult to treat and have extremely limited disposal
options. By applying the SET process to remove the RCRA and TSCA components,
leaving only radioactive waste material, disposal options expand. SET not only
removes the hazardous components but also does so by an efficient, non-thermal
process that can control and contain the radioactive material so that it remains
in the treated material and does not enter the environment in an uncontrolled
fashion.
EPA Nationwide Permit. In order to treat PCBs within the United States
on all non-Superfund sites, a treating entity must obtain a permit from the EPA.
Most EPA permits granted to date for PCB destruction are solely for single-site
incineration treatment centers. In August 1995, SET was demonstrated to the EPA
in order to obtain the Nationwide Permit, which was issued to the Company in
March 1996. The Nationwide Permit allows the Company to use SET on-site to treat
PCB-contaminated soil at any location in the United States. In addition to soil
treatment, the Nationwide Permit allows the Company to treat PCB contaminated
metallic surfaces and waste oils, as well as wastewater (the wastewater is
treated by a non-SET process). The Company has also successfully demonstrated
SET as a treatment process for organic materials contaminated with PCBs and
radionuclides and has received a draft revised EPA permit for these matrices.
This permit revision covers the destruction of PCBs in soils, waste oils,
organic materials, water, and on metallic surfaces.
The Nationwide Permit expired in September 2001, and may be renewed
subject to providing any requested additional information to the EPA at the time
of renewal. The Company is in the process of obtaining a permit revision for its
commercial SET processing system, the S-10. The S-10 system is capable of
processing up to 10 tons of contaminated material daily. Various revisions to
the equipment and process parameters are being made to the existing permit. The
revised permit will be issued pending the final site selection for the full or
6
part-time operation of any SET system for the treatment of PCB wastes. The
revised permit will require the Company to fund closure costs associated with
the implementation of any SET system for the treatment of PCB wastes. The
closure costs are calculated on a site-by-site basis and are funded accordingly
by the Company.
Based on currently published lists of EPA national operating permits,
the Company believes that it possesses the only non-thermal PCB treatment
technology for multiple applications permitted under the EPA's Alternate
Destruction Technology Program. EPA regulations governing permitting have been
in effect for more than 15 years, and according to the latest EPA published list
of non-thermal destructive processes, only seven companies have met EPA's
stringent requirements for commercial operation. Of these, only the Company is
permitted for the chemical destruction of such a wide range of PCB contaminated
materials. The EPA's Alternative Destruction Technology Program is designed to
encourage remediation technologies as an alternative to incineration.
Test Results. In more than 1,500 tests using SET, various high levels
of contaminants, including PCBs, were reduced to levels approaching
non-detectable with the destruction process occurring in a matter of minutes.
The following table lists selected results of these tests.
7
The following table displays selected test results from 1996-2001.
These tests were conducted on limited quantities of contaminated material, and
there can be no assurance that SET will be able to replicate any of these test
results on a large-scale commercial basis or on any specific project.
--------------------- ----------------------- --------------------- ------------------ ------------------
Destruction
Post-Treatment Efficiency
Analyte Material Type Pre Treatment (ppm) (ppm)) (%)
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB** Sand, clay 777 <1.0 99.87
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB Sand, silt, clay 77 <2.0 97.41
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB Sand, silt 1250 <2.0 99.9
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB** Volcanic soil 102 0.2 99.8
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB Activated carbon 512 0.93 99.8
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB Solid resin 1212 0.5 99.96
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB Sludge 32,800 1.3 99.996
--------------------- ----------------------- --------------------- ------------------ ------------------
Dioxin Sludge .04 ND 99.99
--------------------- ----------------------- --------------------- ------------------ ------------------
DDD Clay 15 <0.02 99.87
--------------------- ----------------------- --------------------- ------------------ ------------------
TCE** Corn cob* 6,400 <0.5 99.992
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB** Metal capacitors* 5.6 <0.2 96.5
--------------------- ----------------------- --------------------- ------------------ ------------------
RDX Soil 3850 <1.0 99.98
--------------------- ----------------------- --------------------- ------------------ ------------------
TCE Soil* 48,000 0.5 99.999
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB Used motor oil 23,339 <1.0 99.996
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB Transformer oil 509,000 20* 99.996
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB Mineral oil 5000 <0.5 99.99
--------------------- ----------------------- --------------------- ------------------ ------------------
PCB Hexane 100,000 0.5 99.995
--------------------- ----------------------- --------------------- ------------------ ------------------
Freon 113** Aqueous sludge* 276 ND 99.999
--------------------- ----------------------- --------------------- ------------------ ------------------
TCE** Aqueous sludge* 262 ND 99.999
--------------------- ----------------------- --------------------- ------------------ ------------------
CCl4** Oil* 200,000 <0.5 99.999
--------------------- ----------------------- --------------------- ------------------ ------------------
R 23 Refrigerant 999,999 ND 99.99
--------------------- ----------------------- --------------------- ------------------ ------------------
Dioxin Oil 0.4 .000002 99.99
--------------------- ----------------------- --------------------- ------------------ ------------------
Malathion Oil 900,000 ND 99.999
--------------------- ----------------------- --------------------- ------------------ ------------------
* Material was low-level radioactive waste
** Commercial quantities treated on site
ENVIRONMENTAL MANAGEMENT--COMMODORE ADVANCED SCIENCES, INC.
The Company, through Commodore Advanced Sciences, Inc. ("Advanced
Sciences"), provides specialized technical and project management products and
services primarily to government-sector customers, including the Department of
Energy ("DOE") and the Department of Defense ("DOD"), and also to private-sector
domestic and foreign industrial customers. Advanced Sciences engages in all
aspects of environmental regulation and compliance, as well as access to leading
8
technologies and innovative skills related to the identification, investigation,
remediation and management of hazardous, mixed and radiological waste sites.
Advanced Sciences currently operates a network of six offices located in four
states, with its principal executive offices located in Albuquerque, New Mexico.
The Company's strategy in acquiring Advanced Sciences was to
incorporate its process technology into the products and services offered to
Advanced Sciences' customers, with a view to increasing the quality and scope of
services offered and providing the Company with a broader customer base for its
technology.
Services
Environmental Services. Advanced Sciences' analytic and scientific
abilities enable it to become involved in environmental issues and problems at
their outset. Initially, Advanced Sciences provides its customers with a broad
outline of the types of environmental problems, health risks and liabilities
associated with a particular activity. Advanced Sciences also conducts
environmental audits and assessments, underground storage tank site
investigations, remedial investigations/feasibility studies, environmental
impact assessments, and statements and studies to identify any potential
environmental hazards.
Remediation Services. Having already established a market position in
the consulting and front-end analysis phase, Advanced Sciences is poised to
follow market demand into remediation services. After an environmental problem
is identified, Advanced Sciences offers alternative remediation approaches that
may involve providing on-site waste containment or management of
on-site/off-site remediation and waste removal. Advanced Sciences can also
redesign its customers' ongoing production processes and develop engineering
plans and technical specifications to minimize or eliminate the generation of
hazardous waste. The Company believes that Advanced Sciences' integration of
engineering and environmental skills, plus its access to innovative
technologies, provide Advanced Sciences with a competitive advantage in
redesigning production processes.
Technical Services. New technologies play a critical role in both the
remediation of existing waste sites and in the reduction of waste generated by
ongoing production processes. Advanced Sciences has access to the SET technology
and all its derivatives. Additionally, Advanced Sciences has access to the
Supported Liquid Membrane ("SLiM(TM)") technology held by Commodore Separation
Technologies, Inc. ("Separation"). This technology has the ability to
selectively extract heavy metals and radioactive nuclides from liquids and
gasses. The SLiM technology is held in an 85% owned subsidiary of Commodore
Environmental Services, which owns 14.20% of the Company. Advanced Sciences has
also retained what it believes are among the most qualified professionals in the
environmental consulting business. Advanced Sciences' scientists have
participated on national boards for risk assessment and quality assurance, were
instrumental in the development of environmental regulations for the DOE and the
DOD, and have served as expert witnesses before the U.S. Congress and the
Nuclear Regulatory Commission. To maintain its competitive position, Advanced
Sciences intends to continue to develop viable remediation technologies and
attract and retain qualified personnel.
9
Contracts
Parsons Infrastructure and Technology Group, Inc.: Advanced Sciences
provides two to three engineering personnel on a time and material basis to
Parsons who supports BWXT, the operating and management contractor at the Y12
facility in Oak Ridge, TN. The time and material contract remains on-going
through 2003. Advanced Sciences provides general engineering, draftsmen and
maintenance of engineering drawings for the Y12 facility management group.
Accelerated Systems, Inc.: Advanced Sciences provides one engineering
personnel on a time and material basis to Accelerated, supporting Kaiser-Hill
Company, LLC (Kaiser-Hill) in the archiving of engineering, documentation and
records for the Rocky Flats Environmental Technology Site (RFETS) in Denver, CO.
The time and material contract remains on-going through 2003.
UT Battelle: Advanced Sciences provides one engineering personnel on a
time and material basis to UT Battelle, supporting the site closure at Oak Ridge
National Laboratories (ORNL). The Advanced Sciences personnel provide structural
engineering assessment services under this contract. The time and material
contract remains on-going through 2003.
American Ecology Recycle Center (AERC): Advanced Sciences provides
waste treatment services utilizing the SET technology to AERC. Equipment
operators are provided on a fixed unit rate based on pounds of material
processed. This fixed unit rate contract remains open through 2003.
Denver Regional Water Council of Governments: Advanced Sciences is
contracted annually to sample surface waters, streams, groundwater wells and
watersheds to Chatfield damn located southwest of Denver. The contract was
completed in December 2002. The contract is subject to re-bid for awardment in
February 2003.
Rocky Flats Environmental Technology Site (RFETS) Contracts: Advanced
Sciences had two contract vehicles at RFETS: (i) servicing Kaiser-Hill Company
LLC (Kaiser-Hill), prime integrating and management responsible for cleanup of
RFETS; and (ii) a lower-tier subcontract with Accelerated Systems LLC. Under its
fixed unit rate type subcontract with Kaiser Hill, Advanced Sciences provided 20
personnel who sampled surface water or soils, collected SDWA and bioassay
samples in radiological controlled areas, and shipped the samples to
Kaiser-Hill's laboratories. Advanced Sciences also provided engineering design
and documentation support services to Kaiser Hill under a time and materials
type task order executed via its Basic Ordering Agreement (BOA) with Accelerated
Systems. The RFETS contract expired September 30, 2002. Advanced Sciences was
unsuccessful in its attempts to re-bid a multi-year extension to the RFETS.
Tetra Tech Contract: Advanced Sciences has completed its five-year
subcontract under Tetra Tech's general engineering support contract with Bechtel
Jacobs Co, LLC. Bechtel Jacobs is responsible for environmental oversight of the
U.S. DOE's Oak Ridge, TN site. Advanced Sciences provided 1 to 3 engineering
personnel on a time and material basis to Tetra Tech on a contract basis through
September 2002. This contract remains open but has not been utilized by the
client since September 2002.
10
General Services Administration Contract: In January 2000, Advanced
Sciences was awarded a 5-year contract for environmental and engineering
services by the GSA's Federal Supply Service. Work is performed by task orders
not to exceed a $15 million contract ceiling. GSA's needs were diverted to
facility security and Anthrax sampling due to the events of September 11 and
beyond causing Advanced Sciences its expected backlog of $2 million through
December 2003. The environmental advisory services contract includes providing
expertise in the areas of environmental planning services and documentation,
environmental compliance services, environmental/occupational training services,
and waste management services. To date Advanced Sciences has not performed any
billable services under this contract.
American Technologies Incorporated (ATI) Contract: Advanced Sciences,
under a fixed price type subcontract with a three-year base period, was
providing facility maintenance, surveillance and inspection services for
American Technologies, Inc. (ATI) in support of Bechtel Jacobs Company at the
East Tennessee Technology Park (ETTP) at Oak Ridge, TN. The contract expired in
April 2002.
ENVIRONMENTAL INSURANCE CLAIM RESOLUTION-DISPUTE RESOLUTION MANAGEMENT, INC.
The Company, through DRM, which was disposed of May 16, 2002, provided
guidance to an environmentally impacted Company through the strategic tactical
and implementation issues that are inherent to an insurance recovery effort.
DRM was founded as a division of the KPMG Peat Marwick, LLP
Environmental Management Group in 1994 and purchased by the principals of DRM in
December 1996. The Company purchased 81% of DRM on August 30, 2000. The
principals of DRM retained the remaining 19%.
DRM represents policyholders, typically large multi-national
corporations, in the non-litigated resolution of large insurance claims. DRM
facilitates the settlement of claims by utilizing a series of proprietary
systems to perform insurance policy archeology, policy coverage analysis and
prioritization, claim documentation, coverage trigger allocation, settlement
value targeting, risk allocation modeling and settlement structuring and
documentation. DRM commits to manage the entire settlement process, typically in
exchange for a monthly retainer and/or a percentage success fee payable when the
insurers enter into a settlement agreement with its client.
The Company discontinued the operations of its previously 81% owned
subsidiary, DRM, on May 16, 2002 as a result of the Company's inability to meet
the terms and conditions of the Stock Purchase Agreement with DRM. The loss from
the disposition of DRM is recorded at $4,134,000 to the Company. The Company's
consolidated financial statements include the discontinued operations of DRM
since August 30, 2000 to May 16, 2002.
11
Joint Ventures
Teledyne Environmental Joint Venture. In August 1996, Commodore
Government Environmental Technologies, Inc. ("Government Technologies"), a
wholly-owned subsidiary of the Company, entered into a joint venture agreement
with Teledyne Environmental, Inc. ("Teledyne Environmental"), a subsidiary of
Allegheny Teledyne, Inc., as the exclusive means by which each party (and their
affiliates) would pursue the chemical weapons destruction and demilitarization
market on a worldwide basis. The purpose of the joint venture, known as
Teledyne-Commodore, LLC (the "LLC"), a Delaware limited liability company,
encompassed all phases of chemical weapons demilitarization including design,
engineering, field work, ordinance and residue (heel) neutralization and
demilitarization, disposal and reclamation through the use, application and
commercialization of the SET process. The LLC's SET process and the ammonia jet
cutting system was unable to compete successfully in the Army's ACWA program.
Government Technologies and Teledyne Environmental each owned 50% of
the equity, profit and losses of the LLC. Teledyne Environmental and the Company
agreed to cease the operations of and dissolve their Teledyne-Commodore LLC as
of October 22, 2001. There have been no operations since October 22, 2001. The
companies have not ruled out further collaboration in the future with respect to
demilitarization of chemical weapons. Under the dissolution agreement, the
Company obtained, from the LLC, equipment used by the LLC and the intellectual
property rights of the relevant technologies it licensed to the LLC as they
applied to chemical weapons destruction. The Company has valued the equipment
obtained from the LLC on our current financial statements at a net book value
($30,000) at the time of dissolution.
Nuvotec, Inc., Joint Venture. In April 2002, Commodore Government
Environmental Technologies, Inc. ("Government Technologies"), a wholly-owned
subsidiary of the Company, entered into a LLC agreement with Technical Resources
International, Inc., ("TRI"), a wholly owned subsidiary of Nuvotec, Inc., as a
non-exclusive means by which each party (and their affiliates) may pursue the
mixed waste treatment on a limited, domestic basis. TRI is a provider of
contract services to the DOE and to the public utilities market. The purpose of
the joint venture, known as Nuvoset, LLC (the "Nuvoset LLC"), a Delaware limited
liability company, encompasses all aspects of mixed waste characterization,
treatment, storage, transportation and disposal through the use, application and
commercialization of the technologies of the Nuvotec LLC partners. As of
December 31, 2002 there has been no activity in the joint venture.
MARKETS AND CUSTOMERS
General
The Company markets its services and technologies to governmental and
industrial customers throughout the United States. The Company also plans to
target customers in markets abroad, particularly in Eastern Europe. A majority
of the Company's sales are technical in nature and involve senior technical and
management professionals, supported by the Company's marketing groups. During
the year ended December 31, 2002, sales of approximately 7% of the Company's
12
environmental management services were to private sector customers and sales of
approximately 93% were derived from contracts with federal, state and municipal
government agencies. Contracts to private sector customers generally may not be
terminated at the option of the customer. Contracts with governmental customers
generally may be terminated at any time at the option of the customer. In 2002,
Advanced Sciences' Rocky Flats Contracts, Oak Ridge Contracts, and the AERC
Contract accounted for approximately 72%, 21% and 7%, respectively of the
Advanced Sciences' sales. The Company has benefited from its long-term
relationships with many of its customers that result in a significant amount of
repeat business.
Soil Decontamination
The Company anticipates that the initial market for commercial
applications of SET will be the hazardous and mixed waste and industrial
by-products treatment and disposal market. Mixed waste is material that contains
both a hazardous and radioactive component. The most common methods of treatment
and disposal of hazardous wastes and industrial by-products include landfilling,
chemical and biological treatment and incineration. Most of the current
treatment and disposal methods entail air pollution and transportation risks. In
a mixed waste, both hazardous and nuclear regulations apply, making disposal
difficult, if not impossible. Currently, there exists very limited disposal
options and these may not provide a permanent solution. Certain of these
treatment and disposal methods result in large volumes of residual waste, which
may require further treatment prior to disposal. As a result, a number of these
methods are encountering increased public resistance and added regulatory
oversight.
As with any new technology or process, there has been initial
resistance to the use of SET on a large scale, especially in connection with a
strong vested interest on the part of the U.S. Military (based on substantial
expenditures and commitments previously made) to use incineration for the
destruction of weapons. In addition, other prospective projects for the Company
have already been committed to other forms of destruction technology, including
incineration, plasma arc, vitrification, molten metal, molten salt, chemical
neutralization, biological treatment, catalytic electrochemical oxidation and
supercritical wet oxidation. The Company, and its collaborative partners, have
been attempting to overcome such competition by introducing SET in smaller
clean-up projects and through feasibility studies demonstrating its
applicability to larger projects, such as the Initial Harrisburg Contract and
the WCS Fixed Facility Processing Contract. The SET process provides a
significant advantage by allowing the processed material to be disposed of as a
non-mixed waste by destroying the hazardous component.
It may also be anticipated that, over an extended period, the market
for decontamination of hazardous materials will continue to decline as past
environmental degradation is corrected, and as the private and public sectors
limit further pollution through prohibitions on production and use of a broad
range of hazardous materials and through the modification and improved
efficiency of various manufacturing processes. The mixed waste market is one of
the few areas that shows growth and has limited competition when compared to the
general hazardous waste market. The SET process brings a unique solution to the
problem of remediating mixed waste.
13
Environmental Management
Based on market data compiled by Advanced Sciences, the largest market
for environmental services today within the United States is the U.S.
Government. Government wide spending levels for environmental services exceed
$10 billion per year. The DOD and DOE are expected to account for approximately
66% of such expenditures and together expect to spend in excess of $200 billion
for environmental work. Advanced Sciences has a long-term record for providing
environmental services to the U.S. Government with the DOD and DOE being its
primary customers.
RAW MATERIALS
The Company has historically experienced no difficulty in obtaining
components used in the SET process for which it relies on a broad range of
suppliers. Nevertheless, business disruptions or financial difficulties of such
suppliers, shortages or other causes beyond the Company's control, could
adversely affect the Company by increasing the cost of goods sold or reducing
the availability of such components. If the Company was unable to obtain a
sufficient supply of required components, it could experience significant delays
in the furnishing of components used in the SET process, which could result in
the loss of orders and customers and could have a material adverse affect on the
Company's business, financial condition and results of operations. In addition,
if the cost of finished components was to increase, there can be no assurance
that the Company would be able to pass such increase on to its customers. The
use of outside suppliers also entails risks of quality control and disclosure of
proprietary information.
BACKLOG
At December 31, 2002, total potential backlog for the Company was
approximately $1,200,000 as compared with approximately $11,000,000 as of
December 31, 2001. Approximately $300,000 of the total backlog represents work
for which the Company has entered into a signed agreement or purchase order with
respect thereto or has received an order to proceed with work up to a specified
dollar amount. The remaining backlog of approximately $900,000 represents the
Company's current estimate of work, for which the Company has been notified that
it has been chosen for a project but where a contract has not yet been
finalized, options that have yet to be formally exercised, proposals in
evaluation by our customers or new bids. The Company estimates that
approximately $360,000 of the total backlog represents work that will be
completed in the next 12 months. Backlog amounts have historically resulted in
revenues; however, no assurance can be given that all amounts included in
backlog will ultimately be realized, even if covered by written contracts or
work orders.
RESEARCH AND DEVELOPMENT
Research and development activities are ongoing and utilize internal
technical staff, as well as independent consultants retained by the Company and
its subsidiaries. All such activities are company-sponsored. Research and
development expenditures for the Company and its subsidiaries were $297,000,
$423,000, and $993,000 for the years ended December 31, 2002, 2001 and 2000
respectively.
14
INTELLECTUAL PROPERTY
The Company currently has twenty-three (23) issued U.S. and foreign
patents. Additionally, the Company has twenty-one (21) patent applications
currently on file and pending in the U.S. and in foreign countries. The average
life expectancy for the currently issued patents is 13.87 years. As patents are
issued, the U.S. Patent and Trademark Office assigns the Company a twenty (20)
year patent-life for each patent issued.
The Company believes that its patent portfolio provides the Company the
necessary "proprietary turf" in which it can market, distribute, and license the
full range of the SET technology and all of its derivatives. Additionally, the
Company's strength of its patent portfolio may operate as an effective "barrier
to entry" in several of the markets in which the Company is presently conducting
business.
To protect its trade secrets and the un-patented proprietary
information in its development activities, the Company requires its employees,
consultants and contractors to enter into agreements providing for the
confidentiality and the Company's ownership of such trade secrets and other
un-patented proprietary information originated by such persons while in the
employ of the Company. The Company also requires potential collaborative
partners to enter into confidentiality and non-disclosure agreements.
There can be no assurance that any patents that may hereafter be
obtained, or any of the Company's confidentiality and non-disclosure agreements,
will provide meaningful protection of the Company's confidential or proprietary
information in the case of unauthorized use or disclosure. In addition, there
can be no assurance that the Company will not incur significant costs and
expenses, including the costs of any future litigation, to defend its rights in
respect of any such intellectual property.
COMPETITION
Soil Decontamination
The Company anticipates that the initial market for commercial private
sector applications of SET will be the hazardous and non-hazardous waste and
industrial by-products treatment and disposal market. Several large domestic and
international companies and numerous small companies, many of whom have
substantially greater financial and other resources than the Company,
characterize this market. The Company primarily competes in the hazardous waste
treatment market in the U.S., a market valued at over $3.7 billion for 2003. The
top ten competitors in this market account for over 70 percent of the revenues
for this market sector. The dominant companies in this sector include URS, The
IT Group, Inc., Tetra Tech, Inc. and CH2M Hill, Inc. The Company's revenues for
2002 account for less than 1 percent of the dollar volume of the hazardous waste
market. Although the Company believes that it possesses the only Nationwide
Permit for destroying PCBs, any one or more of the Company's competitors or
other enterprises not presently known may develop technologies which are
superior to the technologies utilized by the Company. To the extent that the
15
Company's competitors are able to offer comparable services at lower prices or
of higher quality, or more cost-effective remediation alternatives, the
Company's ability to compete effectively could be adversely affected.
The domestic and international governmental public sector of the market
is dominated by many large multinational corporations who are presently engaged
in providing incineration and other conventional technologies in decontaminating
chemical weapons and warfare agents, concentration of nuclear wastes and the
decontamination of military vessels and other hardware. These competitors
include Raytheon Corporation (the current general contractor for the Johnston
Atoll incinerator), EG&G, Inc. (the general contractor for the Tooele Army
Depot), Mason and Hanger (the general contractor for the Newport News Naval
Facility), Waste Management Corporation (a bidder for domestic "large burial"
stockpile weapons decontamination), and others, including Browning-Ferris
Industries, Inc., Jacobs Engineering, Inc., Fluor Daniel Corporation and
Lockheed Martin Marietta Corporation. All of these corporations have
substantially greater financial, personnel and other resources than the Company.
In addition, many prospective users of SET have already committed substantial
resources to other forms of environmental remediation technology, including
incineration, plasma arc, vitrification, molten metal, molten salt, chemical
neutralization, catalytic electrochemical oxidation and supercritical wet
oxidation.
The Company believes that its ability to compete in both the commercial
private and governmental public sectors is dependent upon SET being accepted in
these sectors as a superior, more cost-effective method to achieve
decontamination of a variety of materials.
Environmental Management
Advanced Sciences has been primarily engaged in providing environmental
engineering and scientific support services to United States government
agencies, such as the DOE and DOD. Based on market data compiled by Advanced
Sciences, the largest market for environmental services today is the United
States government, which is expected to continue its spending level for
environmental services at approximately $10 to $11 billion for 2003. The DOE and
DOD are expected to account for approximately 66% of such expenditures. Advanced
Sciences currently occupies a position in the waste management and environmental
services arena by virtue of its long-term record for providing environmental
services to the United States government.
External developments and forces affecting Advanced Sciences include
competition from its competitors, as well as, demographic and technological
trends that influence the composition and needs of its customer base and the
usefulness and competitive position of its services. In addition, in order to
maintain its position in its market, Advanced Sciences must be able to respond
to economic trends and regulatory actions that affect the usefulness and
accessibility of its services and control its costs of doing business.
In the hazardous waste management market, Advanced Sciences'
competitors include such firms as Roy F. Weston, Jacobs Engineering, Science
Applications International Corp., CH2M Hill and CDM. In providing environmental
impact assessment services, Advanced Sciences' principal competitors in this
16
market sector include Tetra Tech, The Earth Technology Corp., URS and
Woodward-Clyde. Primary factors affecting Advanced Sciences' competitiveness in
this market are its ability to continue to attract and retain qualified
technical and professional staff with quality project performance records and to
control its costs of doing business.
In an effort to maintain its competitive position, Advanced Sciences
believes that it has developed a solid infrastructure, acquired a qualified
professional staff, and developed aggressive marketing objectives to provide
hazardous waste management and environmental sciences to the United States
government and private sector industrial customers. The Company believes its
competitive position with the United States government is enhanced by the
physical proximity of Advanced Sciences' plants to DOE and DOD sites, its
skilled professional staff, prior project experience with the United States
government, numerous existing multi-year contracts with the United States
government, integrated services and high quality performance.
ENVIRONMENTAL REGULATION
The environmental legislation and policies which the Company believes
are applicable to SET in the United States primarily include TSCA, RCRA, and the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of
1986 ("SARA"), and may include, on a case by case basis, the Clean Air Act of
1970, as amended (the "Clean Air Act"). These laws regulate the management and
disposal of toxic and hazardous substances, provide for the protection of land
and groundwater resources, and control the discharge of pollutants into the air.
Many of these laws have international counterparts, particularly in Europe and
elsewhere in North America.
TSCA regulates the manufacture, distribution, and sale of chemical
substances, and requires testing of new chemicals and new uses of known
chemicals that may present an unreasonable risk of injury to health or the
environment. The EPA, through TSCA, has adopted comprehensive regulations for
PCB's and other halogenated substances, as part of a vast regulatory program
covering thousands of chemicals.
RCRA was enacted in 1976 with the primary objective to protect human
health and the environment and to conserve valuable material and energy
resources. The most important aspect of RCRA is its establishment of
"cradle-to-grave" management and tracking of hazardous waste, from generator to
transporter, to treatment, storage, and disposal.
CERCLA and subsequent amendments under SARA (often referred to
collectively as Superfund) impose strict, retroactive liability upon persons who
generated, transported, or arranged for the transportation of hazardous
substances or owned or operated the vessels or facilities at which such
substances were disposed. CERCLA provides for the investigation and remediation
of hazardous substance sites and mandates that any hazardous substances
remaining on-site must meet certain regulatory requirements, with a preference
for innovative technology. These program regulations may create an incentive to
utilize environmental-friendly technologies such as SET, which destroy targeted
wastes without creating additional residual waste product. Moreover, to the
extent hazardous substances are effectively destroyed, potential liability can
be eliminated or significantly reduced.
17
The Clean Air Act empowered the EPA to establish and enforce ambient
air quality standards and limitations on emissions of air pollutants from
specific facilities. In 1987, the EPA began to enforce stricter standards for
incineration emissions. With more stringent regulations on waste reduction
technologies, the Company believes that SET could obtain a desired market share
since, in most cases, it produces little or no air emissions.
CERCLA imposes strict joint and several liability upon owners or
operators of facilities when a release or threatened release of a hazardous
substance has occurred, upon parties who generated hazardous substances that
were released at such facilities and upon parties who arranged for the
transportation of hazardous substances to and from such facilities. The
Company's plans to own and operate SET at on-site installations expose the
Company to potential liability under CERCLA for releases of hazardous substances
at those sites. In the event that off-site treatment, storage or disposal
facilities utilized by the Company for final disposition of residues from SET
are targeted for investigation and clean-up under CERCLA, the Company could
incur liability as a generator of such materials or by virtue of having arranged
for their transportation and disposal.
In light of such potential liability, the Company has designed the SET
technology to minimize the potential for release of hazardous substances into
the environment. In addition, the Company has developed plans to manage the risk
of CERCLA liability, including training of operators, use of operational
controls and structuring of its relationships with the entities responsible for
the handling of waste materials and by-products. The Company also maintains
insurance with respect to environmental claims, although there can be no
assurance that such insurance will be adequate.
The Clean Air Act Amendments of 1990 impose strict requirements upon
owners and operators of facilities that discharge pollutants into the
environment. These amendments may require that certain air emission control
technology be installed on the SET systems in the event that there is any
discharge of non-recovered gases into the environment. Such additional air
emission controls can be costly and require an air permit to construct and
operate.
The Company possesses a Nationwide Permit issued by the EPA under the
Alternative Destruction Technology Program that allows it to use SET on-site to
treat PCB-contaminated soils and metallic surfaces. The Nationwide Permit
contains numerous conditions for maintaining the Nationwide Permit and there can
be no assurance that the Company will be able to comply with such conditions to
maintain and/or secure renewal of the Nationwide Permit. In addition, if
environmental legislation or regulations are amended, or are interpreted or
enforced differently, the Company may be required to meet stricter standards of
operation and/or obtain additional operating permits or approvals. Failure to
obtain such permits or otherwise comply with such regulatory requirements could
have a material adverse effect on the Company and its operations. Various
revisions to the equipment and process parameters are being made to the existing
permit. The revised permit will be issued pending the final site selection for
the full or part-time operation of any SET system for the treatment of PCB
wastes. The revised permit will require the Company to fund closure costs
associated with the implementation of any SET system for the treatment of PCB
wastes. The closure costs are calculated on a site-by-site basis and are funded
accordingly by the Company.
18
EMPLOYEES
As of December 31, 2002, the Company (including all of its direct and
indirect subsidiaries) had a total of 14 full-time and 5 part-time employees, of
which approximately 15 are engineers, scientists, lawyers and other
professionals. None of such employees are covered by collective bargaining
agreements and the Company's relations with its employees are believed to be
good.
ITEM 2. PROPERTIES.
------ -----------
The Company's principal executive offices are located in New York, New
York. The Company leases approximately 2,000 square feet of office space in New
York from an affiliate of Bentley J. Blum, a director and principal stockholder
of Commodore Environmental Services, Inc. ("Environmental") and a director of
the Company, Solution, Commodore Separation Technologies, Inc. ("Separation"),
Advanced Sciences and certain other subsidiaries and affiliates of the Company.
Such space also serves as the principal executive offices of Environmental and
certain of its affiliates. Although the Company's lease for the New York City
space expired in December 1998, the Company has been permitted to use the New
York City office space during 1999, 2000, 2001, 2002 and 2003 on a rent-free
basis. The Company is charged for direct labor, office supplies and third party
vendor services that the Company generates in its activities in the New York
City offices. Also, the Company provides director and officer insurance to
Environmental and Separation under its policy at no charge to Environmental and
Separation.
In addition to the New York, New York facilities, since April 2000, the
Company has leased approximately 1600 square feet of space from Shelby T.
Brewer, a director and executive officer of the Company, on a month-to-month
basis, for a rental payment in the amount of $2300 per month.
The Company leases approximately 10,800 square feet of laboratory,
office and storage space at Kirtland Air Force Base in Albuquerque, New Mexico
for rental payments in the amount of $3,800 per month, pursuant to a
month-to-month lease arrangement.
Advanced Sciences' principal executive and administrative offices are
located in Albuquerque, New Mexico. Advanced Science leases approximately 3,750
square feet of space for rental payments in the amount of $4,305 per month under
a month-to-month lease. Advanced Sciences also leases various spaces for field
operations in Oak Ridge, Tennessee, and Wheat Ridge, Colorado.
The Company believes that the foregoing properties will satisfy the
business and operational needs of the Company and its subsidiaries in the
present and in the foreseeable future.
19
ITEM 3. LEGAL PROCEEDINGS
------- -----------------
Indemnification Matters
-----------------------
The Company, along with several other entities, in a prior year
guaranteed a performance bond of Separation relating to the Port of Baltimore
contract. The Company was notified on June 28, 2000 that the performance bond is
being called. It is not known, at this time, the amount, if any, the Company's
share of liability will be.
As of April 15, 2003, no litigation has been filed against the Company,
or any of the Company's subsidiaries with respect to this indemnification issue.
The Company is currently investigating all of the relevant facts and
circumstances in connection with the Surety's potential claim or cause of
action. In the event that the Company is obligated to indemnify the Surety, the
Company estimates that its liability will not exceed approximately $390,000.
Incidental Matters
------------------
As of April 15, 2003, the Company and its subsidiaries are involved in
ordinary, routine litigation incidental to the conduct of their business.
Management believes that none of this litigation, individually or in the
aggregate, is material to the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------ --------------------------------------------------- -
The annual meeting for the year 2001 and 2002 will be held during the
year 2003. All shareholders of record as of the announced record date will be
notified of the meeting in a timely manner. All shareholders of record will
receive the appropriate financial and proxy materials prior to the meeting.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
------ ----------------------------------------------------------------------
MARKET INFORMATION
On June 28, 1996, the Company issued common stock and warrants at
initial public offering prices of $6.00 per share and $0.10 per warrant. The
Company's warrants, previously extended from June 16, 2001, expired on June 16,
2002. On March 6, 2003, the Common Stock ceased to be quoted on the American
Stock Exchange ("AMEX") and began trading in the over-the-counter market in the
so-called "pink sheets" of the National Quotation Bureau, Inc. and the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. (the "OTC
Bulletin Board"), where it is currently traded under the symbol CXII. As of
April 15, 2003, there were 215 record holders of the Company's common stock.
The following table sets forth, for the fiscal periods shown, the high
and low sale prices (rounded to the nearest cent) for the Company's common stock
and warrants as reported on the AMEX.
Common Stock Warrants*
---------------- ----------------
High Low High Low
---- --- ---- ---
Fiscal 2002
First Quarter............. $0.21 $0.09 $0.03 $0.01
Second Quarter............ 0.12 0.05 0.01 0.01
Third Quarter............. 0.09 0.05 - -
Fourth Quarter............ 0.12 0.04 - -
Fiscal 2001
First Quarter............. $0.75 0.19 0.11 0.02
Second Quarter............ 0.28 0.13 0.07 0.01
Third Quarter............. 0.17 0.06 0.03 0.01
Fourth Quarter............ 0.18 0.06 0.02 0.01
* Warrants expired on June 16, 2002
ISSUANCE OF COMMON STOCK SUBSEQUENT TO DECEMBER 31, 2002
The Company issued a total of 20,705,790 shares of its common stock
during the period from January 1, 2003 to April 15, 2003, in connection with
various conversion notices from the holders of the Company's Series E
Convertible Preferred Stock, par value ($0.001) per share (the "Series E
Preferred Stock") and the holders of the Company's Series F Convertible
Preferred Stock, par value ($0.001) per share (the "Series F Preferred Stock").
21
DIVIDEND INFORMATION
Series E Preferred Stock
------------------------
The holders of the Company's Series E Convertible Preferred Stock, par
value ($0.001) per share (the "Series E Preferred Stock"), are entitled to a
variable rate dividends beginning at 12% and averaging 8.15% over the term of
the securities. Through December 31, 2002, the Company had paid $134,000 in cash
dividends and the Company has accrued an additional $772,489 in dividends. The
Company has the option to pay the dividends accrued in all periods after April
30, 2000 in the Company's common stock rather than cash. On January 9, 2002 the
Company paid $36,657 in common stock dividends representing the accrued
dividends on all of the converted Series E Preferred Stock shares to date. See
"Recent Sales of Unregistered Securities -- November 1999 Private Placement of
Series E Preferred Stock."
Series F Preferred Stock
------------------------
The holders of the Company's Series F Convertible Preferred Stock, par
value ($0.001) per share (the "Series F Preferred Stock"), are entitled to a
variable rate dividend beginning at 12% and averaging 8.15% over the term of the
securities. Through December 31, 2002, the Company had paid $92,000 in cash
dividends and the Company has accrued an additional $428,705 in dividends. The
Company has the option to pay the dividends accrued in all periods after
September 31, 2000 in the Company's common stock rather than cash. During 2002
the Company paid $96,981 in common stock dividends representing the accrued
dividends on all of the converted Series F shares to date. See "Recent Sales of
Unregistered Securities -- March 2000 Private Placement of Series F Preferred
Stock."
Series H Preferred Stock
------------------------
The holders of the Company's Series H Convertible Preferred Stock, par
value ($0.001) per share (the "Series H Preferred Stock"), are entitled to a
dividend rate of 3% over the term of the securities. Through December 31, 2002,
the Company had not paid cash dividends and the Company has accrued $8,762 in
dividends. The Company has the option to pay the dividends accrued in all
periods in additional shares of Series H Preferred Stock. See "Recent Sales of
Unregistered Securities -- May 2002 Settlement Agreement Issuance of Series H
Preferred Stock."
Common Stock
------------
The Company has never paid cash dividends on its common stock. Any
future determination by the Board of Directors of the Company with respect to
the payment of cash dividends on the common stock of the Company will depend on
the ability of the Company to service its outstanding indebtedness, the
Company's future earnings, capital requirements, the financial condition of the
Company and such other factors as the Company's Board of Directors may consider.
The Company currently intends to retain its earnings to finance the growth and
development of its business, to repay outstanding indebtedness and does not
anticipate paying cash dividends on its common stock in the foreseeable future.
22
RECENT SALES OF UNREGISTERED SECURITIES
On October 2, 2002, Mr. Bentley Blum, a Director of the Company, had
previously loaned the Company with $125,000 of cash installments over the period
of one year (the "Blum Loan"). The Company elected to convert the Blum Loan to
the Company's common stock using the conversion feature of the 5-day average
closing price of the Company's common stock prior to October 2, 2002. On October
2, 2002, Blum issued a conversion notice for $125,000 of the outstanding
principal of the Blum Loan into 2,500,000 shares. Mr. Blum continues to provide
cash installments in the form of a loan to the Company. The Blum Loan bears
interest at 9% per annum and has no due date at this time. The current principal
balance of the Blum Loan remains unpaid as of April 15, 2003. See "MD&A -
Liquidity and Capital Resources."
On June 13, 2001, the Company issued and sold to Milford Capital
Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar")
one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan
Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year
warrant for 333,334 shares of the Company's common stock at an exercise price of
$0.22 per share. The Company pledged its equipment and SET related intellectual
property as collateral for the Milford/Shaar Bridge Loan Notes. The Company
shall pay Milford/Shaar principal and interest on a monthly basis in arrears.
The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty.
The Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities.
The Company made all payments on the Milford/Shaar Bridge Loan Notes
until November 13, 2001. The Company asked for and received a forbearance of
payments on the Milford/Shaar Bridge Loan Notes from November 13, 2001 until
August 13, 2002. The Shaar Fund, Ltd., through the Shaar Bridge Loan, continues
to provide cash installments on a periodic basis in the form of additional
principal. The current principal balance of the Milford/Shaar Bridge Loan Notes
remains unpaid as of April 15, 2003. The Company has not been notified of a
default of the Milford/Shaar Bridge Loan Notes as of April 15, 2003. See "MD&A -
Liquidity and Capital Resources."
On May 23, 2001, a private investor purchased $250,000 of the Company's
common stock at the market price. The Company issued the private investor
1,973,077 shares of common stock of the Company as a result of the equity
purchase. In connection with the purchase of the shares of the Company's common
stock, the Company issued the private investor a 2-year warrant for 500,000
shares of the Company's common stock at an exercise price of $0.22 per share.
The Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities. See "MD&A - Liquidity and
Capital Resources."
In September 2000, the Company completed $500,000 in financing in the
form of a loan (the "Brewer Note") from S. Brewer Enterprises, Inc. ("SB
Enterprises"), which is owned by one of its officers and directors, Shelby T.
Brewer, Chairman of the Board and Chief Executive Officer of the Company. The
Brewer Note bears a 9.75% interest rate, payable monthly, with a balloon
principal payment at the end of the term. In connection with the Brewer Note,
the Company issued SB Enterprises a 2-year warrant for 100,000 shares of the
23
Company's common stock at an exercise price of $1.0625 per share. This warrant
expired by it terms in September of 2002. The note was due and payable on March
15, 2001. The Brewer Note was convertible into the Company's common stock at the
market price up through March 15, 2001.
On March 15, 2001, SB Enterprises executed an Amended and Restated
Promissory Note (the "Restated Brewer Note"), which extended the maturity date
of the note until December 31, 2001. Additionally, the conversion feature of the
Restated Brewer Note was changed to the 5-day average closing price of the
Company's common stock prior to a conversion notice. On April 9, 2001, SB
Enterprises issued a conversion notice for $250,000 of the outstanding principal
of the Brewer Restated Note. The conversion price was calculated by the previous
5-day average of the closing price of the Company's common stock and was
converted into 1,041,667 shares.
On December 12, 2002, SB Enterprises executed an Amended and Restated
Promissory Note Extension (the "Restated Brewer Note Extension"), which extended
the maturity date of the note until January 1, 2004. In connection with the
Restated Brewer Note Extension, the Company issued SB Enterprises a 2-year
warrant for 1,000,000 shares of the Company's common stock at an exercise price
of $0.05 per share. On March 14, 2003, SB Enterprises issued a conversion notice
for the remaining principal balance of $250,000 plus accrued interest of
$36,563. The conversion price was calculated by the previous 5-day average of
the closing price of the Company's common stock and was converted into
13,189,842 shares. These shares have not been issued to Mr. Brewer as of April
15, 2003. The Company believes that this issuance of convertible debt is exempt
from the registration requirements of the Securities Act under Section 4(2)
thereof as a transaction not involving any public offering of securities. See
"MD&A - Liquidity and Capital Resources."
In November 2000, the Company completed $500,000 in financing in the
form of a loan (the "Weiss Group Note") from a group of four investors; $75,000
of which was borrowed from the son of Paul E. Hannesson, our former President
and Chief Executive Officer, and $25,000 of which was borrowed from Stephen A.
Weiss, a shareholder of Greenberg Traurig, LLP, our former corporate and
securities counsel. The Weiss Group Note bears interest at 12% per annum, was
due and payable on February 12, 2001, and is secured by the first $500,000 of
loans or dividends that the Company may receive from DRM. As consideration for
such loan, Environmental, one of the Company's principal stockholders owning
approximately 14.20% of the Company's common stock, transferred to the investors
a total of 1,000,000 shares of the Company's common stock. All holders of the
Weiss Group Note have granted payment extensions until January 1, 2004.
Effective April 16, 2001, the Company issued two-year warrants to
purchase 1,000,000 shares of its common stock at an exercise price of $0.22 per
share (the closing price of our common stock on the AMEX on such date) to all
holders of the Weiss Group Note in consideration of the extension of the due
date of such loans by such persons from February 12, 2001 to June 30, 2001. The
Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities.
Effective January 24, 2002, the Company issued warrants to purchase
500,000 shares of its common stock at an exercise price of $0.15 per share (the
closing price of our common stock on the AMEX on such date) to all holders of
24
the Weiss Group Note in consideration of the extension of the due date of such
loans by such persons from June 30, 2001 to May 31, 2002. The Company believes
that this transaction is exempt from the registration requirements of the
Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities. See "MD&A - Liquidity and Capital Resources."
Effective October 29, 2002, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 1,000,000 shares at an
exercise price of $0.22 per share of the Company's common stock in connection
with the Weiss Group Note. Effective October 29, 2002, the members of the Weiss
Group Note voluntarily cancelled all issued warrants to purchase 500,000 shares
at an exercise price of $0.15 per share of the Company's common stock in
connection with the Weiss Group Note.
Effective October 29, 2002, the Company issued two-year warrants to
purchase 1,500,000 shares of its common stock at an exercise price of $0.05 per
share (the closing price of our common stock on the AMEX on such date) to all
holders of the Weiss Group Note in consideration of the extension of the due
date of such loans by such persons from May 31, 2002 to January 1, 2004. The
Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities. See "MD&A - Liquidity and
Capital Resources."
May 2002 Settlement Agreement Issuance of Series H Preferred Stock
On August 30, 2000, Applied completed a stock purchase agreement with
Dispute Resolution Management, Inc. (DRM) and its two shareholders, William J.
Russell ("Russell") and Tamie B. Speciale ("Speciale").
On May 16, 2002, a Notice of Default and Right to Pursue Remedies (the
"Notice") was issued to the Company by William J. Russell and Tamie B. Speciale
(the "Pledgees") claiming that the Company is in default under the Stock
Purchase Agreement (the "Agreement"), between the Company and DRM and the
related Stock Pledge Agreement (the "Stock Pledge"). As of May 16, 2002, the
Company no longer owns an 81% interest in DRM.
On August 19, 2002, the Company entered into a settlement agreement
with DRM (the "DRM Settlement Agreement"). Under terms of the DRM Settlement
Agreement, the Company acknowledged that it had previously received back
4,750,000 shares of its common stock from DRM and its shareholders. As part of
the DRM Settlement Agreement, the Company received an additional 1,187,500
shares of its common stock from DRM and its shareholders.
Additionally, the Company issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per share, each such share of
Series H Preferred having a stated value of $1.00 per share, to DRM, Russell and
Speciale as part of the DRM Settlement Agreement as of September 30, 2002 for
satisfaction of the remaining liabilities relating to the purchase and working
capital of DRM. The Series H Preferred shall have the following rights,
privileges, and limitations:
25
a) The conversion feature shall be exercisable on June 30, 2003.
b) No Series H Preferred may be converted prior to June 30, 2003.
Until July 31, 2005, only 80,000 shares of the Series H Preferred
shall be convertible in any calendar quarter. The balance of any
unconverted Series H Preferred Stock may be converted at any time
on or after August 1, 2005.
c) The conversion price of the Series H Preferred shall be determined
by the average closing price of Company's common stock in the
previous 30 trading days, but in no event shall the conversion
price be less than $0.20 per share.
d) The Series H Preferred shall have a non-cumulative annual dividend
of 3%, payable in cash or Series H Preferred within 30 days of the
end of the Company's fiscal year, at the Company's election.
e) The Series H Preferred shall not be transferable.
March 2000 Private Placement of Series F Preferred Stock
On March 20, 2000, the Company completed a $2.0 million private
placement financing with The Shaar Fund Ltd. The Company issued to The Shaar
Fund 226,700 shares of a newly authorized Series F Convertible Preferred Stock
(the "Series F Convertible"), convertible into the Company's common stock, at
any time after September 31, 2000, for a conversion price equal to the
arithmetic mean of the closing prices of the Company's common stock as reported
on the AMEX for the ten trading days immediately preceding the date of
conversion so long as the Company's common stock continues to trade on the AMEX.
In May 2003, the Series F Convertible will automatically convert into the
Company's common stock at a conversion price calculated in accordance with the
above conversion formula plus any accrued and unpaid dividends.
The Series F Convertible has a variable rate dividend averaging 8.15%
over the term of the securities. The Company reserved the right to redeem all of
the Series F Convertible on or before September 30, 2000 by payment to the
holders of the shares of the Series F Convertible of $2.3 million plus any
accrued and unpaid dividends. Depending upon the market price of the Company's
common stock at the time of conversion, the issuance of the Company's common
stock upon conversion of the Series F Convertible may be subject to shareholder
approval. In addition, the Company issued to The Shaar Fund a warrant to
purchase up to 226,500 shares of the Company's common stock (subject to
adjustment) at a purchase price of $1.94 per share. The warrant expires on March
20, 2005. The Company also issued to Avalon Research Group Inc., as finder in
this transaction, a five-year warrant to purchase up to 250,000 shares of the
Company's common stock (subject to adjustment) at a purchase price of $1.94 per
share. The Company also paid Avalon a "finder's fee" in the amount of $200,000
for this transaction.
26
The recipient of securities in this transaction represented its
intention to acquire the securities for investment only and not with a view to,
or for sale in connection with, any distribution thereof, and appropriate
restrictive legends were affixed to the warrants and the certificates
representing the shares issued in this transaction. The Company made available
to The Shaar Fund Ltd., written information about the Company in accordance with
Rule 502 of the Securities Act and advised such recipient of the limitations on
resale of such securities. In addition, The Shaar Fund Ltd. was offered the
opportunity, prior to purchasing any securities, to ask questions of, and
receive answers from, the Company concerning the terms and conditions of the
transaction and to obtain additional relevant information about the Company.
Based upon the facts above, the Company believed this transaction to be exempt
from the registration requirements of the Securities Act in reliance on Section
4 (2) thereof as a transaction not involving any public offering of securities.
November 1999 Private Placement of Series E Preferred Stock
On November 4, 1999, the Company completed a $2.5 million private
placement financing with The Shaar Fund Ltd. The Company issued to The Shaar
Fund 335,000 shares of a newly authorized Series E Convertible Preferred Stock
(the "Series E Convertible"), convertible into the Company's common stock, at
any time after April 30, 2000, for a conversion price equal to the arithmetic
mean of the closing prices of the Company's common stock as reported on the AMEX
for the ten trading days immediately preceding the date of conversion so long as
the Company's common stock continues to trade on the AMEX. In May 2003, the
Series E Convertible will automatically convert into the Company's common stock
at a conversion price calculated in accordance with the above conversion formula
plus any accrued and unpaid dividends.
The Series E Convertible has a variable rate dividend averaging 8.15%
over the term of the securities. The Company reserved the right to redeem all of
the Series E Convertible on or before April 30, 2000 by payment to the holders
of the shares of the Series E Convertible of $2.8 million plus any accrued and
unpaid dividends. Depending upon the market price of the Company's common stock
at the time of conversion, the issuance of the Company's common stock upon
conversion of the Series E Convertible may be subject to shareholder approval.
In addition, the Company issued to The Shaar Fund a warrant to purchase up to
312,500 shares of our common stock (subject to adjustment) at a purchase price
of $1.1963 per share. The warrant expires on November 4, 2004. The Company also
issued to Avalon Research Group Inc., as finder in this transaction, a five-year
warrant to purchase up to 250,000 shares of our common stock (subject to
adjustment) at a purchase price of $1.1963 per share. The Company also paid
Avalon a "finder's fee" in the amount of $250,000 for this transaction.
The recipient of securities in this transaction represented its
intention to acquire the securities for investment only and not with a view to,
or for sale in connection with, any distribution thereof, and appropriate
restrictive legends were affixed to the warrants and the certificates
representing the shares issued in this transaction. The Company made available
to The Shaar Fund Ltd., written information about the Company in accordance with
Rule 502 of the Securities Act and advised such recipient of the limitations on
resale of such securities. In addition, The Shaar Fund Ltd. was offered the
opportunity, prior to purchasing any securities, to ask questions of, and
receive answers from, the Company concerning the terms and conditions of the
transaction and to obtain additional relevant information about the Company.
Based upon the facts above, the Company believed this transaction to be exempt
from the registration requirements of the Securities Act in reliance on Section
4 (2) thereof as a transaction not involving any public offering of securities.
27
ITEM 6. SELECTED FINANCIAL DATA.
------ ------------------------
The following table presents selected financial data of the Company, as
of December 31, 2002, 2001, 2000, 1999, and 1998 and for the years then ended.
The following selected historical data is derived from the Company's
Consolidated Financial Statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report.
Consolidated Statement of Operations Data: (in thousands, except per share data)
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
Revenue:
Contract revenue.............. $ 17,470 $ 1 8,147 $ 17,057 $ 4,590 $ 3,710
Cost of sales:
Cost of sales................. 15,421 16,127 14,452 3,369 2,108
Research and development...... 2,722 1,145 993 423 297
General and administrative.... 8,118 4,037 5,228 2,420 1,792
Depreciation and amortization. 1,150 696 865 658 314
Impairment of Machinery.... -- -- -- 776 --
Impairment of Patents...... -- -- -- 627 --
Impairment of Goodwill..... -- -- 6,586 -- --
Minority interests............ 300 -- -- -- --
----------- ----------- ----------- ----------- -----------
Loss from operations.............. (10,241) (3,858) (11,067) (3,683) (801)
Interest income............... 337 39 57 38 --
Interest expense.............. (1,066) (166) (586) (226) (104)
Equity in net losses of
subsidiary.................. (2,383) -- -- (295) --
----------- ----------- ----------- ----------- -----------
Loss before income taxes ......... (13,353) (3,985) (11,596) (4,166) (905)
Income taxes.................. ----------- ----------- ----------- ----------- -----------
Loss on disposal of
discontinued operations -- -- -- -- (4,134)
(Loss) gain from discontinued
operations...................... -- -- 155 (2,388) (933)
----------- ----------- ----------- ------------ -----------
Net loss ......................... (13,353) $ (3,985) $ (11,441) $ (6,554) $ (5,972)
=========== =========== =========== =========== ===========
Net loss per share-- basic and
diluted......................... $ (.58) $ (.16) $ (.34) $ (.13) $ (.11)
=========== =========== =========== =========== ===========
Weighted average number of
shares.......................... 23,194 24,819 35,866 53,241 57,775
=========== =========== =========== =========== ===========
Consolidated Balance Sheet Data: (in thousands)
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents......... $ 1,777 $ 1,797 $ 579 $ 170 $ 59
Assets held for sale - DRM........ -- -- 29,687 29,407 --
Total assets...................... 15,617 16,047 37,473 31,200 736
Long term debt.................... -- 716 221 -- 431
Liabilities held for sale - DRM... -- -- 22,966 22,165 --
Total liabilities................. 3,709 6,096 29,618 29,629 5,025
Minority interests................ -- -- -- -- --
Stockholders' (deficit) equity.... 11,908 9,951 7,855 1,571 (4,289)
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------ -----------------------------------------------------------------------
OF OPERATIONS.
---------------
Overview
The Company is engaged in providing a range of engineering and
technical services to the public and private sectors related to (i) remediating
contamination in soils, liquids and other materials and disposing of or reusing
certain waste by-products by utilizing SET; and (ii) providing services related
to, environmental management for on-site and off-site identification,
investigation remediation and management of hazardous, mixed and radioactive
waste.
The Company owns technologies related to the separation and destruction
of mixed waste, polychlorinated biphenyls (PCBs) and chlorofluorocarbons (CFCs).
The Company is currently working on the commercialization of these technologies
through development efforts, licensing arrangements and joint ventures. Through
Advanced Sciences, formerly Advanced Sciences, Inc., a subsidiary acquired on
October 1, 1996, the Company has contracts with various government agencies and
private companies in the U.S. As some government contracts are funded in
one-year increments, there is a possibility for cutbacks as these contracts
constitute a major portion of Advanced Sciences' revenues, and such a reduction
would materially affect the operations. However, management believes Advanced
Sciences' existing client relationships will allow the Company to obtain new
contracts in the future.
Applied discontinued the operations of its previously 81% owned
subsidiary DRM, on May 16, 2002 as a result of Applied's inability to meet the
terms and conditions of the Stock Purchase Agreement with DRM. The loss from the
disposition of DRM is recorded at $4,134,000 to Applied. The Company's loss of
the DRM subsidiary may have a material adverse effect on the financial condition
of the Company and its cash flow problems. The Company currently requires
additional cash to sustain existing operations and to meet current obligations
and ongoing capital requirements. Excluding DRM, the Company's current monthly
operating expenses exceed cash revenues by approximately $80,000.
The Company has identified two reportable segments in which it
operates, based on the guidelines set forth in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131. These two
segments are as follows: Commodore Advanced Sciences, Inc., which primarily
provides various engineering, legal, sampling, and public relations services to
Government agencies on a cost plus basis; and Commodore Solutions, Inc., which
is commercializing technologies to treat mixed and hazardous waste.
Results of Operations
Year ended December 31, 2002 compared to Year ended December 31, 2001
Revenues were $3,710,000 for the year ended December 31, 2002, compared
to $4,590,000 for the year ended December 31, 2001. The decrease in revenues is
due to the decreases in revenue contribution by Advanced Sciences.
29
In the case of Advanced Sciences, revenues were $3,448,000 for the year
ended December 31, 2002, compared to $4,409,000 for the year ended 2001.
Revenues in 2002 were primarily from engineering and scientific services
performed for the United States government under a variety of contracts similar
to those in place in 2001. Advanced Sciences had two major customers in 2002,
each of which represents more than 10% of annual revenue. The combined revenue
for these two customers was $3,448,000 or 100% of the Company's total 2002
revenue. The decline in revenues at Advanced Sciences is primarily the result of
fewer contracts and overall, less subcontract work being performed in 2002. The
government decided to deal directly with the subcontractor rather than having
Advanced Sciences subcontract this work on behalf of the government. The
government took this action, as the subcontracts became too large. Cost of sales
decreased from $3,080,000 for 2001 to $1,854,000 for 2002. A reduction in cost
of sales at Advanced Sciences resulted from fewer contracts and overall, less
work performed resulting in decreased revenues. Anticipated losses on contracts
are provided for by a charge to income during the period such losses are first
identified.
In the case of Solution, revenues were $262,000 for the year ended
December 31, 2002 as compared with $181,000 for the year ended December 31,
2001. The increase is primarily due to the increase in feasibility studies and
commercial processing. Revenues in 2002 were primarily from remediation services
performed for engineering and waste treatment companies in the U.S. under a
variety of contracts. Solution has two major customers, each of which represents
more than 10% of annual revenue. The combined revenue for these two customers
was $262,000 or 100% of the Solution's total 2002 revenue. The increase in
revenues at Solution is primarily the result of more subcontract work being
performed in 2002. Cost of sales was $254,000 for the year ended December 31,
2002 as compared to $289,000 for the year ended December 31, 2001. The decrease
in cost of sales is attributable to lower sales and marketing expenses for the
SET technology. Anticipated losses on engagements, if any, will be provided for
by a charge to income during the period such losses are first identified.
For the year ended December 31, 2002, the Company incurred research and
development costs of $297,000, as compared to $423,000 for the year ended
December 31, 2001. 100% of the research and development costs are attributable
to the operations of Solution. In 2002, the Company invested more money in
capital expenditures and less in laboratory work and consultants than it had in
2001. Advanced Sciences did not incur research and development costs in the
years 2001 and 2002.
General and administrative expenses for the year ended December 31,
2002 were $1,792,000 as compared to $2,420,000 for the year ended December 31,
2001. This decrease reflects the impact of some of the restructuring steps in
the Company throughout 2002.
In the case of Advanced Sciences, general and administrative costs
decreased from $1,219,000 for the year ended December 31, 2001 to $754,000 for
the year ended December 31, 2002. This decrease reflects the impact of some
restructuring steps in Advanced Sciences (including principally a reduction in
personnel) the Company made throughout 2002 due to the inability to replace
certain completed contracts. Solution incurred general and administrative costs
of $203,000 for the year ended December 31, 2002 as compared with $313,000 for
30
the year ended December 31, 2001. This decrease was primarily due to a more
narrowly focused sales and marketing effort for Solution's services, which has
resulted in contracts that will produce revenue in 2003.
The decrease in interest expense of $122,000 from 2001 to 2002 is
primarily related to lower, amortized non-cash interest costs associated with
the Brewer Note, Milford/Shaar and the Weiss Group Note and lower balances on
the Company's receivable financing line of credit.
The loss from discontinued operations is approximately $933,000 and
$2,388,000 for the years ended December 31, 2002 and 2001, respectively. The
difference results primarily from the estimated loss on disposal of DRM of
approximately $4,134,000. The remaining difference is the result of the reduced
retainers paid by DRM's current customers and the lack of material settlements
on their existing client agreements.
Year ended December 31, 2001 compared to Year ended December 31, 2000
Revenues were $4,590,000 for the year ended December 31, 2001, compared
to $17,057,000 for the year ended December 31, 2000. The decrease in revenues is
due to the decreases in revenue contribution by Advanced Sciences.
In the case of Advanced Sciences, revenues were $4,409,000 for the year
ended December 31, 2001, compared to $16,786,000 for the year ended 2000.
Revenues in 2001 were primarily from engineering and scientific services
performed for the United States government under a variety of contracts similar
to those in place in 2000. Advanced Sciences had two major customers in 2001,
each of which represents more than 10% of annual revenue. The combined revenue
for these two customers was $4,409,000 or 100% of the Company's total 2001
revenue. The decline in revenues at Advanced Sciences is primarily the result of
fewer contracts and overall, less subcontract work being performed in 2001. The
government decided to deal directly with the subcontractor rather than having
Advanced Sciences subcontract this work on behalf of the government. The
government took this action, as the subcontracts became too large. Cost of sales
decreased from $13,962,000 for 2000 to $3,080,000 for 2001. A reduction in cost
of sales at Advanced Sciences resulted from fewer contracts and overall, less
work performed resulting in decreased revenues. Anticipated losses on contracts
are provided for by a charge to income during the period such losses are first
identified.
In the case of Solution, revenues were $181,000 for the year ended
December 31, 2001 as compared with $271,000 for the year ended December 31,
2000. The decrease is primarily due to the decrease in feasibility studies and
commercial processing. Revenues in 2001 were primarily from remediation services
performed for engineering and waste treatment companies in the U.S. under a
variety of contracts. Solution has two major customers, each of which represents
more than 10% of annual revenue. The combined revenue for these two customers
was $181,000 or 100% of the Solution's total 2001 revenue. The decrease in
revenues at Solution is primarily the result of less subcontract work being
performed in 2001. Cost of sales was $289,000 for the year ended December 31,
2001 as compared to $490,000 for the year ended December 31, 2000. The decrease
in cost of sales is attributable to lower sales and marketing expenses for the
31
SET technology. Anticipated losses on engagements, if any, will be provided for
by a charge to income during the period such losses are first identified.
For the year ended December 31, 2001, the Company incurred research and
development costs of $423,000, as compared to $993,000 for the year ended
December 31, 2000. 100% of the research and development costs are attributable
to the operations of Solution. In 2001, the Company invested more money in
capital expenditures and less in laboratory work and consultants than it had in
2000. Advanced Sciences did not incur research and development costs in the
years 2000 and 2001.
General and administrative expenses for the year ended December 31,
2001 were $2,420,000, as compared to $5,228,000 for the year ended December 31,
2000. This decrease reflects the impact of some of the restructuring steps in
the Company throughout 2001.
In the case of Advanced Sciences, general and administrative costs
decreased from $2,355,000 for the year ended December 31, 2000 to $1,219,000 for
the year ended December 31, 2001. This decrease reflects the impact of some
restructuring steps in Advanced Sciences (including principally a reduction in
personnel) the Company made throughout 2001 due to the inability to replace
certain completed contracts. Solution incurred general and administrative costs
of $313,000 for the year ended December 31, 2001 as compared with $504,000 for
the year ended December 31, 2000. This decrease was primarily due to a more
narrowly focused sales and marketing effort for Solution's services.
The decrease in interest expense of $360,000 from 2000 to 2001 is
primarily related to lower, amortized non-cash interest costs associated with
the Brewer Note, Milford/Shaar and the Weiss Group Note.
In 2001, the Company took a machinery impairment charge of $776,000 and
a patent impairment charge of $627,000 in order to record the machinery and
patents at fair market value. In taking this charge, the Company considered the
machinery's and the associated patents' operating history and cash flows, its
inability to obtain material commercial contracts in 2001 and the future
prospects for additional contracts in 2002.
In 2000, the Company took an asset impairment charge of $6,586,000 as a
result of the write off of goodwill associated with the prior acquisition of
Advanced Sciences. In taking this charge, the Company considered Advanced
Sciences' operating history and cashflows, its inability to obtain replacement
contracts for completed contracts in fourth quarter of 2000 and the future
prospects for additional contracts to Advanced Sciences in 2001. The Company
believes that revenues from existing and potential contracts in 2001 will be
insufficient to offset amortization of goodwill associated with Advanced
Sciences. The impairment charge reduced the value of the assets of Advanced
Sciences to their fair market value.
The gain (loss) from discontinued operations is approximately
$(2,388,000) and $155,000 for the years ended December 31, 2001 and 2000,
respectively. The difference is the result of the reduced retainers paid by
DRM's customers in 2001 as compared to 2000 and the lack of material settlements
on their existing client agreements.
32
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002 and December 31, 2001 Advanced Sciences had a $0
and $108,000 outstanding balance, respectively, on its revolving lines of
credit.
The Company's loss of the DRM subsidiary effective May 16, 2002 may
have a material adverse effect on the financial condition of the Company and its
cash flow problems. The Company currently requires additional cash to sustain
existing operations and to meet current obligations and ongoing capital
requirements. The Company's current monthly operating expenses exceed cash
revenues by approximately $80,000 at December 31, 2002.
In March 2000, the Company completed $2.0 million in financing through
private placement. The Company issued 266,700 shares of a new Series F
Convertible Preferred Stock, convertible into common stock at the market price,
after September 30, 2000 and up through April 30, 2003 at which time it
automatically converts to common stock. The Series F Convertible Preferred Stock
has a variable rate dividend averaging 8.15% over the term of the security.
In September 2000, the Company completed $500,000 in financing in the
form of a loan (the "Brewer Note") from S. Brewer Enterprises, Inc. ("SB
Enterprises"), which is owned by one of its officers and directors, Shelby T.
Brewer. The Brewer Note bears a 9.75% interest rate, payable monthly, with a
balloon principal payment at the end of the term. The note was due and payable
on March 15, 2001 and was extended under the same terms and conditions until
December 31, 2001. The Brewer Note was convertible into Common Stock at the
market price up through December 31, 2001.
On March 15, 2001, SB Enterprises executed an Amended and Restated
Promissory Note (the "Restated Brewer Note"), which extended the maturity date
of the note until December 31, 2001. Additionally, the conversion feature of the
Restated Brewer Note was changed to the 5-day average closing price of the
Company's common stock prior to a conversion notice. On April 9, 2001, SB
Enterprises issued a conversion notice for $250,000 of the outstanding principal
of the Brewer Restated Note. The conversion price was calculated by the previous
5-day average of the closing price of the Company's common stock and was
converted into 1,041,667 shares.
On December 12, 2002, SB Enterprises executed an Amended and Restated
Promissory Note Extension (the "Restated Brewer Note Extension"), which extended
the maturity date of the note until January 1, 2004. In connection with the
Restated Brewer Note Extension, the Company issued SB Enterprises a 2-year
warrant for 1,000,000 shares of the Company's common stock at an exercise price
of $0.05 per share. On March 14, 2003, SB Enterprises issued a conversion notice
for the remaining principal balance of $250,000 plus accrued interest of
$36,563. The conversion price was calculated by the previous 5-day average of
the closing price of the Company's common stock and was converted into
13,189,842 shares. These shares have not been issued to Mr. Brewer as of April
15, 2003. The Company believes that this issuance of convertible debt is exempt
from the registration requirements of the Securities Act under Section 4(2)
thereof as a transaction not involving any public offering of securities.
33
In October 2001, ASI refinanced their line of credit with Commerce
Funding Corporation (the "Commerce Credit Line"). The Commerce Credit Line is
not to exceed 85 percent of eligible receivables or $1,000,000 and is due
October 2002, and subsequently extended until November 2003, with interest
payable monthly at prime plus 2 percent (6.75 percent as of December 31, 2002).
The Commerce Credit Line is collateralized by the receivables of ASI and is
guaranteed by the Company. The Commerce Credit Line contains certain financial
covenants and restrictions including minimum ratios that ASI must satisfy. ASI
was in compliance with the covenants of the Commerce Credit Line at April 15,
2003.
In addition, the Commerce Credit Line agreement stipulates that no
payments shall be made by ASI to the Company other than monthly scheduled
payments of principal with respect to the $8,280,000 subordinated indebtedness
owed by ASI to the Company (which is eliminated in consolidation) and
intercompany indebtedness not to exceed $20,000 in any month. In addition, ASI
shall not incur indebtedness in excess of $25,000, other than trade payables,
the above subordinated indebtedness and other contractual obligations to
suppliers and customers incurred in the ordinary course of business.
In November 2000, the Company completed $500,000 in financing in the
form of a loan (the "Weiss Group Note") from a group of four investors; $75,000
of which was borrowed from the son of Paul E. Hannesson, our former President
and Chief Executive Officer, and $25,000 of which was borrowed from Stephen A.
Weiss, a shareholder of Greenberg Traurig, LLP, our former corporate and
securities counsel. The Weiss Group Note bears interest at 12% per annum, was
due and payable on February 12, 2001, and is secured by the first $500,000 of
loans or dividends that the Company may receive from DRM. As consideration for
such loan, Environmental, one of the Company's principal stockholders owning
approximately 16.58% of the Company's common stock, transferred to the investors
a total of 1,000,000 shares of the Company's common stock. All holders of the
Weiss Group Note have granted payment extensions until January 1, 2004.
Effective April 16, 2001, the Company issued warrants to purchase
1,000,000 shares of its common stock at an exercise price of $0.22 per share
(the closing price of our common stock on the AMEX on such date) to all holders
of the Weiss Group Note in consideration of the extension of the due date of
such loans by such persons from February 12, 2001 to June 30, 2001. The Company
believes that this transaction is exempt from the registration requirements of
the Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities.
Effective January 24, 2002, the Company issued warrants to purchase
500,000 shares of its common stock at an exercise price of $0.15 per share (the
closing price of our common stock on the AMEX on such date) to all holders of
the Weiss Group Note in consideration of the extension of the due date of such
loans by such persons from June 30, 2001 to May 31, 2002. The Company believes
that this transaction is exempt from the registration requirements of the
Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities. See "MD&A - Liquidity and Capital Resources."
Effective October 29, 2002, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 1,000,000 shares at an
exercise price of $0.22 per share of the Company's common stock in connection
with the Weiss Group Note. Effective October 29, 2002, the members of the Weiss
Group Note voluntarily cancelled all issued warrants to purchase 500,000 shares
at an exercise price of $0.15 per share of the Company's common stock in
connection with the Weiss Group Note.
34
Effective October 29, 2002, the Company issued warrants to purchase
1,500,000 shares of its common stock at an exercise price of $0.05 per share
(the closing price of our common stock on the AMEX on such date) to all holders
of the Weiss Group Note in consideration of the extension of the due date of
such loans by such persons from May 31, 2002 to January 1, 2004. The Company
believes that this transaction is exempt from the registration requirements of
the Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities.
On June 13, 2001, the Company issued and sold to Milford Capital
Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar")
one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan
Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year
warrant for 333,334 shares of the Company's common stock at an exercise price of
$0.22 per share. The Company pledged its equipment and SET related intellectual
property as collateral for the Milford/Shaar Bridge Loan Notes. The Company
shall pay Milford/Shaar principal and interest on a monthly basis in arrears.
The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty.
The Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities.
The Company made all payments on the Milford/Shaar Bridge Loan Notes
until November 13, 2001. The Company asked for and received a forbearance of
payments on the Milford/Shaar Bridge Loan Notes from November 13, 2001 until
August 13, 2002. The Shaar Fund, Ltd., through the Shaar Bridge Loan, continues
to provide cash installments on a periodic basis in the form of additional
principal. The current principal balance of the Milford/Shaar Bridge Loan Notes
remains unpaid as of April 15, 2003. The Company has not been notified of a
default of the Milford/Shaar Bridge Loan Notes as of April 15, 2003.
On October 2, 2002, Mr. Bentley Blum, a Director of the Company, had
previously loaned the Company $125,000 of cash installments over the period of
one year (the "Blum Loan"). The Company elected to convert the Blum Loan to the
Company's common stock using the conversion feature of the 5-day average closing
price of the Company's common stock prior to October 2, 2002. On October 2,
2002, Blum issued a conversion notice for $125,000 of the outstanding principal
of the Blum Loan into 2,500,000 shares. Mr. Blum continues to provide cash
installments in the form of a loan to the Company. The Blum Loan bears interest
at 9% per annum and has no due date at this time. The current principal balance
of the Blum Loan remains unpaid as of April 15, 2003.
On August 30, 2000, Applied completed a stock purchase agreement with
Dispute Resolution Management, Inc. (DRM) and its two shareholders, William J.
Russell ("Russell") and Tamie B. Speciale ("Speciale").
On May 16, 2002, a Notice of Default and Right to Pursue Remedies (the
"Notice") was issued to the Company by William J. Russell and Tamie B. Speciale
(the "Pledgees") claiming that the Company is in default under the Stock
Purchase Agreement (the "Agreement"), between the Company and DRM and the
related Stock Pledge Agreement (the "Stock Pledge"). As of May 16, 2002, the
Company no longer owns an 81% interest in DRM.
On August 19, 2002, the Company entered into a settlement agreement
with DRM (the "DRM Settlement Agreement"). Under terms of the DRM Settlement
Agreement, the Company acknowledged that it had previously received back
4,750,000 shares of its common stock from DRM and its shareholders. As part of
the DRM Settlement Agreement, the Company received an additional 1,187,500
shares of its common stock from DRM and its shareholders.
35
Additionally, the Company issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per share, each such share of
Series H Preferred having a stated value of $1.00 per share, to DRM, Russell and
Speciale as part of the DRM Settlement Agreement as of September 30, 2002 for
satisfaction of the remaining liabilities relating to the purchase and working
capital of DRM. The Series H Preferred shall have the following rights,
privileges, and limitations:
f) The conversion feature shall be exercisable on June 30, 2003.
g) No Series H Preferred may be converted prior to June 30, 2003.
Until July 31, 2005, only 80,000 shares of the Series H Preferred
shall be convertible in any calendar quarter. The balance of any
unconverted Series H Preferred Stock may be converted at any time
on or after August 1, 2005.
h) The conversion price of the Series H Preferred shall be determined
by the average closing price of Company's common stock in the
previous 30 trading days, but in no event shall the conversion
price be less than $0.20 per share.
i) The Series H Preferred shall have a non-cumulative annual dividend
of 3%, payable in cash or Series H Preferred within 30 days of the
end of the Company's fiscal year, at the Company's election.
j) The Series H Preferred shall not be transferable.
The financial information included in the accompanying form 10K for the
period ending December 31, 2002 reflects the terms of the DRM Settlement
Agreement. For the year ended December 31, 2002 the Company recorded a loss on
the disposal of DRM in the amount of $4,134,000. The Company's loss of the DRM
subsidiary may have a material adverse effect on the financial condition of the
Company and its cash flow problems. The Company currently requires additional
cash to sustain existing operations and to meet current obligations and ongoing
capital requirements. The Company's current monthly operating expenses exceed
cash revenues by approximately $80,000. Because of the dissolution of DRM, it
has been reflected as Assets Held for Sale - Component DRM and Liabilities Held
for Sale - Component DRM at December 31, 2002 and 2001 and as discontinued
operations for the years ended December 31, 2002, 2001 and 2000.
The Company's auditor's opinion on our fiscal 2002 financial statements
contains a "going concern" qualification in which they express doubt about the
Company's ability to continue in business, absent additional financing.
For the year ended December 31, 2002, the Company incurred a net loss
of $5,972,000, as compared to a net loss of $6,554,000 for the year ended
December 31, 2001.
36
As shown in the financial statements for the years ended December 31,
2002, 2001, and 2000, the Company incurred losses of $5,972,000, $6,554,000 and
$11,441,000 respectively. The Company has also experienced net cash inflows
(outflows) from operating activities of ($121,000), $965,000, and ($2,629,000)
for the years ended December 31, 2002, 2001 and 2000 respectively. At December
31, 2002 and 2001 the Company had working capital (deficit) of $(4,276,000) and
$(6,368,000) respectively. The decrease in the working capital deficit from
December 31, 2001 to December 31, 2002 is mainly due to the Company's reduction
of accounts payable during the year ended December 31, 2002.
As shown in the financial statements for the years ended December 31,
2002 and 2001 the Company had stockholders' (deficit) equity of ($4,289,000) and
$1,571,000 respectively. The Company's net decrease in stockholders' equity from
December 31, 2001 to December 31, 2002 is primarily due to the loss for the
period ($5,972,000), the majority of which ($4,134,000) is associated with the
disposal of the DRM component.
The Company currently is negotiating with a lender to obtain debt
financing, to supplement funds generated from operations, to meet the Company's
cash needs over the next 12 months. The Company intends to meet its long term
capital needs through obtaining additional contracts that will generate funds
from operations and obtaining additional debt or equity financing as necessary
or engaging in merger or sale transactions. There can be no assurance that such
sources of funds will be available to the Company or that it will be able to
meet its short or long term capital requirements.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards (the "NOLs") of
approximately $32,000,000, which expire in the years 2002 through 2022. The
amount of NOLs that can be used in any one year will be limited by the
applicable tax laws that are in effect at the time such NOLs can be utilized.
The unused NOLs balances may be accumulated and used in subsequent years. A full
valuation allowance has been established to offset any benefit from the net
operating loss carryforwards. It cannot be determined when or if the Company
will be able to utilize the NOLs.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
This Statement address financial accounting and reporting for the disposal of
long-lived assets. Applied is currently assessing the impact of this statement.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This statement requires the
classification of gains or losses from the extinguishments of debt to meet the
criteria of APB Opinion No. 30 "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Business, Extraordinary and Unusual and
Infrequently Occurring Events and Transactions" before they can be classified as
extraordinary in the income statement. As a result, companies that use debt
extinguishment as part of their risk management cannot classify the gain or loss
from that extinguishment as extraordinary. The statement also requires
sale-leaseback accounting for certain lease modifications that have economic
effects similar to sale-leaseback transactions. The Company does not expect the
adoption of SFAS 145 to have a material impact on its financial position or
future operations.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This standard which is effective for exit or disposal activities initiated after
December 31, 2002, provides new guidance on the recognition, measurement and
37
reporting of costs associated with these activities. The standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date the company commits to an exit or
disposal plan. The adoption of SFAS 146 by the Company is not expected to have a
material impact on the financial position or future operations.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123," which is effective for all
fiscal years ending after December 15, 2002. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation under SFAS No. 123 from the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25. SFAS 148 also changes the disclosure requirements of SFAS
123, requiring a more prominent disclosure of pro-forma effect of the fair value
based method of accounting for stock-based compensation. The adoption of SFAS
No. 148 by the Company is not expected to have a significant impact on the
Company's financial position or future operations.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," ("FIN 45") was issued. This interpretation requires the
initial recognition and initial measurement, on a prospective basis only, of
guarantees issued or modified after December 31, 2002. Additionally, certain
disclosure requirements are effective for financial statements ending after
December 15, 2002. The disclosures required of us by FIN 45 in its fiscal 2002
consolidated financial statements are in note 13. We do not believe that the
adoption of this interpretation in 2003 will have a material impact on our
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Ethics (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Applied does not expect to
identify any variable interest entities that must be consolidated. In the event
a variable interest entity is identified, Applied does not expect the
requirements of FIN No. 46 to have a material impact on its financial condition
or results of operations.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These forward-looking statements
can generally be identified as such because the context of the statement will
include words such as the Company "believes," "anticipates," "expects" or words
of similar import. Similarly, statements that describe the Company's future
plans, objectives or goals are also forward-looking statements.
Such statements may address future events and conditions concerning,
among other things, the Company's results of operations and financial condition;
the consummation of acquisition and financing transactions and the effect
thereof on the Company's business; capital expenditures; litigation; regulatory
matters; and the Company's plans and objectives for future operations and
expansion. Any such forward-looking statements would be subject to the risks and
uncertainties that could cause actual results of operations, financial
condition, acquisitions, financing transactions, operations, expenditures,
expansion and other events to differ materially from those expressed or implied
in such forward-looking statements. Any such forward-looking statements would be
subject to a number of assumptions regarding, among other things, future
economic, competitive and market conditions generally. Such assumptions would be
based on facts and conditions as they exist at the time such statements are made
as well as predictions as to future facts and conditions, the accurate
prediction of which may be difficult and involve the assessment of events beyond
the Company's control.
38
Further, the Company's business is subject to a number of risks and
uncertainties that would affect any such forward-looking statements. These risks
and uncertainties include, but are not limited to:
o the Company's critical need for additional cash to sustain
existing operations and meet existing obligations and capital
requirements;
o the ability to generate profitable operations from a large scale
remediation project;
o the ability of the Company to renew its nationwide permit to treat
PCBs;
o the ability of the Company to implement its waste processing
operations, including obtaining commercial waste processing
contracts and processing waste under such contracts in a timely
and cost effective manner; the timing and award of contracts by
the U.S. Department of Energy for the cleanup of waste sites
administered by it;
o the Company's ability to integrate acquired companies;
o the acceptance and implementation of the Company's waste treatment
technologies in the government and commercial sectors;
o the Company's ability to obtain and perform under other large
technical support services projects; developments in environmental
legislation and regulation;
o the ability of the Company to obtain future financing on favorable
terms; and
o other circumstances affecting anticipated revenues and costs.
These risks and uncertainties could cause actual results of the Company
to differ materially from those projected or implied by such forward-looking
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-------- ----------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
------ -------------------------------------------
The consolidated financial statements of the Company are included on
pages F-1 through F-43 of this Annual Report and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------ -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
------- --------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the executive officers and directors of the
Company, and their positions with the Company as of April 15, 2003 are as
follows:
Name Age Position
--------------------------------------------------------------------------------
Shelby T. Brewer, Ph.D. 66 Chairman of the Board, President and
Chief Executive Officer
--------------------------------------------------------------------------------
James M. DeAngelis 42 Chief Financial and Administrative
Officer, Treasurer
--------------------------------------------------------------------------------
Bentley J. Blum 61 Director
--------------------------------------------------------------------------------
Frank E. Coffman 61 Director
--------------------------------------------------------------------------------
Paul E. Hannesson 62 Director
--------------------------------------------------------------------------------
Michael P. Kalleres 63 Director
--------------------------------------------------------------------------------
William A. Wilson 88 Director
--------------------------------------------------------------------------------
SHELBY T. BREWER, Ph.D. was appointed Chairman, Chief Executive Officer
and President of the Company in January 2001. Since April 2000, Mr. Brewer has
served as Chairman and Chief Executive Officer of Solutions, a wholly owned
subsidiary of the Company, which oversees Advanced Sciences. From 1996 to March
2000, Dr. Brewer was President of S. Brewer Enterprises, a consulting firm he
founded that is engaged in supporting mergers and acquisitions, arranging
private and public financing, forming joint ventures abroad, re-positioning
established companies, and fostering new technology enterprises. Dr. Brewer
served as President and CEO of the nuclear power businesses of ABB Combustion
Engineering from 1985 to 1995. From 1981 to 1984, Dr. Brewer served as Assistant
Secretary of Energy in the Reagan administration, holding the top nuclear post
in the U.S. government. Prior to his appointment by President Reagan, Dr. Brewer
achieved positions of increasing line responsibility in private industry, the
U.S. Navy, and the Atomic Energy Commission. Dr. Brewer holds Ph.D. and M.S.
degrees in nuclear engineering from the Massachusetts Institute of Technology.
He holds a B.S. degree in mechanical engineering and a B.A. in humanities from
Columbia University.
Bentley J. Blum has served as a director of the Company since March
1996 and served as its Chairman of the Board from March to November 1996. Mr.
Blum has served as a director of Environmental since 1984 and served as its
Chairman of the Board from 1984 to November 1996. Mr. Blum also currently serves
as a director of Separation, Solution and CFC Technologies. For more than 15
years, Mr. Blum has been actively engaged in real estate acquisitions and
currently is the sole stockholder and director of a number of corporations that
hold real estate interests, oil drilling interests and other corporate
40
interests. Mr. Blum is a principal stockholder of Environmental. Mr. Blum is the
brother-in-law of Paul E. Hannesson, a director of the Company.
FRANK E. COFFMAN, Ph.D. has served as a director of the Company since
June 2002. Mr. Coffman also currently serves as Senior Vice President, Corporate
Development Officer of Holmes & Narver. (August 1997 - Present). Mr. Coffman
served as Senior Vice President, Government & Commercial Programs, IT
Corporation, from January 1995 to May 1997 and as Vice President, Government &
Commercial Programs, IT Corporation from 1984 to 1995. Mr. Coffman served as
Deputy Assistant Secretary for Waste Management for the Department of Energy
("DOE") from 1981 to 1984, Director of the Office of Advanced Nuclear Systems,
DOE from 1980 to 1981 and as a Director of the Division of Fusion Development
and Technology, DOE from 1978 to 1980. Mr. Coffman served as Chief of the Energy
Research Development Agency, Fusion Systems and Applications Studies Branch from
1970 to 1975. Mr. Coffman serves on the Board of Directors of Holmes and Narver.
Mr. Coffman holds a Ph.D. in nuclear physics and a Master of Arts degree in
plasma physics from Vanderbilt University. Mr. Coffman holds a Bachelor of
Science degree in physics from Western Kentucky University.
James M. dEAngelis has served as a director of the Company since June
2002. Mr. DeAngelis was appointed Vice President-Finance and Treasurer of the
Company in July 1998 and was promoted to Chief Financial and Administrative
Officer and Secretary in December 1998. Mr. DeAngelis has also served as Senior
Vice President-Sales & Marketing of Separation since July 1996, after having
served as its Vice President-Marketing since November 1995. Mr. DeAngelis has
also served as the President of CFC Technologies since September 1994, and
served as Vice President-Marketing of Environmental from September 1992 to
September 1995. Mr. DeAngelis holds a Masters in Business Administration degree
from the American Graduate School of International Management. Mr. DeAngelis
holds Bachelor of Science degrees in Biology and Physiology from the University
of Connecticut.
Paul E. Hannesson has served as a director of the Company since March
1996 and served as Chairman of the Board from November 1996 through January
2001. Mr. Hannesson also served as Chief Executive Officer of the Company from
March to October 1996 and as President from March to September 1996, and was
re-appointed Chief Executive Officer in November 1996 and President in May 1997,
all positions he served until January 2001. Mr. Hannesson has been a director of
Environmental since February 1993 and was appointed its Chairman of the Board
and Chief Executive Officer in November 1996. Mr. Hannesson also served as
President of Environmental from February 1993 to July 1996 and was re-appointed
President in May 1997. In July 1998 Mr. Hannesson resigned as Director and
Officer of Environmental. Mr. Hannesson also currently serves as the Chairman of
the Board and Chief Executive Officer of Separation. Mr. Hannesson was a private
investor and business consultant from 1990 to 1993. Mr. Hannesson is the
brother-in-law of Bentley J. Blum, a director of the Company.
Vice Admiral MICHAEL P. KALLERES, USN (Ret) has served as a director of
the Company since June 2002. VADM Kalleres currently serves as President of Dare
to Excel Inc. (1998 to present). He also served as President and Chief Executive
Officer of Global Associates, Ltd., Technology Services Group from 1994 to 1998.
VADM Kalleres retired from active duty in September 1994 after 32 years as a
41
naval officer. His last assignment was as Commander, Military Sealift Command,
an organization of over 8,000 people, from which he successfully operated nearly
150 maritime vessels and 27 offices worldwide. VADM Kalleres was awarded 18
personal/unit military/combat decorations including the Defense Distinguished
Service Medal (2 awards) and the U.S. Navy Distinguished Service Medal. He is
also a recipient of the Congressional, Ellis Island Medal of Honor. He is also a
Distinguished Graduate of the U.S. Naval War College and a graduate of the
National War College. VADM Kalleres is a former member (1994-1998) of the
Defense Science Board, the Naval Studies Board of the National Academy of
Science. He is also a board member of the Dean's Advisory Council at the
Krannert School of Management-Purdue University, and the National Board of the
Salvation Army. Vice Admiral Kalleres was awarded a Bachelor of Science Degree
in Industrial Management and Engineering from the Krannert School of
Management-Purdue University, and a Master of Science Degree in Political and
International Affairs from George Washington University.
WILLIAM A. WILSON (Ambassador) has served as a director of the Company
since June 2002. Mr. Wilson has been active in ranching and farming in
California and Mexico from 1980 to the present. Mr. Wilson was active in real
estate development in California from 1961 through 1980. Mr. Wilson served as
Chief Engineer of Wilson Oil Tools from 1938 through 1955 and as Chairman from
1955 to 1961 when the company was sold to Joy Manufacturing, Co. Mr. Wilson
served as the Presidential Envoy to the Holy See from 1980 to 1984 and as
Ambassador to the Holy See from 1984 to 1986. Mr. Wilson is a Trustee of Saint
John's Hospital and a member of the Knights of Malta. Mr. Wilson served on the
Board of Directors of Jorgensen Steel Co. from 1973 to 1984 and again from 1986
to 1991. Mr. Wilson also served on the Board of Directors of Pennzoil Company
from 1983 to 1987. Mr. Wilson holds a Stanford University BA Mechanical
Engineering from Stanford University and a Doctor of Laws, Honoris Causa from
Assumption College, Barry University, and Pepperdine University.
Each director is elected to serve for a term of one year or until his
or her successor is duly elected and qualified. The Company's officers are
elected by, and serve at the pleasure of, the Board of Directors, subject to the
terms of any employment agreements. Messrs. Hannesson and Blum are
brothers-in-law. No family relationship exists among any other directors or
executive officers of the Company.
KEY EMPLOYEES
The names and ages of the key employees of the Company not listed
above, and their positions with the Company as of April 15, 2002, are as
follows:
Name Age Position
---- --- --------
O. Mack Jones 62 President of Advanced Sciences
O. Mack Jones has been serving as Acting President of Advanced Sciences
since February 2001. Mr. Jones also has served as Vice President of Field
Operations since April 1998, managing its field treatability studies and
commercial projects. On February 28, 2001, Mr. Jones was appointed President of
Advanced Sciences. Mr. Jones served as a consultant to the Company from June
1996 to April 1998, assisting in the commercialization of the solvated electron
42
technology. From September 1994 to May 1996, he served as a consultant to
Environmental assisting in the development of the solvated electron technology.
From 1991 to May 1996, Mr. Jones served as the founder and principal executive
officer of an environmental consulting company, Florida Vector Services, which
provided both consulting and hands-on remediation services primarily in
TSCA-related areas. From 1986 to 1991, Mr. Jones was Vice President-Operations
with Quadrex Environmental Company, managing the company's field remediation
businesses. Mr. Jones is a professional mechanical engineer who held several
managerial operating positions in power generation and distribution arenas
during his twenty-six years of service to General Electric Company. His
experience includes commercial nuclear, fossil, and hydro power construction and
maintenance, industrial power delivery systems, and industrial drives and
controls.
BOARD COMMITTEES
The Company's Board of Directors has (i) an Audit Committee and (ii) a
Compensation, Stock Option and Benefits Committee. The Company no longer
maintains an Executive and Finance Committee (the "Finance Committee"). On
August 30, 2000, the Board of Directors unanimously voted to abolish the Finance
Committee and determined that the entire Board of Directors would perform its
function.
As of December 31, 2002, the Audit Committee was composed of Michael P.
Kalleres as Chairman, Frank E. Coffman, William A. Wilson and James M.
DeAngelis. The responsibilities of the Audit Committee include recommending to
the Board of Directors the firm of independent accountants to be retained by the
Company, reviewing with the Company's independent accountants the scope and
results of their audits, reviewing with the independent accountants and
management the Company's accounting and reporting principles, policies and
practices, as well as the Company's accounting, financial and operating controls
and staff, supervising the Company's policies relating to business conduct and
dealing with conflicts of interest relating to officers and directors of the
Company.
As of December 31, 2002, the Compensation, Stock Option and Benefits
Committee, was composed of Frank E. Coffman, as Chairman, Michael P. Kalleres,
William A. Wilson and Shelby T. Brewer. The Compensation, Stock Option, and
Benefits Committee has responsibility for establishing and reviewing employee
and consultant/advisor compensation, bonuses and incentive compensation awards,
administering and interpreting the Company's 1998 Stock Option Plan, and
determining the recipients, amounts and other terms (subject to the requirements
of the 1998 Stock Option Plan) of options which may be granted under the 1998
Stock Option Plan from time to time and providing guidance to management in
connection with establishing additional benefit plans.
COMPENSATION OF DIRECTORS
The Company pays non-management directors a director's fee in the
amount of $375 per meeting for attendance at the meetings of the Board of
Directors, and the Company reimburses the directors for actual expenses incurred
in respect of such attendance. The Company does not separately compensate
employees for serving as directors.
43
COMPLIANCE WITH SECTION 16(a) of the exchange act
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of the outstanding shares
of the Company's common stock, to file initial reports of beneficial ownership
and reports of changes in beneficial ownership of shares of common stock with
the Commission and the AMEX. Such persons are required by regulations
promulgated under the Exchange Act to furnish the Company with copies of all
Section 16(a) forms filed with the Commission.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the year ended December 31, 2002, and upon a
review of Forms 5 and amendments thereto furnished to the Company with respect
to the year ended December 31, 2002, or upon written representations received by
the Company from certain reporting persons that such persons were not required
to file Forms 5, the Company believes that no director, executive officer or
holder of more than 10% of the outstanding shares of common stock failed to file
on a timely basis the reports required by Section 16(a) of the Exchange Act
during, or with respect to, the year ended December 31, 2002 with the exception
of a Form 4 filing inadvertently filed late for Shelby T. Brewer.
44
ITEM 11. EXECUTIVE COMPENSATION.
------- ----------------------
SUMMARY COMPENSATION
The following table sets forth the amount of all compensation paid by
the Company and/or its affiliates and allocated to the Company's operations for
services rendered during each of 2002, 2001 and 2000 to all persons serving as
the Company's Chief Executive Officer during 2000, to each of the Company's four
most highly compensated executive officers other than the Chief Executive
Officer whose total salary and bonus compensation exceeded $100,000 during any
such year.
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------------------------------------ --------------------------------------
Other Securities
Annual Restricted Under- LTIP All Other
Compen- Stock Lying Pay- Compen-
Name and Principal Salary Bonus sation Award(s) Options outs sation
Position Year ($) ($) ($) ($) (#) ($) ($)
-------------------------------- -------- -------------- ------- ------------- ------------ -------------- -------- --------
(a) (b) (c) (d) (e) (g) (g) (h) (i)
Shelby T. Brewer, Ph.D.(1) 2002 69,677(2) -0- -0- -0- 2,865,200(3) -0- 30,000(4)
Chief Executive Officer 2001 90,317(2) -0- -0- -0- 200,000(3) -0- -0-
2000 58,707(2) -0- -0- -0- 640,000(3) -0- -0-
Paul E. Hannesson 2002 -0- -0- -0- -0- 1,181,925(6) -0- -0-
Former Chief Executive Officer 2001 77,242(5) -0- -0- -0- -0- -0- -0-
2000 358,934(5) -0- -0- -0- -0- -0- -0-
James M. DeAngelis(7) 2001 114,175(8) -0- -0- -0- 1,841,688(9) -0- -0-
Senior Vice President & Chief 2000 164,368(8) -0- -0- -0- 300,000(9) -0- -0-
Financial Officer 1999 147,614(8) -0- -0- -0- -0- -0- -0-
William E. Ingram 2002 -0- -0- -0- -0- -0- -0- -0-
Former Vice President & 2001 20,645(10) -0- -0- -0- -0- -0- -0-
Controller 2000 147,842(10) -0- -0- -0- 100,000(11) -0- -0-
O. Mack Jones(12) 2002 110,019(13) -0- -0- -0- 1,759,375(14) -0- -0-
President 2001 134,805(13) -0- -0- -0- 100,000(14) -0- -0-
Advanced Sciences 2000 143,755(13) -0- -0- -0- -0- -0- -0-
Peter E Harrod 2002 -0- -0- -0- -0- -0- -0- -0-
Former President 2001 49,460(15) -0- -0- -0- -0- -0- -0-
Advanced Sciences 2000 187,036(15) -0- -0- -0- 200,000(16) -0- -0-
45
(1) Mr. Brewer served as Chief Executive Officer and President of
Solutions and a director of the Company since April 2000. Mr.
Brewer assumed the positions of Chairman, Chief Executive Officer
and President of the Company as of January 15, 2001.
(2) Represents the amount of Mr. Brewer's base salary paid by the
Company. Mr. Brewer's base salary for 2002 was $250,000 of which
$184,231 was originally deferred until December 31, 2002, and
remains unpaid as of April 15, 2003. Mr. Brewer's base salary for
2001was $250,000 of which $160,000 annually originally deferred
until December 31, 2001, and remains unpaid as of April 15, 2003.
Mr. Brewer's base salary for 2000 was $90,000.
(3) Represents shares of common stock underlying stock options granted
to Mr. Brewer by the Company in his capacity as an officer and
director of the Company. Mr. Brewer canceled prior options for
840,000 shares of common stock voluntarily on October 2, 2002.
(4) Represents a $1,000,000 Life Insurance Policy in the name of
Shelby T. Brewer paid on behalf of Mr. Brewer by the Company.
(5) Represents the amount of Mr. Hannesson's base salary paid by the
Company. The Company previously recorded a liability for $344,000
representing amounts owed to Mr. Hannesson under his employment
contract, but deferred per agreement. The deferred salary amount
was used by Mr. Hannesson to offset a portion of the exercise
price and taxes with respect to Mr. Hannesson's stock option
exercise of 830,000 stock options in July 2000. See "Certain
Relationships and Related Transactions--Services Agreement." Mr.
Hannesson was replaced by Shelby T. Brewer effective January 15,
2001. Mr. Hannesson remains a director of the Company.
(6) Represents shares of common stock underlying stock options granted
to Mr. Hannesson by the Company in his capacity as an officer and
director of the Company. Mr. Hannesson canceled prior options for
2,147,500 shares of common stock voluntarily on October 2, 2002
(7) Mr. DeAngelis served as Vice President and Treasurer of the
Company from July 1998 to December 1999 and as Sr. Vice President,
Chief Financial and Administrative Officer, Treasurer and
Secretary from December 1999 to present.
(8) Represents the amount of Mr. DeAngelis' base salary paid by the
Company. Mr. DeAngelis' total base salary for 2002 was $165,000 of
which $55,985 was originally deferred until December 31, 2002, and
remains unpaid as of April 15, 2003. Mr. DeAngelis' total base
salary for 2001 was $165,000 of which $33,000 was originally
deferred until December 31, 2002, and remains unpaid as of April
15, 2003. Mr. DeAngelis' base salary for 2000 and 1999 was
$165,000 and $145,000 respectively.
(9) Represents shares of common stock underlying stock options granted
to Mr. DeAngelis by the Company in his capacity as an officer of
the Company. Mr. DeAngelis canceled prior options for 681,250
shares of common stock voluntarily on October 2, 2002.
(10) Represents the amount of Mr. Ingram's base salary paid by the
Company. Mr. Ingram's total base salary for 2001, 2000 and 1999
was $150,000. Mr. Ingram resigned his management position
effective January 12, 2001.
(11) Represents shares of common stock underlying stock options granted
to Mr. Ingram by the Company in his capacity as an officer of the
Company. Mr. Ingram resigned his management position effective
January 12, 2001.
(12) Mr. Jones served as Vice President and Field Operations Manager of
Solutions from April 1998 to January 2001 and as President of
Advanced Sciences from February 2001 to present.
(13) Represents the amount of Mr. Jones' base salary paid by the
Company. Mr. Jones' total base salary for 2002 was $165,000 of
which $60,581 originally deferred until December 31, 2002, and
remains unpaid as of April 15, 2003. Mr. Jones' total base salary
for 2001 was $165,000 of which $33,000 originally deferred until
December 31, 2001, and remains unpaid as of March 25, 2002. Mr.
Jones' base salary for 2000 and 1999 was $150,000.
(14) Represents shares of common stock underlying stock options granted
to Mr. Jones the Company in his capacity as an officer of the
Company. Mr. Jones canceled prior options for 437,500 shares of
common stock voluntarily on October 2, 2002.
(15) Represents the amount of Mr. Harrod's base salary paid by the
Company, through its wholly owned subsidiary, Advanced Sciences.
Mr. Harrod's total base salary for 1997, 1998 and 1999 was
$150,000, $170,000, and $190,000 respectively. Mr. Harrod resigned
his management position effective February 28, 2001.
(16) Represents shares of common stock underlying stock options granted
to Mr. Harrod by the Company in his capacity as an officer of the
Company. Mr. Harrod resigned his management position effective
February 28, 2001.
46
STOCK OPTIONS
The following table sets forth certain information concerning options
granted during the year ended December 31, 2002 to the individuals listed in the
Summary Compensation Table pursuant to the Company's 1998 Stock Option Plan (the
"1998 Plan") and to certain individuals outside of the 1998 Plan. The Company
has no outstanding stock appreciation rights and granted no stock appreciation
rights during the year ended December 31, 2002.
Option Grants in Last Fiscal Year
Individual Grants
Potential Realizable Value
Number of Percent of at Assumed
Securities Total Options Exercise of Annual Rates of
Underlying Granted to Base Stock Price Appreciation
Options Employees in Price Expiration for Option Term(6)
Name Granted (#) Fiscal Year(5) ($/Share) Date 5% ($) 10% ($)
---------------------------- --------------- --------------- ------------- -------------- ----------------------------
(a) (b) (c) (d) (e) (f) (g)
Shelby T. Brewer............ 2,865,200(1) 29.10% 0.07 12/14/08 18,844 76,302
James M. DeAngelis.......... 1,841,688(2) 18.70% 0.07 12/14/08 12,113 49,045
O. Mack Jones............... 1,759,375(3) 17.87% 0.07 12/14/08 11,571 46,853
Paul E. Hannesson........... 1,181,925(4) 12.00% 0.07 12/14/08 7,773 31,475
(1) Options to purchase 865,200 shares of common stock were issued on
October 2, 2002 as part of the 1998 Plan of which 100% vested upon
issuance. Additionally, Options to purchase 2,000,000 shares of
common stock were issued on October 2, 2002 outside of the 1998
Plan of which 100% will vest upon the award of a mixed waste
processing contract in Hanford, Washington to the Company. Prior
to the issuance of new options on October 2, 2002, existing
options to purchase 840,000 shares of common stock were
voluntarily cancelled by the individual.
(2) Options to purchase 841,688 shares of common stock were issued on
October 2, 2002 of which 100% vested upon issuance. Additionally,
Options to purchase 1,000,000 shares of common stock were issued
on October 2, 2002 outside of the 1998 Plan of which 100% will
vest upon the award of a mixed waste processing contract in
Hanford, Washington to the Company. Prior to the issuance of new
options on October 2, 2002, existing options to purchase 681,250
shares of common stock were voluntarily cancelled by the
individual.
(3) Options to purchase 1,759,375 shares of common stock were issued
on October 2, 2002 of which 100% vested upon issuance. Prior to
the issuance of new options on October 2, 2002, existing options
to purchase 437,500 shares of common stock were voluntarily
cancelled by the individual.
(4) Options to purchase 1,181,925 shares of common stock were issued
on October 2, 2002 of which 100% vested upon issuance. Prior to
the issuance of new options on October 2, 2002, existing options
to purchase 2,147,500 shares of common stock were voluntarily
cancelled by the individual.
47
(5) Percentages based on 9,847,218 stock options granted (the 1998
Plan and outside the 1998 Plan) during the year ended December 31,
2002.
(6) The closing price for the Company's common stock on December 31,
2002 was $0.06. The closing price is used for all the subsequent
stock appreciation calculations.
The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the 1998
Plan and outside of the 1998 Plan at December 31, 2002 by the individuals listed
in the Summary Compensation Table.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares Value at Fiscal Year-End(#) at Fiscal Year-End($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($)(1) Un-exercisable Un-exercisable(2)
----------------------------------- ------------------ --------------- ------------------------------ -----------------------
(a) (b) (c) (d) (e)
Shelby T. Brewer................ -0- -0- 865,200 / 2,000,000 -0- / -0-
Paul E. Hannesson............... -0- -0- 1,181,925 / -0- -0- / -0-
James M. DeAngelis.............. -0- -0- 841,688 / 1,000,000 -0- / -0-
O. Mack Jones................... -0- -0- 1,759,375 / -0- -0- / -0-
(1) Represents the difference between the last reported sale price of
the Common Stock on December 31, 2002 ($0.06), and the exercise
price of the option ($0.07) multiplied by the applicable number of
options exercised.
(2) Represents the difference between the exercise price and the
closing price on December 31, 2002, multiplied by the applicable
number of securities.
EMPLOYMENT AGREEMENTS
The Company has no employment contracts.
48
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The individuals who served as members of the Compensation, Stock Option
and Benefits Committee (the "Compensation Committee") during the year ended
December 31, 2002 were Frank E. Coffman (Chairman), Michael P. Kalleres, William
A. Wilson and Shelby T. Brewer.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee was established in November 1996 and is
responsible for, among other things, establishing the compensation policies
applicable to executive officers of the Company. The Compensation Committee was
composed of Frank E. Coffman (Chairman), Michael P. Kalleres, William A. Wilson
and Shelby T. Brewer at December 31, 2002, all of whom, with the exception of
Shelby T. Brewer, were non-employee Directors of the Company. All decisions of
the Compensation Committee relating to the compensation of the Company's
executive officers are reviewed by, and are subject to the final approval of,
the full Board of Directors of the Company. Set forth below is a report prepared
by Mr. Coffman, Mr. Kalleres and Mr. Wilson in their capacities as members of
the Compensation Committee at December 31, 2002, addressing the Company's
compensation policies for 2002 as they affected the Company's executive
officers.
Overview and Philosophy
The Company's executive compensation program is designed to be linked
to corporate performance and returns to stockholders. Of particular importance
to the Company is its ability to grow and enhance its competitiveness for the
rest of the decade and beyond. Shorter-term performance, although scrutinized by
the Compensation Committee, stands behind the issue of furthering the Company's
strategic goals. To this end, the Company has developed an overall compensation
strategy and specific compensation plans that tie a significant portion of
executive compensation to the Company's success in meeting specified performance
goals.
The objectives of the Company's executive compensation program are to:
o attract, motivate and retain the highest quality executives;
o motivate them to achieve tactical and strategic objectives in a
manner consistent with the Company's corporate values; and
o link executive and stockholder interest through equity-based plans
and provide a compensation package that recognizes individual
contributions as well as overall business results.
To achieve these objectives, the Company's executive compensation
program is designed to:
o focus participants on high priority goals to increase stockholder
value;
49
o encourage behavior that exemplifies the Company's values relating
to customers, quality of performance, employees, integrity,
teamwork and good citizenship;
o assess performance based on results and pre-set goals that link
the business activities of each individual to the goals of the
Company; and
o increase stock ownership to promote a proprietary interest in the
success of the Company.
Executive Officer Compensation
Each year the Compensation Committee conducts a full review of the
Company's executive compensation program. This review includes a comprehensive
evaluation of the competitiveness of the Company's compensation program and a
comparison of the Company's executive compensation to certain other public
companies, which in the view of the Compensation Committee represent the
Company's most direct competitors for executive talent. It is the Compensation
Committee's policy to target overall compensation for executive officers of the
Company taking into account the levels of compensation paid for such positions
by such other public companies. A variety of other factors, however, including
position and time in position, experience, and both Company performance and
individual performance, will have an impact on individual compensation amounts.
The key elements of the Company's executive compensation program in
2001 consisted of base salary, annual incentive compensation and long-term
incentive compensation in the form of stock options. The Compensation
Committee's policies with respect to each of these elements, including the basis
for the compensation awarded to the Company's Chief Executive Officer, are
discussed below.
Base Salaries. Base salaries for executive officers are established by
evaluating, on an annual basis, the performance of such individuals (which
evaluation involves management's consideration of such factors as
responsibilities of the positions held, contribution toward achievement of the
Company's strategic plans, attainment of specific individual objectives and
interpersonal managerial skills), and by reference to the marketplace for
executive talent, including a comparison to base salaries for comparable
positions at other similar public companies.
In 2002, total compensation was paid to executives primarily based upon
individual performance and the extent to which the business plans for their
areas of responsibility were achieved or exceeded. On balance, performance goals
were substantially met or exceeded and therefore compensation was paid
accordingly.
Mr. Brewer, the Chairman of the Board, President and Chief Executive
Officer of the Company received annual compensation based upon, among other
things, individual performance and the extent to which the business plans for
his areas of responsibility were achieved or exceeded. Mr. Brewer received a
base salary at an annual rate of $250,000 in 2001 and 2002, of which $160,000
annually was deferred until December 31, 2002 and remains unpaid as of April 15,
2003, for services rendered to the Company.
50
The members of the Compensation Committee establish the amount actually
received by Mr. Brewer each year as base salary for services rendered to the
Company and its affiliates. In establishing Mr. Brewer's base salary for 2002,
the Compensation Committee took into account the salaries of chief executive
Officers at other similar public companies, future objectives and challenges,
and Mr. Brewer's individual performance, contributions and leadership. The
Compensation Committee reviewed in detail Mr. Brewer's achievement of his 2001
goals and his individual contributions to the Company and its affiliates. The
Compensation Committee concluded that he had achieved his 2001 goals and had
provided a leadership role in achieving the Company's and its affiliates'
strategic priorities for 2001. The Compensation Committee also considered Mr.
Brewer's decisive management of operational and strategic issues, his drive to
reinforce a culture of innovation and his ability and dedication to enhance the
long-term value of the Company and its affiliates for their respective
stockholders. In making its salary decisions with respect to Mr. Brewer, the
Compensation Committee exercised its discretion and judgment based on the above
factors, and no specific formula was applied to determine the weight of each
factor.
Mr. Brewer's base salary increased from $90,000 for 2000 to $250,000
for 2001 and 2002, representing an increase of approximately 277%. On January
15, 2001, Mr. Brewer agreed to defer a portion of his base salary (64%),
reducing his base salary to $90,000, of which $160,000 annually was deferred
until December 31, 2002 and remains unpaid as of April 15, 2003.
Annual Incentive Bonus. Annual incentive bonuses for executive officers
are intended to reflect the Compensation Committee's belief that a significant
portion of the annual compensation of each executive officer should be
contingent upon the performance of the Company. During 2002, no annual incentive
bonuses were paid to the individuals named in the Summary Compensation Table.
Stock Options. The Compensation Committee has the power to grant stock
options under the 1998 Plan and outside of the 1998 Plan. With respect to
executive officers, it has been the Compensation Committee's practice to grant,
on an annual basis, stock options that vest at the rate of 20% upon grant and
20% in each calendar year thereafter for four years, and that are exercisable
over a ten-year period at exercise prices per share set at the fair market value
per share on the date of grant. Generally, the executives must be employed by
the Company at the time the options vest in order to exercise the options and,
upon announcement of a Change in Control (pursuant to and as defined in the 1998
Plan), such options become immediately exercisable. The Compensation Committee
believes that stock option grants provide an incentive that focuses the
executives' attention on managing the Company from the perspective of an owner
with an equity stake in the business. The Company's stock options are tied to
the future performance of the Company's stock and will provide value to the
recipient only when the price of the Company's stock increases above the option
grant price.
A total of 9,847,218, 920,000, and 2,243,769 stock options were granted
pursuant to the 1998 Plan in 2002, 2001 and 2000 respectively. 2,865,000,
200,000 and 640,000 of such options were granted to Mr. Brewer in 2002, 2001 and
2000 respectively, and 4,634,238, 400,000, and 0 of such options were granted
(in the aggregate) to other individuals named in the Summary Compensation Table
in 2002, 2001 and 2000 respectively. The number of stock options granted in
2002, 2001 and 2000 were determined by reference to the long-term compensation
for comparable positions at other similar public companies and based upon an
assessment of individual performance.
51
Impact of Section 162(m) of the Internal Revenue Code
The Compensation Committee's policy is to structure compensation awards
for executive officers that will be consistent with the requirements of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Section
162(m) limits the Company's tax deduction to $1.0 million per year for certain
compensation paid in a given year to the Chief Executive Officer and the four
highest compensated executives other than the Chief Executive Officer named in
the Summary Compensation Table. According to the Code and corresponding
regulations, compensation that is based on attainment of pre-established,
objective performance goals and complies with certain other requirements will be
excluded from the $1.0 million deduction limitation. The Company's policy is to
structure compensation awards for covered executives that will be fully
deductible where doing so will further the purposes of the Company's executive
compensation program. However, the Compensation Committee also considers it
important to retain flexibility to design compensation programs that recognize a
full range of performance criteria important to the Company's success, even
where compensation payable under such programs may not be fully deductible. The
Company expects that all compensation payments in 2001 to the individuals listed
in the Summary Compensation Table will be fully deductible by the Company.
Conclusion
The Compensation Committee believes that the quality of executive
leadership significantly affects the long-term performance of the Company and
that it is in the best interest of the stockholders to compensate fairly
executive leadership for achievement meeting or exceeding the high standards set
by the Compensation Committee, so long as there is a corresponding risk when
performance falls short of such standards. A primary goal of the Compensation
Committee is to relate compensation to corporate performance. Based on the
Company's performance in 2002, the Compensation Committee believes that the
Company's current executive compensation program meets such standards and has
contributed, and will continue to contribute, to the Company's and its
stockholders' long-term success.
COMPENSATION, STOCK OPTION AND BENEFITS COMMITTEE
William A. Wilson (Chairman)
Frank E. Coffman
Paul E. Hannesson
Michael P. Kalleres
The Report of the Compensation Committee on Executive Compensation
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Annual Report into any filing under the
Securities Act, or under the Exchange Act, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------- ---------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information, as of December 31,
2002, with respect to the beneficial ownership of common stock by each person
known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock of the Company. Unless otherwise indicated,
the owners have sole voting and investment power with respect to their
respective shares.
Number of Shares Percentage of Outstanding
Name and Address of of Common Stock Shares of Common Stock
Beneficial Owner Beneficially Owned(6) Beneficially Owned
Commodore Environmental 8,382,302(7) 14.20%
Services, Inc.(1)..............
Credit Agricole Deux Sevres(2). 7,743,578(8) 13.12%
Bentley J. Blum(1)............. 6,249,553(9) 10.59%
Robert S. Goldsmith(3)......... 5,000,000(10) 8.47%
Shelby T. Brewer(4)............ 4,359,313(11) 6.98%
Tamie P. Speciale(5)........... 3,145,000(12) 5.32%
(1) The address of Commodore Environmental Services, Inc., and Bentley
J. Blum is 150 East 58th Street, Suite 3238, New York, New York
10155.
(2) The address of Credit Agricole Deux Sevres is 4 Boulevard Louis
Tardy, 79000 Niort, France.
(3) The address of Robert S. Goldsmith is 117 East 77th Street,
Apartment 2A, New York, New York 10021.
(4) The address of Shelby T. Brewer is 2151 Jamieson Street, Carlyle
Towers, Suite 1607, Alexandria, Virginia 84101.
(5) The address of Tamie P. Speciale is 132 West Pierpoint Avenue,
Suite 400, Salt Lake City, Utah 84101.
(6) As used herein, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Exchange Act as
consisting of sole or shared voting power (including the power to
vote or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise, including a right to acquire such power(s) during the
next 60 days. Unless otherwise noted, beneficial ownership
consists of sole ownership, voting and investment rights.
(7) Excludes warrants to purchase an aggregate of 19,188,009 shares of
common stock at exercise prices ranging from $1.42 per share to
$2.15 per share. See "Market for Registrant's Common Equity and
Related Stockholder Matters--Recent Sales of Unregistered
Securities" and "Certain Relationships and Related Transactions."
(8) Consists of (i) 6,000,000 shares of common stock pledged to Credit
Agricole Deux Sevres from Environmental in connection with
Environmental's default on $4.0 million of convertible bonds on
February 06, 2001; and (ii) Credit Agricole Deux Sevres' indirect
53
beneficial ownership of common stock based upon their ownership of
16,800,000 shares of Environmental's common stock pledged to
Credit Agricole Deux Sevres from Environmental in connection with
Environmental's default on $4.0 million of convertible bonds on
February 06, 2001.
(9) Consists of: (i) 2,500,000 shares of our common stock issued to
Bentley J. Blum in exchange for $125,000 of debt owed to Mr. Blum
from the Company; (ii) 144,200 shares of the Company common stock
underlying currently exercisable options granted to Mr. Blum by
the Company under the Plan; and (iii) Mr. Blum's indirect
beneficial ownership of common stock based upon his beneficial
ownership of 28,479,737 shares and his spouse's ownership of
2,000,000 shares of Environmental common stock, representing
together 37.74% of the outstanding shares of Environmental common
stock at April 15, 2003, and 4,500,000 shares of Environmental
common stock underlying currently exercisable stock options,
representing together 41.02% of the outstanding shares of
Environmental. Does not include 450,400 shares of Environmental
common stock owned by Simone Blum, the mother of Mr. Blum, and
385,000 shares of Environmental common stock owned by Samuel Blum,
the father of Mr. Blum. Mr. Blum disclaims any beneficial interest
in the shares of Environmental common stock owned by his spouse,
mother and father.
(10) Consists of 5,000,000 shares of our common stock purchased by
Robert S. Goldsmith.
(11) Consists of: (i) 3,428 shares of common stock (ii) 490,695 shares
of our common stock representing the balance held of the common
stock issued pursuant to the Restated Brewer Note, dated as of
March 15, 2001, between the Company and SB Enterprises and a
subsequent conversion notice for 50% of the outstanding principal
dated as of April 9, 2001; (iii) 865,200 shares of the Company
common stock underlying currently exercisable options granted to
Mr. Brewer by the Company under the 1998 Plan; (iv) 2,000,000
shares of the Company common stock underlying currently
exercisable options granted to Mr. Brewer by the Company outside
of the 1998 Plan; and (v) 1,000,000 shares of our common stock
underlying a currently exercisable two year warrant at an exercise
price of $0.05 per share granted to S.B. Enterprises in connection
with the extension of the Brewer Note until January 1, 2004.
(12) Consists of (i) 2,850,000 shares of our common stock issued to
Tamie P. Speciale and George H. Speciale with joint tenancy and
rights of survivorship, by the Company in connection with the
dissolution of the Company's ownership of 81.0% of DRM; and (ii)
340,000 shares of our common stock underlying a currently
exercisable five year warrant at an exercise price of $2.00 per
share granted to Ms. Tamie P. Speciale and George H. Speciale with
joint tenancy and rights of survivorship, by the Company in
connection with the dissolution of the Company's ownership of
81.0% of DRM.
54
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of common stock as of April 15, 2003 by (i) each person
known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock of the Company, (ii) each Director, (iii)
each individual listed in the Summary Compensation Table herein, and (iv) all
executive officers and Directors of the Company as a group, as reported by such
persons. Unless otherwise indicated, the owners have sole voting and investment
power with respect to their respective shares.
Percentage of
Outstanding
Shares of Common
Name and Address of Number of Shares Stock Beneficially
Beneficial Owner(1) Beneficially Owned(6) Owned
--------------------------------------------------------------------------------
Commodore Environmental
Services, Inc...................... 8,382,302(7) 14.20%
Credit Agricole(2) ................ 7,743,578(8) 13.12%
Bentley J. Blum.................... 6,249,553(9) 10.59%
Robert S. Goldsmith(3)............. 5,000,000(10) 8.47%
Shelby T. Brewer, PhD(4)........... 4,359,313(11) 6.98%
Tamie P. Speciale(5)............... 3,145,000(12) 5.32%
Paul E. Hannesson.................. 1,491,978(13) 4.35%
James M. DeAngelis................. 1,730,700(14) 3.16%
O. Mack Jones...................... 1,708,452(15) 2.89%
Frank E. Coffman, PhD.............. 139,669(16) *
Michael P. Kalleres, VADM.......... 139,669(17) *
William A. Wilson.................. 139,669(18) *
All executive officers and 17,163,864 28.68%
Directors as a group (8 persons)...
* Percentage ownership is less than 1%.
(1) Unless otherwise noted the address of each beneficial owner is 150
East 58th Street, Suite 3238, New York, New York 10155. Messrs.
Blum and Hannesson are brothers-in-law.
(2) The address of Credit Agricole Deux Sevres is 4 Boulevard Louis
Tardy, 79000 Niort, France.
(3) The address of Robert S. Goldsmith is 117 East 77th Street,
Apartment 2A, New York, New York 10021.
(4) The address of Shelby T. Brewer is 2151 Jamieson Street, Carlyle
Towers, Suite 1607, Alexandria, Virginia 84101.
(5) The address of Tamie P. Speciale is 132 West Pierpoint Avenue,
Suite 400, Salt Lake City, Utah 84101.
(6) As used herein, the term "beneficial ownership" with respect to a
security is defined by Rule 13d-3 under the Exchange Act as
consisting of sole or shared voting power (including the power to
vote or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise, including a right to acquire such power(s) during the
next 60 days. Unless otherwise noted, beneficial ownership
consists of sole ownership, voting and investment rights.
55
(7) Excludes warrants to purchase an aggregate of 19,188,009 shares of
common stock at exercise prices ranging from $1.42 per share to
$2.15 per share. See "Market for Registrant's Common Equity and
Related Stockholder Matters--Recent Sales of Unregistered
Securities" and "Certain Relationships and Related Transactions."
(8) Consists of (i) 6,000,000 shares of our common stock pledged to
Credit Agricole Deux Sevres from Environmental in connection with
Environmental's default on $4.0 million of convertible bonds on
February 06, 2001; and (ii) Credit Agricole Deux Sevres' indirect
beneficial ownership of our common stock based upon its ownership
of 16,800,000 shares of Environmental's common stock pledged to
Credit Agricole Deux Sevres from Environmental in connection with
Environmental's default on $4.0 million of convertible bonds on
February 06, 2001. (Verify calculation - See table)
(9) Consists of: (i) 2,500,000 shares of our common stock issued to
Bentley J. Blum in exchange for $125,000 of debt owed to Mr. Blum
from the Company; (ii) 144,200 shares of the Company common stock
underlying currently exercisable options granted to Mr. Blum by
the Company under the Plan; and (iii) Mr. Blum's indirect
beneficial ownership of common stock based upon his beneficial
ownership of 28,479,737 shares and his spouse's ownership of
2,000,000 shares of Environmental common stock, representing
together 37.74% of the outstanding shares of Environmental common
stock at April 15, 2003, and 4,500,000 shares of Environmental
common stock underlying currently exercisable stock options,
representing together 41.02% of the outstanding shares of
Environmental. Does not include 450,400 shares of Environmental
common stock owned by Simone Blum, the mother of Mr. Blum, and
385,000 shares of Environmental common stock owned by Samuel Blum,
the father of Mr. Blum. Mr. Blum disclaims any beneficial interest
in the shares of Environmental common stock owned by his spouse,
mother and father.
(10) Consists of 5,000,000 shares of our common stock purchased by
Robert S. Goldsmith.
(11) Consists of: (i) 3,428 shares of common stock (ii) 490,695 shares
of our common stock representing the balance held of the common
stock issued pursuant to the Restated Brewer Note, dated as of
March 15, 2001, between the Company and SB Enterprises and a
subsequent conversion notice for 50% of the outstanding principal
dated as of April 9, 2001; (iii) 865,200 shares of the Company
common stock underlying currently exercisable options granted to
Mr. Shelby T. Brewer by the Company under the 1998 Plan; (iv)
2,000,000 shares of the Company common stock underlying currently
exercisable options granted to Mr. Brewer by the Company outside
of the 1998 Plan; and (v) 1,000,000 shares of our common stock
underlying a currently exercisable two year warrant at an exercise
price of $0.05 per share granted to S.B. Enterprises in connection
with the extension of the Brewer Note until January 1, 2004.
(12) Consists of (i) 2,850,000 shares of our common stock issued to
Tamie P. Speciale and George H. Speciale with joint tenancy and
rights of survivorship, by the Company in connection with the
dissolution of the Company's ownership of 81.0% of DRM; and (ii)
340,000 shares of our common stock underlying a currently
exercisable five year warrant at an exercise price of $2.00 per
share granted to Ms. Tamie P. Speciale and George H. Speciale with
joint tenancy and rights of survivorship, by the Company in
connection with the dissolution of the Company's ownership of
81.0% of DRM
(13) Consists of: (i) 750,000 shares of common stock; (ii) 1,181,925
shares of common stock underlying currently exercisable stock
options granted to Mr. Paul E. Hannesson by the Company under the
1998 Plan; and (iii) Mr. Hannesson's indirect beneficial ownership
of common stock based upon his ownership of an aggregate of (a)
2,650,000 shares of Environmental common stock owned by Suzanne
Hannesson, the spouse of Mr. Hannesson, (b) 2,650,000 shares of
56
Environmental common stock owned by the Hannesson Family Trust
(Suzanne Hannesson and John D. Hannesson, trustees) for the
benefit of Mr. Hannesson's spouse and (c) 500,000 shares of
Environmental common stock in exchange for options to purchase
950,000 shares of Environmental common stock, issued to Hannesson
Family Trust, representing together 7.18% of the outstanding
shares of Environmental common stock as of March 15, 2001, and (d)
currently exercisable options to purchase 525,705 shares of
Environmental common stock, representing together 7.78% of the
outstanding shares of Environmental common stock. Does not include
(i) 40,000 shares of the Company's common stock owned by each of
Jon Paul and Krista Hannesson, the adult children of Mr.
Hannesson; and (ii) 1,000,000 shares of Environmental common stock
owned by each of Jon Paul and Krista Hannesson. Mr. Hannesson
disclaims any beneficial interest in the shares of Environmental
common stock owned by or for the benefit of his spouse and
children. It also does not include 1,000,000 shares of common
stock underlying stock options granted to Mr. Hannesson by the
Company that are not currently exercisable.
(14) Consists of (i) 16,500 shares of common stock; (ii) 841,688 shares
of common stock underlying currently exercisable stock options
granted to Mr. James M. DeAngelis by the Company under the
Company's 1998 Plan; (iii) 1,000,000 shares of common stock
underlying currently exercisable stock options granted to Mr.
DeAngelis by the Company outside of the Company's 1998 Plan; and
(iv) Mr. DeAngelis' indirect beneficial ownership of common stock
based upon his ownership of 580,000 shares of Environmental.
(15) Consists of 1,759,375 shares of common stock underlying currently
exercisable stock options granted to Mr. O. Mack Jones by the
Company under the Company's 1998 Plan. (Disclose on Table)
(16) Consists of 140,000 shares of common stock underlying currently
exercisable stock options granted to Mr. Frank E. Coffman by the
Company under the Company's 1998 Plan.
(17) Consists of 140,000 shares of common stock underlying currently
exercisable stock options granted to Mr. Michael P. Kalleres VADM
by the Company under the Company's 1998 Plan.
(18) Consists of 140,000 shares of common stock underlying currently
exercisable stock options granted to Mr. William A. Wilson by the
Company under the Company's 1998 Plan.
Messrs. Blum and Hannesson are brothers-in-law.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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ORGANIZATION AND CAPITALIZATION OF THE COMPANY
Since its acquisition of the capital stock of Commodore Laboratories,
Inc. (the Company's predecessor) in 1993, Environmental has advanced an
aggregate of $8,925,426 to the Company, which has been used to finance the
development of SET, including salaries of personnel, equipment, facilities and
patent prosecution. These cash advances by Environmental were evidenced by
successive unsecured 8% promissory notes of the Company's predecessor, and, at
December 31,1995, by the Environmental Funding Note. Kraft Capital Corporation
("Kraft"), a corporation wholly owned by Bentley J. Blum, a principal
stockholder of Environmental and a director of the Company and of Environmental,
provided approximately $656,000 of such financing to Environmental.
Environmental provided additional advances to the Company of $978,896 for the
first fiscal quarter of 1996, which were repaid by the Company subsequent to its
obtaining a line of credit from a commercial bank in April 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources."
In March 1996, the Company was formed as a wholly owned subsidiary of
Environmental. Prior to its IPO, in exchange for the issuance of 15,000,000
shares of common stock, Environmental contributed to the Company (i) all of the
57
assets and properties (including joint working proposals, quotations and bids in
respect to projects and contracts awarded for feasibility studies), subject to
all of the liabilities, of its operating divisions relating to SET and the
exploitation of the SET technology and processes in all commercial and
governmental applications; (ii) all of the outstanding shares of the capital
stock of each of Commodore Laboratories, Inc., Commodore Remediation
Technologies, Inc., Commodore Government Environmental Technologies, Inc.,
Commodore Technologies, Inc. and Sandpiper Properties, Inc. (except for a 9.95%
minority interest in Commodore Laboratories, Inc. which at the time was held by
Albert E. Abel); and (iii) a portion of the Environmental Funding Note in the
amount of $3.0 million.
In October 1996, the Company acquired all of the outstanding shares of
capital stock of Advanced Sciences. Advanced Sciences, together with its
subsidiaries, provides a full range of environmental and technical services,
including identification, investigation, remediation and management of hazardous
and mixed waste sites, to government agencies, including the DOD and DOE, and to
private companies located in the United States and abroad. In consideration for
all of the outstanding shares of capital stock of Advanced Sciences, the former
shareholders of Advanced Sciences received an aggregate of 450,000 shares of
common stock. Simultaneously, the Company also acquired of all of the
outstanding shares of capital stock of ASE. ASE, a newly formed entity with no
history of operations, had an option to purchase all of the outstanding capital
stock of Advanced Sciences and was acquired by the Company for the purpose of
enabling the Company to effect its acquisition of Advanced Sciences. The former
shareholders of ASE received, in consideration for all of the outstanding shares
of capital stock of ASE, an aggregate of 450,000 shares of Company's common
stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
In December 1996, the Company transferred certain of its operating
assets related to its SET technology to Solution, subject to certain liabilities
related to such assets, in exchange for 100 shares of common stock of Solution,
representing all of the issued and outstanding shares of capital stock of
Solution. Solution agreed to assume all of the net assets of the Company
relating to its SET technology at December 1, 1996, which assets had an
aggregate value of approximately $4.0 million at such date, and all known or
unknown contingent or un-liquidated liabilities of and claims against the
Company and its subsidiaries to the extent they relate to or arise out of the
transferred assets. The Company retained, among other things, (a) all temporary
cash investments of the Company at December 1, 1996, aggregating approximately
$14.1 million, and (b) the principal executive offices and related assets of the
Company that, at the time, were located in McLean, Virginia. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
On August 30, 2000, Applied completed a stock purchase agreement with
Dispute Resolution Management, Inc. (DRM) and its two shareholders, William J.
Russell ("Russell") and Tamie B. Speciale ("Speciale").
On May 16, 2002, a Notice of Default and Right to Pursue Remedies (the
"Notice") was issued to the Company by William J. Russell and Tamie B. Speciale
(the "Pledgees") claiming that the Company is in default under the Stock
Purchase Agreement (the "Agreement"), between the Company and DRM and the
58
related Stock Pledge Agreement (the "Stock Pledge"). As of May 16, 2002, the
Company no longer owns an 81% interest in DRM.
On August 19, 2002, the Company entered into a settlement agreement
with DRM (the "DRM Settlement Agreement"). Under terms of the DRM Settlement
Agreement, the Company acknowledged that it had previously received back
4,750,000 shares of its common stock from DRM and its shareholders. As part of
the DRM Settlement Agreement, the Company received an additional 1,187,500
shares of its common stock from DRM and its shareholders.
Additionally, the Company issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per share, each such share of
Series H Preferred having a stated value of $1.00 per share, to DRM, Russell and
Speciale as part of the DRM Settlement Agreement as of September 30, 2002 for
satisfaction of the remaining liabilities relating to the purchase and working
capital of DRM. The Series H Preferred shall have the following rights,
privileges, and limitations:
a) The conversion feature shall be exercisable on June 30, 2003.
b) No Series H Preferred may be converted prior to June 30, 2003.
Until July 31, 2005, only 80,000 shares of the Series H Preferred
shall be convertible in any calendar quarter. The balance of any
unconverted Series H Preferred Stock may be converted at any time
on or after August 1, 2005.
c) The conversion price of the Series H Preferred shall be determined
by the average closing price of Company's common stock in the
previous 30 trading days, but in no event shall the conversion
price be less than $0.20 per share.
d) The Series H Preferred shall have a non-cumulative annual dividend
of 3%, payable in cash or Series H Preferred within 30 days of the
end of the Company's fiscal year, at the Company's election.
e) The Series H Preferred shall not be transferable.
The financial information included in the accompanying form 10K for the
period ending December 31, 2002 reflects the terms of the DRM Settlement
Agreement. For the year ended December 31, 2002 the Company recorded a loss on
the disposal of DRM in the amount of $4,134,000. The Company's loss of the DRM
subsidiary may have a material adverse effect on the financial condition of the
Company and its cash flow problems. The Company currently requires additional
cash to sustain existing operations and to meet current obligations and ongoing
capital requirements. The Company's current monthly operating expenses exceed
cash revenues by approximately $80,000. Because of the dissolution of DRM, it
has been reflected as Assets Held for Sale - Component DRM and Liabilities Held
for Sale - Component DRM at December 31, 2000 and 2001 and as discontinued
operations for the years ended December 31, 2002, 2001 and 2000.
On June 13, 2001, the Company issued and sold to Milford Capital
Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar")
one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan
Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year
warrant for 333,333 shares of the Company's common stock at an exercise price of
$0.22 per share. The Company pledged its equipment and SET related intellectual
59
property as collateral for the Milford/Shaar Bridge Loan Notes. The Company
shall pay Milford/Shaar principal and interest on a monthly basis in arrears.
The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty.
The Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities.
The Company made all payments on the Milford/Shaar Bridge Loan Notes
until November 13, 2001. The Company asked for and received a forbearance of
payments on the Milford/Shaar Bridge Loan Notes from November 13, 2001 until
August 13, 2002. The Shaar Fund, Ltd., through the Shaar Bridge Loan, continues
to provide cash installments on a periodic basis in the form of additional
principal. The current principal balance of the Milford/Shaar Bridge Loan Notes
remains unpaid as of April 15, 2003. The Company has not been notified of a
default of the Milford/Shaar Bridge Loan Notes as of April 15, 2003. See "MD&A -
Liquidity and Capital Resources."
In September 2000, the Company completed $500,000 in financing in the
form of a loan (the "Brewer Note") from S. Brewer Enterprises, Inc. ("SB
Enterprises"), which is owned by one of its officers and directors, Shelby T.
Brewer, Chairman of the Board and Chief Executive Officer of the Company. The
Brewer Note bears a 9.75% interest rate, payable monthly, with a balloon
principal payment at the end of the term. In connection with the Brewer Note,
the Company issued SB Enterprises a 2-year warrant for 100,000 shares of the
Company's common stock at an exercise price of $1.0625 per share. This warrant
expired by it terms in September of 2002. The note was due and payable on March
15, 2001. The Brewer Note was convertible into the Company's common stock at the
market price up through March 15, 2001.
On March 15, 2001, SB Enterprises executed an Amended and Restated
Promissory Note (the "Restated Brewer Note"), which extended the maturity date
of the note until December 31, 2001. Additionally, the conversion feature of the
Restated Brewer Note was changed to the 5-day average closing price of the
Company's common stock prior to a conversion notice. On April 9, 2001, SB
Enterprises issued a conversion notice for $250,000 of the outstanding principal
of the Brewer Restated Note. The conversion price was calculated by the previous
5-day average of the closing price of the Company's common stock and was
converted into 1,041,667 shares.
On December 12, 2002, SB Enterprises executed an Amended and Restated
Promissory Note Extension (the "Restated Brewer Note Extension"), which extended
the maturity date of the note until January 1, 2004. In connection with the
Restated Brewer Note Extension, the Company issued SB Enterprises a 2-year
warrant for 1,000,000 shares of the Company's common stock at an exercise price
of $0.05 per share. On March 14, 2003, SB Enterprises issued a conversion notice
for the remaining principal balance of $250,000 plus accrued interest of
$36,563. The conversion price was calculated by the previous 5-day average of
the closing price of the Company's common stock and was converted into
13,189,842 shares. These shares have not been issued to Mr. Brewer as of April
15, 2003. The Company believes that this issuance of convertible debt is exempt
from the registration requirements of the Securities Act under Section 4(2)
thereof as a transaction not involving any public offering of securities. See
"MD&A - Liquidity and Capital Resources."
60
In November 2000, the Company completed $500,000 in financing in the
form of a loan (the "Weiss Group Note") from a group of four investors; $75,000
of which was borrowed from the son of Paul E. Hannesson, our former President
and Chief Executive Officer, and $25,000 of which was borrowed from Stephen A.
Weiss, a shareholder of Greenberg Traurig, LLP, our former corporate and
securities counsel. The Weiss Group Note bears interest at 12% per annum, was
due and payable on February 12, 2001, and is secured by the first $500,000 of
loans or dividends that the Company may receive from DRM. As consideration for
such loan, Environmental, one of the Company's principal stockholders owning
approximately 16.58% of the Company's common stock, transferred to the investors
a total of 1,000,000 shares of the Company's common stock. All holders of the
Weiss Group Note have granted payment extensions until January 1, 2004.
Effective April 16, 2001, the Company issued warrants to purchase
1,000,000 shares of its common stock at an exercise price of $0.22 per share
(the closing price of our common stock on the AMEX on such date) to all holders
of the Weiss Group Note in consideration of the extension of the due date of
such loans by such persons from February 12, 2001 to June 30, 2001. The Company
believes that this transaction is exempt from the registration requirements of
the Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities.
Effective January 24, 2002, the Company issued warrants to purchase
500,000 shares of its common stock at an exercise price of $0.15 per share (the
closing price of our common stock on the AMEX on such date) to all holders of
the Weiss Group Note in consideration of the extension of the due date of such
loans by such persons from June 30, 2001 to May 31, 2002. The Company believes
that this transaction is exempt from the registration requirements of the
Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities. See "MD&A - Liquidity and Capital Resources."
Effective October 29, 2002, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 1,000,000 shares at an
exercise price of $0.22 per share of the Company's common stock in connection
with the Weiss Group Note. Effective October 29, 2002, the members of the Weiss
Group Note voluntarily cancelled all issued warrants to purchase 500,000 shares
at an exercise price of $0.15 per share of the Company's common stock in
connection with the Weiss Group Note.
Effective October 29, 2002, the Company issued warrants to purchase
1,500,000 shares of its common stock at an exercise price of $0.05 per share
(the closing price of our common stock on the AMEX on such date) to all holders
of the Weiss Group Note in consideration of the extension of the due date of
such loans by such persons from May 31, 2002 to January 1, 2004. The Company
believes that this transaction is exempt from the registration requirements of
the Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities. See "MD&A - Liquidity and Capital Resources."
On May 23, 2001, a private investor purchased $250,000 of the Company's
common stock at the market price. The Company issued the private investor
1,923,077 shares of common stock of the Company as a result of the equity
purchase. In connection with the purchase of the shares of the Company's common
stock, the Company issued the private investor a 2-year warrant for 500,000
61
shares of the Company's common stock at an exercise price of $0.22 per share.
The Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities. See "MD&A - Liquidity and
Capital Resources."
On October 2, 2002, Mr. Bentley Blum, a Director of the Company, had
loaned the Company with $125,000 of cash installments over the period of one
year (the "Blum Loan"). The Company elected to convert the Blum Loan to the
Company's common stock using the conversion feature of the 5-day average closing
price of the Company's common stock prior to October 2, 2002. On October 2,
2002, Blum issued a conversion notice for $125,000 of the outstanding principal
of the Blum Loan into 2,500,000 shares. Mr. Blum continues to provide cash
installments in the form of a loan to the Company. The Blum Loan bears interest
at 9% per annum and has no due date at this time. The current principal balance
of the Blum Loan remains unpaid as of April 15, 2003. See "MD&A - Liquidity and
Capital Resources."
SERVICES AGREEMENT
In September 1997, the Company, Environmental, Separation, Advanced
Sciences, and certain other affiliates of the Company (the "Affiliated Parties")
entered into a services agreement, dated as of September 1, 1997 (the "Services
Agreement"), whereby the Company and the Affiliated Parties agreed to cooperate
in sharing, where appropriate, costs related to accounting services, financial
management, human resources and personnel management and administration,
information systems, executive management, sales and marketing, research and
development, engineering, technical assistance, patenting, and other areas of
service as are appropriately and necessarily required in the operations of the
Company and the Affiliated Parties (collectively, the "Services"). Pursuant to
the Services Agreement, services provided by professional employees of the
Company and the Affiliated Parties to one another are charged on the basis of
time actually worked as a percentage of salary (including cost of benefits)
attributable to that professional. In addition, charges for rent, utilities,
office services and other routine charges regularly incurred in the normal
course of business are apportioned to the professionals working in the office on
the basis of salary, and then charged to any party in respect of whom the
professional devoted such time based upon time actually worked. Furthermore,
charges from third parties, including, without limitation, consultants,
attorneys and accountants, are levied against the party actually receiving the
benefit of such services. Pursuant to the Services Agreement, the Company acts
as the coordinator of billings and payments for Services on behalf of itself and
the other Affiliated Parties.
There was no sharing of services in 2001 and 2002, although, insurance
costs were allocated between Affiliated Parties when it was beneficial to insure
the family of companies under one policy.
62
ITEM 14. CONTROLS AND PROCEDURES.
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(a) Evaluation of disclosure controls and procedures. As required by
Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an
evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of
the Company's management, including the Company's President and
Chief Executive Officer, and the Company's Chief Financial Officer
and Chief Accounting Officer. Based upon that evaluation, the
Company's President and Chief Executive Officer, and Chief
Financial Officer and Chief Accounting Officer have concluded that
the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the
Company required to be included in the Company's periodic SEC
filings. Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required
to be disclosed in Company reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's rule and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in Company
reports filed under the Exchange Act is accumulated and
communicated to management, include the Company's Chief Executive
Officer, and Chief Financial Officer and Chief Accounting Officer
as appropriate, to allow timely decisions regarding required
disclosures.
(b) Changes in internal controls. There have been no changes in
internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
63
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
-------- ----------------------------------------------------------------
The following documents are filed as part of this Annual Report:
All financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and, therefore,
have been omitted.
64
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2002 and 2001
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Index
--------------------------------------------------------------------------------
Page
----
Commodore Applied Technologies, Inc.
Independent Auditors' Report F-1
Consolidated Balance Sheet as of December 31, 2002 and 2001 F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-3
Consolidated Statements of Stockholders' (Deficit) Equity for
the years ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Commodore Applied Technologies, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Commodore Applied
Technologies, Inc. and Subsidiaries as of December 31, 2002 and 2001 and the
related consolidated statements of operations, stockholders' (deficit) equity
and cash flows for the years ended December 31, 2002, 2001, and 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commodore Applied
Technologies, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for the years ended December
31, 2002, 2001, and 2000, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a working capital deficit and
has suffered recurring losses that raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
February 6, 2003, except for Note 20, which is dated April 11, 2003
F-1
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Balance Sheet
December 31, 2002 and 2001
(Amounts in thousands except shares)
-------------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 59 $ 170
Accounts receivable, net 96 599
Prepaid assets and other current assets 163 327
-----------------------------
Total current assets 318 1,096
Property and equipment, net 358 597
Intangible assets:
Patents and completed technology, net of accumulated
amortization of $40 and $1,375, respectively 60 100
-----------------------------
Total intangible assets 60 100
Assets held for sale - component DRM - 29,407
-----------------------------
Total assets $ 736 $ 31,200
-----------------------------
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Balance Sheet
Continued
-------------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------
Liabilities and Stockholders' (Deficit) Equity
----------------------------------------------
Current liabilities:
Accounts payable $ 1,077 $ 3,916
Related party payable 80 160
Line of credit - 108
Notes payable 714 1,245
Other accrued liabilities 2,723 2,035
-----------------------------
Total current liabilities 4,594 7,464
Liabilities held for sale - component DRM - 22,165
Long-term debt 431 -
-----------------------------
Total liabilities 5,025 29,629
-----------------------------
Commitments and contingencies - -
Stockholders' (deficit) equity:
Convertible Preferred Stock, Series E, F and H, par value $.001 per share,
aggregate liquidation value of $6,716,000 and $5,403,000 at December 31,
2002 and 2001, respectively, 5% to 12% cumulative dividends for Series E
and F, 3% dividends for Series H, 1,561,700 shares authorized, 1,213,700
shares and 441,700 shares issued and outstanding at December 31, 2002
and 2001, respectively 1 -
Common Stock, par value $.001 per share, 125,000,000 shares authorized,
59,027,062 shares and 55,417,354 shares issued and outstanding,
at December 31, 2002 and 2001, respectively 59 55
Additional paid in capital 67,129 66,759
Accumulated deficit (71,215) (65,243)
-----------------------------
(4,026) 1,571
Treasury stock, 3,437,500 shares at December 31, 2002 (263) -
-----------------------------
Total stockholders' (deficit) equity (4,289) 1,571
-----------------------------
$ 736 $ 31,200
-----------------------------
-------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-2
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Operations
December 31, 2002 and 2001 and 2000
(Amounts in thousands except per share data)
------------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------
Revenue $ 3,710 $ 4,590 $ 17,057
Costs and expenses:
Cost of revenues 2,108 3,369 14,452
Research and development 297 423 993
General and administrative 1,792 2,420 5,228
Depreciation and amortization 314 658 865
Impairment of machinery - 776 -
Impairment of patents - 627 -
Impairment of goodwill - - 6,586
-------------------------------------------
Total operating expenses 4,511 8,273 28,124
-------------------------------------------
Loss from operations (801) (3,683) (11,067)
Other income (expense):
Interest income - 38 57
Interest expense (104) (226) (586)
Equity in losses of unconsolidated subsidiary - (295) -
-------------------------------------------
Loss from continuing operations
before provision for income taxes (905) (4,166) (11,596)
Income tax benefit - - -
-------------------------------------------
Loss from continuing operations (905) (4,166) (11,596)
Loss on disposal of discontinued operations (4,134) - -
(Loss) gain from discontinued operations (933) (2,388) 155
-------------------------------------------
Net loss $ (5,972) $ (6,554) $ (11,441)
-------------------------------------------
Net loss per share from continuing operations
- basic and diluted $ (0.02) $ (0.08) $ (0.34)
Net (loss) gain per share from discontinued
operations - basic and diluted $ (0.09) $ (0.05) $ 0.00
-------------------------------------------
Total net loss per share - basic and diluted $ (0.11) $ (0.13) $ (0.34)
-------------------------------------------
Number of weighted average shares outstanding 57,775 53,241 35,866
-------------------------------------------
------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-3
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' (Deficit) Equity
Years Ended December 31, 2002 and 2001 and 2000
(Amounts in thousands except shares)
------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------------------------- Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
-----------------------------------------------------------------------------------
Balance, January 1, 2000 335,000 $ - 30,962,938 $ 31 $ 57,168 $ (47,248) $ - $ 9,951
Issuance of Series F Convertible Preferred
Stock and warrants at redemption value 266,700 1 - - 1,770 - - 1,771
Conversion of Series E and F Convertible
Preferred Stock into common stock (45,000) - 440,581 - - - - -
Warrants issued in compensation
with short term note payable
to affiliated party - - - - 89 - - 89
Issuance of common stock for private
placement fee - - 100,000 - - - - -
Issuance of common stock and warrants
in acquisition - - 15,500,000 16 7,506 - - 7,522
Preferred stock dividends - - - - (634) - - (634)
Exercise of stock options - - 1,326,866 1 596 - - 597
Net loss - - - - - (11,441) - (11,441)
-----------------------------------------------------------------------------------
Balance, December 31, 2000 556,700 1 48,330,385 48 66,495 (58,689) - 7,855
------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-4
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' (Deficit) Equity
Continued
------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------------------------- Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
-----------------------------------------------------------------------------------
Conversion of series E and F
preferred stock into common stock (115,000) (1) 4,072,225 4 (3) - - -
Sale of common stock for cash - - 1,973,077 2 146 - - 148
Sale of warrants for cash - - - - 105 - - 105
Conversion of debt to common stock - - 1,041,667 1 249 - - 250
Issuance of warrants in
financing agreements - - - - 175 - - 175
Preferred stock dividends - - - - (408) - - (408)
Net loss - - - - - (6,554) - (6,554)
--------------------------------------------------------------------------------------
Balance, December 31, 2001 441,700 - 55,417,354 55 66,759 (65,243) - 1,571
Conversion of series E and F
preferred stock into common stock (28,000) - 2,496,423 3 (3) - - -
Issuance of common stock as payment of
preferred stock dividends - - 1,113,285 1 136 - - 137
Issuance of preferred H Stock pursuant to
disposition of DRM 800,000 1 - - 799 - - 800
------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-5
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' (Deficit) Equity
Continued
------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------------------------- Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
-----------------------------------------------------------------------------------
Treasury stock, 5,937,500 shares, received
from shareholders of DRM pursuant to the
disposition of DRM - - - - - - (463) (463)
Issuance of 2,500,000 shares of treasury
stock as payment of related party payable - - - - (75) - 200 125
Preferred stock dividends - - - - (528) - - (528)
Issuance of warrants to officer of the
Company to extend note payable - - - - 41 - - 41
Net loss - - - - - (5,972) - (5,972)
-----------------------------------------------------------------------------------
Balance, December 31, 2002 1,213,700 $ 1 59,027,062 $ 59 $ 67,129 $ (71,215) $ (263) $ (4,289)
-----------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-6
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Cash Flows
Years Ended December 31, 2002 and 2001 and 2000
(Amounts in thousands except shares and per share data)
-------------------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------
Cash flows from operating activities:
Net loss $ (5,972) $ (6,554) $ (11,441)
Add: net loss (income) from discontinued operations 933 2,388 (155)
Add: net loss from disposal of discontinued operations 4,134 - -
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 314 658 865
(Gain) loss on disposition of property and equipment (35) - 5
Imputed interest expense - 167 333
Impairment of goodwill - - 6,586
Impairment of machinery - 776 -
Impairment of patents - 627 -
Loss from unconsolidated subsidiary - 295 -
Provision for related party bad debt - - 109
Amortization of debt discount 6 187 174
Changes in assets and liabilities:
Accounts receivable, net 503 2,964 (11)
Restricted cash - - 21
Prepaid assets 24 97 401
Net assets of component DRM (83) (1,559) 512
Accounts payable and accrued liabilities 53 919 (28)
----------------------------------------------
Net cash provided by (used in) operating activities (123) 965 (2,629)
Cash flows from investing activities:
Equipment purchased or constructed - (51) (114)
Patents acquired - - (36)
Advances from (to) related parties, net 45 (87) (97)
Contributions to affiliate - - (325)
----------------------------------------------
Net cash provided by (used in) investing activities 45 (138) (572)
-------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-7
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Cash Flows
Continued
-------------------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants - 253 597
Proceeds from sale of preferred stock - - 1,771
Preferred stock dividends - - (214)
(Repayments)/borrowings under line of credit (108) (1,351) (256)
Borrowings on debt and warrants 431 1,090 1,000
Payments on long-term debt and notes payable (356) (1,228) (915)
----------------------------------------------
Net cash (used in) provided by financing activities (33) (1,236) 1,983
----------------------------------------------
Net change in cash and cash equivalents (111) (409) (1,218)
Cash and cash equivalents at beginning of year 170 579 1,797
----------------------------------------------
Cash and cash equivalents at end of year $ 59 $ 170 $ 579
----------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ - $ 281 $ 158
----------------------------------------------
Income taxes $ - $ - $ -
----------------------------------------------
-------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-8
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Cash Flows
Continued
--------------------------------------------------------------------------------
Non-Cash Investing and Financing Activities:
2002
----
o The Company recorded $528 of unpaid dividends to holders of
preferred stock, and paid $137 of the unpaid dividends by issuance
of 1,113,285 shares of common stock.
o The Company financed prepaid assets with notes payable of $140.
o The Company issued warrants valued at $41 with debt extensions.
o Effective May 16, 2002, the Company dissolved the acquisition of
its 81% interest in Dispute Resolution Management, Inc (DRM) (see
Note 6). Consideration given consisted of the issuance of 800,000
shares of Series H Convertible Preferred valued at $800. The
Company received 5,937,500 shares of treasury stock valued at $463
from DRM shareholders. The Company also relieved $29,490 of assets
held for sale - component DRM, $2,595 of accounts payable and
$22,165 of liabilities held for sale - component DRM, and recorded
a loss on disposal of discontinued operations of $4,134 and a loss
on discontinued operations of $933.
o The Company issued 2,500,000 shares of treasury stock valued at
$125 to satisfy a related party payable to an officer of the
Company.
2001
----
o A debtholder converted $250 of debt to 1,041,667 shares of common
stock
o The Company recorded $408 of unpaid dividends to holders of
preferred stock
o The Company financed prepaid assets with notes payable of $123
o The Company issued warrants valued at $70 with a debt issuance
o The Company received equipment with book value of $30 from an
unconsolidated subsidiary
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-9
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
--------------------------------------------------------------------------------
2000
Effective August 31, 2000, the Company acquired an 81% interest in Dispute
Resolution Management, Inc. (DRM) (see Note 6). Consideration consists of the
following:
9.5 million option shares of common stock $ 13,122
6.0 million shares of common stock 6,563
Warrants to purchase 1 million shares of common stock 959
Future payment guarantee 7,412
------------------
Total consideration $ 28,056
------------------
Assets and liabilities acquired:
Accounts receivable $ 157
Property and equipment 124
Prepaids and other current assets 47
Goodwill 25,095
Covenant not to compete 2,625
Other assets 36
Accounts payable (61)
Accrued expenses (5)
Note payable (470)
------------------
$ 27,548
------------------
Cash received $ 508
------------------
o A shareholder of the Company transferred 100,000 shares of its
common stock in the Company to holders of notes payable from the
Company. The common stock was valued at $500 with $167 considered
prepaid and $333 expensed as interest.
o The Company issued a warrant valued at $89 in connection with a
debt issuance.
o The Company converted 45,000 shares of Series E & F Preferred
Stock to 440,581 shares of common stock.
o The Company financed equipment of $188 and prepaid assets of $271
with notes payable and long-term debt of $459.
o The Company accrued $420 of unpaid dividends to holders of
Preferred Stock.
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements. F-10
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands except share and per share data)
--------------------------------------------------------------------------------
1. Summary of Background
Significant Commodore Applied Technologies, Inc. and subsidiaries
Accounting ("Applied"), is engaged in the destruction and
Policies neutralization of hazardous waste from other materials.
Applied owns technologies related to the separation and
destruction of polychlorinated biphenyls (PCBs) and
chlorofluorocarbons (CFCs). Applied is currently working
on the commercialization of these technologies through
development efforts, licensing arrangements and joint
ventures.
Through Commodore Advanced Sciences, Inc. ("CASI"),
formerly Advanced Sciences, Inc., a subsidiary acquired
on October 1, 1996, Applied has contracts with various
government agencies and private companies in the United
States and abroad. As some government contracts are
funded in one year increments, there is a possibility
for cutbacks as these contracts constitute a major
portion of CASI's revenues, and such a reduction would
materially affect the operations. However, management
believes the subsidiary's existing client relationships
will allow Applied to obtain new contracts in the
future.
Through Dispute Resolution Management, Inc. (DRM), a
subsidiary acquired August 30, 2000 and disposed of May
16, 2002, Applied provided a package of services to help
companies recover financial settlements from insurance
policies to defray costs associated with environmental
liabilities. As of May 16, 2002, Applied no longer owns
an 81% interest in DRM (see Note 6). Applied's loss of
the DRM subsidiary may have a material adverse effect on
the financial condition of Applied and its cash flow
requirements. Applied currently requires additional cash
to sustain existing operations and to meet current
obligations and ongoing capital requirements.
--------------------------------------------------------------------------------
F-11
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Principles of Consolidation
Significant The consolidated financial statements include the
Accounting accounts of Applied and its majority-owned subsidiaries.
Policies Dispute Resolution Management, Inc. is included as
Continued discontinued operations from August 30, 2000 (date of
acquisition) through May 16, 2002 (date of dissolution)
(see Note 6). During the year ended December 31, 2002,
Applied disposed of DRM, and recorded the related loss
on the disposal of DRM. Applied has presented its
financial statements to reflect the operations of DRM as
discontinued operations.
All significant intercompany balances and transactions
have been eliminated.
The investment in Teledyne-Commodore, LLC, a 50% owned
joint venture with Teledyne Environmental, Inc., was
accounted for under the lower of cost or market at
December 31, 2000 as operations had ceased. During the
year ended December 31, 2001, the joint venture was
dissolved, and Applied's share of the related loss was
included in losses of unconsolidated subsidiaries.
Cash and Cash Equivalents
Applied considers cash and highly liquid debt
instruments with original maturities of three months or
less at the date of purchase to be cash equivalents.
Concentration of Credit Risk and Significant Customers
Applied maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits.
Applied has not experienced any losses in such accounts.
With respect to trade receivables, Applied generally
does not require collateral as the majority of Applied's
services are performed for the U.S. Government and prime
contractors that serve the U.S. Government. Applied
believes it is not exposed to any significant credit
risk on cash, cash equivalents and trade receivables.
--------------------------------------------------------------------------------
F-12
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Sales to major customers which exceeded 10 percent of
Significant revenues are as follows:
Accounting
Policies
Continued Years Ended December 31,
------------- -------------- ---------------
2002 2001 2000
------------- -------------- ---------------
Customer A $ 2,622 $ 3,252 $ 1,476
Customer B $ 784 $ 1,148 $ 742
Customer C $ - $ - $ 11,618
The contract with Customer C ended on December 31, 2000,
and the contract with Customer A ended on October 1,
2002.
Risk and Uncertainty
Applied's operations involving the separation and
destruction of PCBs requires a permit from the EPA.
Applied had a valid nationwide permit related to the
treatment of PCBs in certain substances. The permit
expired September 15, 2001. Applied is currently in the
process of applying for a renewal of the permit. Until
the permit is reviewed and allowed, Applied, or its
client, must post a closure bond specific to the amount
of any contracts that utilize Applied's destruction
technology related to the treatment of PCB's. Presently,
there is no information to suggest that the EPA will not
renew Applied's permit or grant them the requested
revision.
Property and Equipment
Property and equipment are recorded at cost.
Improvements which substantially increase the useful
lives of assets are capitalized. Maintenance and repairs
are expensed as incurred. Upon retirement or disposal,
the related cost and accumulated depreciation are
removed from the respective accounts and any gain or
loss is recorded in the Statement of Operations.
Provisions for depreciation are computed on the
straight-line method based on the estimated useful lives
of the assets which range from 3-5 years.
Intangible Assets
Completed technology represents certain technology and
related patents acquired in connection with the purchase
of third-party interests in Commodore Laboratories, Inc.
("Labs"). Completed technology and patents are being
amortized on a straight-line basis over their estimated
1.5 year lives remaining at December 31, 2002.
--------------------------------------------------------------------------------
F-13
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Impairment of Long-Lived Assets
Significant Applied reviews its long-lived assets for impairment
Accounting whenever events or changes in circumstances indicate
Policies that the carrying amount of the assets may not be
Continued recoverable through undiscounted future cash flows. If
it is determined that an impairment loss has occurred
based on expected cash flows, such loss is recognized in
the Statement of Operations.
During the year ended December 31, 2001 Applied recorded
an impairment on its equipment and related patents of
completed technology of $776 and $627, respectively.
During the year ended December 31, 2000 the unamortized
goodwill associated with the purchase of CASI was
determined to be impaired and was written off in the
amount of $6,586.
Revenue Recognition
Substantially all of Applied's revenues from continuing
operations are generated by its subsidiary, CASI. CASI's
revenues consist of engineering and scientific services
performed for the U.S. Government and prime contractors
that serve the U.S. Government under a variety of
contracts, most of which provide for unit prices.
Revenue under unit price contracts are recorded when the
services are provided.
Prior to 2001, most of CASI's contracts provided for
reimbursement of costs plus fixed fees. Direct and
indirect contract costs incurred in reimbursement plus
cost contracts are subject to audit by the Defense
Contract Audit Agency ("DCAA"). Management does not
expect these audits to materially affect the financial
statements and have established appropriate allowances
to cover potential audit disallowances. Contract
revenues have been recorded in amounts which are
expected to be realized upon final settlement. The DCAA
has audited CASI's contracts through 1996. An allowance
for doubtful accounts and potential disallowances has
been established based upon the portion of billed and
unbilled receivables that management believes may be
uncollectible.
--------------------------------------------------------------------------------
F-14
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Revenue Recognition - Continued
Significant DRM's revenue is recognized on retainers according to
Accounting the terms of each contract. Revenue is recognized on
Policies contingent success fees as each dispute with each
Continued insurer is resolved and a binding settlement agreement
has been executed by all parties. All revenues
associated with DRM have been classified in Applied's
current financial statements in discontinued operations.
Applied disposed of its ownership of DRM on May 16, 2002
(see Note 6).
Research and Development
Research and development expenditures are charged to
operations as incurred.
Income Taxes
Income taxes are determined in accordance with Statement
of Financial Accounting Standards ("SFAS") 109, which
requires recognition of deferred income tax liabilities
and assets for the expected future tax consequences of
events that have been included in the financial
statements or tax returns. Under this method, deferred
income tax liabilities and assets are determined based
on the difference between financial statement and tax
bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are
expected to reverse. SFAS 109 also provides for the
recognition of deferred tax assets if it is more likely
than not that the assets will be realized in future
years.
--------------------------------------------------------------------------------
F-15
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Stock-Based Compensation
Significant At December 31, 2002, Applied has one stock-based
Accounting employee compensation plan, which is described more
Policies fully in Note 13. Applied accounts for its plans under
Continued the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based
employee compensation cost is reflected in net loss, as
all options granted under those plans had an exercise
price that equaled or exceeded the market value of the
underlying common stock on the date of grant. In as much
as Applied rescinded certain options during 2002 and
reissued new options to the option holders, the options
are considered variable options and will be revalued
each quarter to determine the effect on operations, if
any. The following table illustrates the effect on net
loss per share if Applied had applied the fair value
recognition provision of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Years Ended December 31,
----------------------------------------
2002 2001 2000
----------------------------------------
Net loss, as reported $ (5,972) $ (6,554) $ (11,441)
Deduct:
Total stock- based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (500) (256) (1,178)
----------------------------------------
Pro forma net loss $ (6,472) $ (6,810) $ (12,619)
----------------------------------------
Loss per share:
Basic and diluted - as reported $ (.11) $ (.13) $ (.34)
----------------------------------------
Basic and diluted - pro forma $ (.12) $ (.14) $ (.37)
----------------------------------------
--------------------------------------------------------------------------------
F-16
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Fair Value of Financial Instruments
Significant The fair value of financial instruments is determined by
Accounting reference to various market data and other valuation
Policies techniques as appropriate. Accounts receivable, notes
Continued receivable, cash equivalents, long term debt and the
line of credit are financial instruments that are
subject to possible material market variations from the
recorded book value. Applied has reflected in the
financial statements debt discounts which are being
amortized over the estimated lives of the obligations.
The debt discounts bring the obligations to a market
rate of interest. The fair value of these financial
instruments approximate the recorded book value as of
December 31, 2002 and 2001.
Use of Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted
in the United States of America requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior years have been reclassified to
conform with the current year presentation.
2. Going The accompanying consolidated financial statements have
Concern been prepared under the assumption that Applied will
continue as a going concern. Such assumption
contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business. As shown in the consolidated financial
statements, Applied incurred losses for the years ended
December 31, 2002, 2001 and 2000. Applied also has a
working capital deficit at December 31, 2002. The
consolidated financial statements do not include any
adjustments that might be necessary should Applied be
unable to continue as a going concern.
--------------------------------------------------------------------------------
F-17
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
2. Going Applied's continuation as a going concern is dependent
Concern upon its ability to generate sufficient cash flow to
Continued meet its obligations on a timely basis, to obtain
additional financing as may be required, and ultimately
to attain profitability. Potential sources of cash
include new contracts, external debt, the sale of new
shares of Company stock or alternative methods such as
mergers or sale transactions. No assurances can be
given, however, that Applied will be able to obtain any
of these potential sources of cash. Applied currently
requires additional cash to sustain existing operations
and to meet current obligations and ongoing capital
requirements.
3. Receivables The components of Applied's trade receivables are as
follows as of December 31:
2002 2001
-------------------------------
Contract receivables 272 1,010
Less: Allowance for doubtful accounts
and potential disallowances (176) (411)
-------------------------------
Total receivables, net $ 96 $ 599
-------------------------------
Substantially all of CASI trade receivables are pledged
to collateralize its line of credit (see Note 8).
--------------------------------------------------------------------------------
F-18
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
4. Property Property and equipment consist of the following:
and
Equipment
Average December 31
Useful Life 2002 2001
--------------------------------------
Machinery and equipment 3 $ 615 $ 599
Furniture and fixtures 5 223 223
Computer equipment 4 510 882
Leasehold improvements 5 19 19
------------------------
1,367 1,723
Less: accumulated depreciation
and amortization (1,009) (1,126)
------------------------
Total property and equipment $ 358 $ 597
------------------------
During the year ended December 31, 2001 an impairment
loss of $776 was recorded against the machinery
equipment.
5. Other Assets Applied had an investment in a joint venture with
Teledyne Environmental, Inc. (LLC). Applied did not
record its equity in the losses of the LLC in 2000 and
1999 as the LLC agreement states that members of the LLC
can only be asked to fund approved capital calls and
Applied had no obligation to fund these 2000 and 1999
losses. During the year ended December 31, 2001, the
joint venture was dissolved, and Applied's share of the
related loss to dissolve the joint venture of $295 was
included in losses of unconsolidated subsidiaries.
--------------------------------------------------------------------------------
F-19
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Acquisition On August 30, 2000, Applied completed a stock purchase
and agreement with Dispute Resolution Management, Inc. (DRM)
Dissolution and its two shareholders. This agreement amended and
of Dispute restated in its entirety the terms of an agreement and
Resolution plan of merger, which Applied had previously entered
Management into with DRM and its shareholders. On May 16, 2002, the
acquisition of DRM was dissolved, and Applied entered
into a settlement agreement with DRM on August 19, 2002.
Under terms of the acquisition agreement, Applied
purchased 81% of the issued and outstanding capital
stock of DRM from the two existing shareholders. The
consideration to these shareholders (and their
designees) consisted of:
a) 10.5 million shares of Applied common stock.
Of these 10.5 million shares, 9.5 million
shares are subject to a one-year option to
repurchase any or all shares. The extended
option expired on May 16, 2002.
b) 5 million shares of Applied common stock in
exchange for an option to purchase the
remaining 19% interest in DRM. The option
expires after five years and the option price
was to be based upon the relative appraised
values of DRM and Applied at the time of
purchase.
c) Five-year warrants to purchase up to an
aggregate of 1.0 million shares of Applied
common stock at an exercise price of $2.00
per share.
d) Quarterly earn-out distributions equal to 35%
of the cash flow of DRM over an earn-out
period commencing as of September 1, 2000 and
ending December 31, 2005. Applied had agreed
that if DRM had not distributed to these
shareholders a total of $10 million in cash
in earn-out payments by December 31, 2003,
Applied would make up the difference between
$10 million and the actual cash distributed.
This difference could have been paid in cash
or Applied common shares at Applied's sole
discretion.
--------------------------------------------------------------------------------
F-20
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Acquisition Applied had an absolute and irrevocable obligation to
and repurchase, by the end of the option period, that number
Dissolution of 9.5 million shares of Applied common stock necessary
of Dispute to provide the holders of those shares with a total of
Resolution $14.5 million. It was Applied's intention to exercise
Management its option to reacquire these shares during the period
Continued and sell these shares to generate the cash necessary to
meet the $14.5 million obligation. The obligation was
recorded as a note payable and interest had been imputed
on the note payable to record debt at the time of
acquisition of $13,122.
The former owners of DRM entered into five-year
employment agreement with DRM providing for starting
salaries of $262 per year, with annual increases of not
more than 5%. In addition, these individuals entered
into five-year non-competition agreements with DRM.
Applied valued the consideration given as follows:
9.5 million option common shares $ 13,122
5.0 million common shares 5,469
1.0 million common shares 1,094
Warrants to purchase 1.0 million shares 959
Future payment guarantee 10,000
Imputed interest on future payment guarantee (2,588)
--------------
Total $ 28,056
--------------
DRM's equity at the date of acquisition was $414.
Applied's 81% share of this equity was $336.
Applied recorded the difference between the
consideration given of $28,056 and its ownership in DRM
equity of $336 as follows:
Covenants not to compete $ 2,625
Goodwill 25,095
-----------------
Total $ 27,720
-----------------
--------------------------------------------------------------------------------
F-21
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Acquisition Covenants not to compete were being amortized over their
and 5 year life. Prior to January 1, 2002, goodwill was
Dissolution being amortized over 20 years.
of Dispute
Resolution On May 16, 2002, a Notice of Default and Right to Pursue
Management Remedies (the "Notice") was issued to Applied by William
Continued J. Russell and Tamie B. Speciale (the "Pledgees")
claiming that Applied was in default under the Stock
Purchase Agreement (the "Agreement"), between Applied
and DRM and the related Stock Pledge Agreement (the
"Stock Pledge"). As of May 16, 2002, Applied no longer
owned an 81% interest in DRM.
On August 19, 2002, Applied entered into a settlement
agreement with DRM (the "DRM Settlement Agreement").
Under terms of the DRM Settlement Agreement, Applied
acknowledged that it had previously received back
4,750,000 shares of its common stock from DRM and its
shareholders, which was recorded as treasury stock at
the fair market value of the common stock. As part of
the DRM Settlement Agreement, Applied received an
additional 1,187,500 shares of its common stock from DRM
and its shareholders, which was also recorded as
treasury stock at the fair market value of the common
stock.
Additionally, Applied issued 800,000 shares of Series H
Preferred stock (the "Series H Preferred"), par value
$0.001 per share, each such share of Series H Preferred
having a stated value of $1 per share, to DRM, Russell
and Speciale as part of the DRM Settlement Agreement as
of September 30, 2002 for satisfaction of the remaining
liabilities relating to the purchase and working capital
of DRM. The Series H Preferred shall have the following
rights, privileges, and limitations:
a) The conversion feature shall be exercisable
on June 30, 2003.
b) No Series H Preferred may be converted prior
to June 30, 2003. Until July 31, 2005, only
80,000 shares of the Series H Preferred shall
be convertible in any calendar quarter. The
balance of any unconverted Series H Preferred
Stock may be converted at any time on or
after August 1, 2005.
--------------------------------------------------------------------------------
F-22
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Acquisition c) The conversion price of the Series H
and Preferred shall be determined by the average
Dissolution closing price of Company's common stock in
of Dispute the previous 30 trading days, but in no event
Resolution shall the conversion price be less than $0.20
Management per share.
Continued
d) The Series H Preferred shall have a
non-cumulative annual dividend of 3%, payable
in cash or Series H Preferred within 30 days
of the end of Applied's fiscal year, at
Applied's election.
e) The Series H Preferred shall not be
transferable.
For the year ended December 31, 2002 Applied recorded a
loss on the disposal of DRM in the amount of $4,134.
Applied's loss of the DRM subsidiary may have a material
adverse effect on the financial condition of Applied and
its cash flow problems. Applied currently requires
additional cash to sustain existing operations and to
meet current obligations and ongoing capital
requirements.
7. Other Other accrued liabilities consist of the following:
Accrued
Liabilities
2002 2001
------------------------------
Dividend payable $ 1,210 $ 816
Compensation and employee benefits 842 658
Loss reserve 238 200
Related parties 185 185
Accrued interest 155 110
Other 93 66
------------------------------
$ 2,723 $ 2,035
------------------------------
--------------------------------------------------------------------------------
F-23
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
8. Line At December 31, 2002 and 2001, CASI had a $0 and $108
of outstanding balance, respectively, on a revolving line
Credit of credit. The line of credit is not to exceed 85% of
eligible receivables or $2,500 and is due November 2003
with interest payable monthly at prime plus 2.0 percent
(6.75% at December 31, 2002). The credit line is
collateralized by the assets of CASI and is guaranteed
by Applied. The line of credit contains certain
financial covenants and restrictions including minimum
ratios that CASI must satisfy.
9. Notes Notes payable consist of the following at December 31:
Payable
2002 2001
------------------------------
Notes payable to individuals with interest at
15%, due in aggregate monthly installments,
beginning in July 2001, of $83,33 plus
interest, maturing through August 2002. In
connection with the notes, Applied issued
warrants to purchase 333,334 shares of stock
which were valued at $70,000 and recorded as a
discount on the notes to be amortized over
their respective terms. The notes are in
default, but Applied has not received notice of
default. $ 583 $ 583
Unamortized discount for warrants - (18)
Notes payable to an insurance company with
interest at 8.18%, secured by an insurance
contract and due November 2003 131 214
--------------------------------------------------------------------------------
F-24
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Notes
Payable
Continued
Notes payable to individuals with interest at
12%, originally due February 13, 2001 and
extended until May 31, 2002, and then until
January 1, 2004 and reclassified as long-term
debt (see Note 10). - 216
Note payable to an officer of Applied with
interest at 9.75%. The note is unsecured and
is convertible into common stock of Applied at
the market rate of the common stock. During
2001 the officer converted $250,000 of the note
for 1,041,667 shares of common stock. The note
was originally due March 15, 2001 but has been
extended until January 1, 2004 during 2002 and
reclassified as long-term debt (see Note 10). - 250
---------------------------
$ 714 $ 1,245
---------------------------
10. Long-Term Applied has the following long-term debt at December 31,
Debt 2002:
Note payable to an officer of Applied with interest at 9.75%.
The note is unsecured and is convertible into common stock of
Applied at the market rate of the common stock. During 2001
the officer converted $250,000 of the note for 1,041,667
shares of common stock. The note was originally due March 15,
2001 but has been extended until until January 1, 2004 and
reclassified from notes payable (see Note 9). Applied also
has imputed a discount for warrants issued for $41 in
connection with the extension of the note which is being
amortized over the extended term of the note $ 250
Notes payable to individuals with interest at 12%, originally
due February 13, 2001 and extended until May 31, 2002, and
then until January 1, 2004 during 2002 and reclassified from
notes payable (see Note 9). The note is secured by accounts
receivable. 216
--------------------------------------------------------------------------------
F-25
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
10. Long-Term
Debt
Continued
Unamortized discount imputed for warrants (35)
--------------
431
Less current maturities -
--------------
$ 431
--------------
Future maturities on long-term debt are as follows:
Year
----
2003 -
2004 431
--------------
Total 431
--------------
11. Income Applied provides for deferred income taxes on temporary
Taxes differences which represent tax effects of transactions
reported for tax purposes in periods different than for
book purposes.
The provision for income taxes for the years ended
December 31 results in an effective tax rate which
differs from federal income tax rates as follows:
2002 2001 2000
-----------------------------------------
Expected tax benefit at federal
statutory rate $ (2,030) $ (2,228) $ (3,890)
State income tax benefit, net of
federal income tax benefit (358) (393) (686)
Interest accretion 24 753 333
Other 604 226 453
Disposition of discontinued
operations 1,654 - -
Change in valuation allowance 106 1,642 3,790
-----------------------------------------
Income tax benefit $ - $ - $ -
-----------------------------------------
--------------------------------------------------------------------------------
F-26
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Income The components of the net deferred tax as of December
Taxes 31, are as follows:
Continued
2002 2001
---------------------------
Reserve for uncollectable
receivables and potential
disallowances $ 153 $ 226
Depreciation and amortization - (41)
Net operating loss carryforward 11,716 11,500
Impairment charges 2,480 2,480
Other 21 99
---------------------------
14,370 14,264
Valuation allowance (14,370) (14,264)
---------------------------
Net deferred taxes $ - $ -
---------------------------
Applied conducts a periodic examination of its valuation
allowance. Factors considered in the evaluation include
recent and expected future earnings and Applied's
liquidity and equity positions. As of December 31, 2002
and 2001, Applied has established a valuation allowance
for the entire amount of net deferred tax assets.
Applied has net operating loss ("NOL") carryforwards at
December 31, 2002 of approximately $32,000 which expire
in years 2010 through 2022. The NOL carryforwards are
limited to use against future taxable income due to
changes in ownership and control.
12. Stockholders' Series E Convertible Preferred Stock
Equity Effective November 4, 1999, Applied issued 335,000
shares of Series E Convertible Preferred Stock with a
stated value of $10 per share.
This stock has a dividend rate of 12% per annum through
April 30, 2000 and thereafter 5% per annum paid
quarterly. In addition the stock has a special dividend
at the rate of 7.5% per annum which began to accrue on
May 1, 2000 and continues to accrue until paid, payable
on May 1, 2001. The special dividend will not be paid on
any stock converted to common stock on or before April
30, 2001.
--------------------------------------------------------------------------------
F-27
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
12. Stockholders' Series E Convertible Preferred Stock - Continued
Equity The Series E Convertible Preferred Stock has a
Continued liquidation preference of $10 per share. In connection
with the issuance of the Series E Convertible Preferred
Stock, Applied issued warrants to purchase 572,500
shares of common stock at a purchase price equal to 110%
of the market price on the date of closing ($1.20).
These warrants were valued at $60 and expire on November
4, 2004.
The Series E Convertible Preferred Stock is convertible
into common stock at any time on or after April 30, 2000
at a conversion price equal to the arithmetic mean of
the closing prices of common stock as reported in the
respective stock exchange for the ten trading days
immediately preceding the date of conversion.
During the year ended December 31, 2001, 22,000 shares
of Series E Convertible Preferred Stock were converted
into 1,256,713 shares of common stock. As of December
31, 2002 there are 278,000 shares of Series E
Convertible Preferred Stock outstanding.
Series F Convertible Preferred Stock
In March 2000, Applied issued 266,700 shares of Series F
Convertible Preferred Stock with a stated value of $10
per share. Transaction costs on the issuance totaled
$230 resulting in net proceeds to Applied of $1,771.
The stock has a dividend rate of 12% per annum through
September 30, 2000 and thereafter 5% per annum paid
quarterly. In addition the stock has a special dividend
at the rate of 7.5% per annum which began to accrue
October 1, 2000 and continues to accrue until paid,
payable on October 1, 2001. The special dividend will
not be paid on stock converted to common stock on or
before September 30, 2001.
The Series F Convertible Preferred Stock has a
liquidation preference of $10 per share. In connection
with the issuance of Series F Convertible Preferred
Stock, Applied issued warrants to purchase 363,475
shares of common stock at $1.93875 per share. These
warrants expire on March 16, 2005.
--------------------------------------------------------------------------------
F-28
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
12. Stockholders' Series F Convertible Preferred Stock - Continued
Equity The Series F Convertible Preferred Stock is convertible
Continued into common stock at any time on or after September 30,
2000. On conversion, the investor will receive for each
converted preferred share the greater number of common
stock as determined by (1) the face value per share
($10) plus accrued dividends divided by the average of
the closing prices over a ten consecutive trading day
period ending on the trading day immediately preceding
the conversion date, or (2) $7.50 (the cash invested for
each preferred share) divided by $1.93875.
During the years ended December 31, 2002 and 2001,
28,000 shares and 93,000 shares of Series F Convertible
Preferred Stock were converted to 2,496,423 shares and
2,815,512 shares of common stock, respectively. Applied
has 135,700 shares of Series F convertible stock
outstanding at December 31, 2002.
Series H Convertible Preferred Stock
Applied issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per
share, each such share of Series H Preferred having a
stated value of $1 per share, to DRM, Russell and
Speciale as part of the DRM Settlement Agreement as of
September 30, 2002 for satisfaction of the remaining
liabilities relating to the purchase and working capital
of DRM. The Series H Preferred shall have the following
rights, privileges, and limitations:
a) The conversion feature shall be exercisable
on June 30, 2003.
b) No Series H Preferred may be converted prior
to June 30, 2003. Until July 31, 2005, only
80,000 shares of the Series H Preferred shall
be convertible in any calendar quarter. The
balance of any unconverted Series H Preferred
Stock may be converted at any time on or
after August 1, 2005.
c) The conversion price of the Series H
Preferred shall be determined by the average
closing price of Company's common stock in
the previous 30 trading days, but in no event
shall the conversion price be less than $0.20
per share.
--------------------------------------------------------------------------------
F-29
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
12. Stockholders' Series H Convertible Preferred Stock - Continued
Equity
Continued
d) The conversion price of the Series H
Preferred shall be determined by the average
closing price of Company's common stock in
the previous 30 trading days, but in no event
shall the conversion price be less than $0.20
per share.
e) The Series H Preferred shall have a
non-cumulative annual dividend of 3%, payable
in cash or Series H Preferred within 30 days
of the end of Applied's fiscal year, at
Applied's election.
f) The Series H Preferred shall not be
transferable.
The holders of all series of convertible preferred stock
have the right, voting as a class, to approve or
disapprove of the issuance of any class or series of
stock ranking senior to or on a parity with the
convertible preferred stock with respect to declaration
and payment of dividends or the distribution of assets
on liquidation, dissolution or winding-up. Upon
liquidation, dissolution or winding up of Applied,
holders of Series E and Series F Convertible Preferred
Stock are entitled to receive liquidation distributions
equivalent to $10.00 per share before any distribution
to holders of the Common Stock or any capital stock
ranking junior to the Series E Convertible Preferred
Stock.
Cumulative unpaid dividends on Preferred Stock is $1,210
and $816 at December 31, 2002 and 2001.
13. Stock Options Applied has adopted the intrinsic value method of
and Stock accounting for stock options and warrants under APB 25
Warrants with footnote disclosures of the pro forma effects as if
the FAS 123 fair value method had been adopted. See Note
1 for the pro forma effect on net loss per share if
Applied had applied the fair value recognition provision
of FAS 123.
--------------------------------------------------------------------------------
F-30
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
13. Stock Options FAS 123 requires stock options to be valued using an
and Stock approach such as the Black-Scholes option pricing model.
Warrants The Black-Scholes model calculates the fair value of the
Continued grant based upon the following assumptions about the
underlying stock: The expected dividend yield of the
stock is zero, the assumed volatility is 197%, the
expected risk-free rate of return is 4.5 percent,
calculated as the rate offered on U.S. Government
securities with the same term as the expected life of
the options, and the expected term is the maximum
possible term under the option.
Stock options issued during the years ended December 31,
2002, 2001 and 2000 had an average value of $.07, $.28
and $.53, respectively.
Stock Options
In December 1998, Applied adopted its 1998 Stock Option
Plan pursuant to which officers, directors, key
employees and/or consultants of Applied can receive
non-qualified stock options to purchase up to an
aggregate 5,000,000 shares of Applied's Common Stock.
During 1999 and 2000 Applied increased the number of
shares authorized by 5,000,000 shares each year
resulting in 15,000,000 shares currently available under
the 1998 stock option plan. Exercise prices applicable
to stock options issued under this Plan represent no
less than 100% of the fair value of the underlying
common stock as of the date of grant. Stock options
granted under the plan may vest immediately or for any
period up to five years.
In as much as Applied rescinded certain options during
2002 and reissued new options to the option holders, the
options are considered variable options and will be
revalued each quarter to determine the effect on
operations, if any.
--------------------------------------------------------------------------------
F-31
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
13. Stock Stock Options - Continued
Options A summary of the status of options granted under the
and Stock Plan as of December 31, 2002, 2001 and 2000 and changes
Warrants during the periods then ended is presented below:
Continued
2002 2001 2000
-----------------------------------------------------------------
Shares Weighted Shares Weighted Shares Weighted
Average verage verage
Exercise Axercise Axercise
Price E Price E Price
-----------------------------------------------------------------
Options
outstanding
- beginning
of year 7,266,908 $ 0.84 7,529,056 $ 0.86 7,169,747 $ .61
Granted 9,847,218 0.07 920,000 0.28 2,243,769 1.05
Exercised - - - - (1,326,866) .46
Rescinded (3,744,373) 0.74 - - - -
Forfeited (3,165,160) 0.55 (1,182,148) 0.49 (557,594) .59
-----------------------------------------------------------------
Options
outstanding
- end of year 10,204,593 $ 0.24 7,266,908 $ 0.84 7,529,056 $ 0.86
-----------------------------------------------------------------
The following table summarizes information about
employee stock options outstanding at December 31, 2002:
Options and Warrants Options and Warrants
Outstanding Exercisable
---------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------------------------------------------------------------------------
$ 0.07 - 0.07 9,847,218 5.96 years $ 0.07 6,847,218 $ 0.07
2.00 - 6.00 357,375 3.98 years 4.86 357,375 4.86
---------------------------------------------------------------
10,204,593 5.89 years $ 0.24 7,204,593 $ 0.31
---------------------------------------------------------------
--------------------------------------------------------------------------------
F-32
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
13. Stock Stock Warrants
Options Outstanding warrants (vested and not vested) at December
and Stock 31, 2002 are as follows:
Warrants
Continued
Granted Number of Current
1999 and Granted Granted Granted Warrants Exercise Expiration
Prior 2000 2001 2002 2002 Price Date
-------------------------------------------------------------------------------
10,905,444 2,764,141 234,893 2,233,885 16,138,363 $ 4.65 December 2003
662,267 127,596 13,074 127,430 930,367 2.93 March 2003
1,766,861 49,020 26,679 261,688 2,104,248 1.24 February 2004
312,500 - - - 312,500 1.20 November 2004
250,000 - - - 250,000 1.20 November 2004
- 25,000 - - 25,000 1.94 March 2005
- 250,000 - - 250,000 1.94 March 2005
- 226,500 - - 226,500 1.94 March 2005
- 1,000,000 - - 1,000,000 2.00 August 2005
- - 333,334 - 333,334 0.22 June 2006
- - - 2,500,000 2,500,000 0.05 October 2004
---------------------------------------------------------
13,897,072 4,442,257 607,980 5,123,003 24,070,312
---------------------------------------------------------
There were no warrants exercised in 2002, 2001 and 2000.
1,833,109 and 11,299,807 warrants expired in 2002 and
2001, respectively, and 1,000,000 warrants were
rescinded in 2002. As of December 31, 2002 all warrants
are exercisable.
The 16,138,363, 930,367 and 2,104,248 warrants
outstanding at December 31, 2002 are warrants granted to
Commodore Environmental Services, Inc. in 1999 and
prior, and contain anti-dilution provisions. The
warrants granted in 2002, 2001 and 2000 were issued
pursuant to these anti-dilution provisions.
14. Earnings All earnings per share amounts reflect the
Per implementation of SFAS 128 "Earnings per Share". Basic
Share earnings per share are computed by dividing net income
available to common shareholders by the weighted average
number of shares outstanding during the period. Diluted
earnings per share are computed using the weighted
average number of shares determined for the basic
computations plus the number of shares that would be
issued assuming all contingently issuable shares having
a dilutive effect on earnings per share were outstanding
for the period.
--------------------------------------------------------------------------------
F-33
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
14. Earnings Per
Share
Continued Years Ended December 31,
-----------------------------------------
2002 2001 2000
-----------------------------------------
Net loss $ (5,972) $ (6,554) $ (11,441)
Preferred stock dividends (528) (408) (634)
-----------------------------------------
Net loss available to
common shareholders $ (6,500) $ (6,962) $ (12,075)
-----------------------------------------
Weighted average common
shares outstanding (basic) 57,775,000 53,241,000 35,866,000
Series E Convertible
Preferred Stock (*) (*) (*)
Series F Convertible
Preferred Stock (*) (*) -
Series H Convertible
Preferred Stock (*) (*) (*)
Employee Stock Options (*) (*) (*)
Warrants issued in connection
with various transactions (*) (*) (*)
-----------------------------------------
Weighted average common
shares outstanding (diluted) 57,775,000 53,241,000 35,866,000
-----------------------------------------
Net loss per share - basic
and diluted $ (.11) $ (.13) $ (.34)
-----------------------------------------
(*) Due to Applied's loss from continuing operations in
2002, 2001 and 2000, the incremental shares issuable in
connection with these instruments are anti-dilutive and
accordingly not considered in the calculation.
15. Related Party Applied had the following material related party
Transactions transactions:
Applied at December 31, 2001 had obligations relating to
the purchase of 81% of DRM (see Note 6).
During the year ended December 31, 2000 a shareholder of
Applied sold, at a discount, 1,000,000 common shares
that it owned of Applied to individuals who loaned $500
to Applied. The discount amount of $500 was used to
offset receivables from related parties and result in a
net related party payable of $80 and $160 as of December
31, 2002 and 2001, respectively.
--------------------------------------------------------------------------------
F-34
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
15. Related Party In addition, Applied has payables to related parties of
Transactions $185 and $185 at December 31, 2002 and 2001 recorded in
Continued accrued liabilities. Applied expensed as bad debt $109
of related party receivables during the year ended
December 31, 2000.
Applied has notes payable and long-term debt to officers
and shareholders of Applied. See Notes 9 and 10.
16. Commitments Operating Leases
and Applied and its subsidiaries are committed under non-
Contingencies cancelable operating leases for office space and other
equipment. Future obligations under the leases are as
follows:
2003 $ 147
2004 116
2005 11
-------------
$ 274
-------------
Rent expense approximated $204, $429, and $403 in 2002,
2001 and 2000, respectively.
Executive Bonus Plan
Applied has a five-year Executive Bonus Plan (the "Bonus
Plan") under which a number of executives and employees
of Applied are entitled to formula bonuses. No bonuses
are accrued at December 31, 2002 and 2001.
Litigation
Applied has matters of litigation arising in the
ordinary course of business which in the opinion of
management will not have a material adverse effect on
its financial condition or results of operations.
--------------------------------------------------------------------------------
F-35
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Guarantee
and Applied, along with several other entities, in a prior
Contingencies year guaranteed a performance bond of Commodore
Continued Separation Technologies, Inc. relating to a contract
with the Port of Baltimore. Applied was notified on June
28, 2000 that the performance bond is being called. It
is not known, at this time, the amount, if any,
Applied's share will be. The maximum exposure is
approximately $390. No amount has been reflected in
these financial statements as the amount is not
determinable.
17. 401(K) Applied has adopted a 401(K) savings plan for all
Savings Plan employees who qualify as to age and service.
Contributions by Applied are discretionary. Applied made
annual contributions to the plan of approximately $0,
$35 and $91 during the years ended December 31, 2002,
2001 and 2000, respectively.
18. Discontinued Condensed financial information for DRM, which was
Operations discontinued, is as follows for the year ended December
31, 2002, 2001 and 2000, which includes DRM operations
from August 30, 2000 (date of acquisition) through May
16, 2002 (date of dissolution):
2002 2001 2000
-----------------------------------------
Revenues $ 718 $ 5,961 $ 3,574
Costs and expenses (1,515) (6,056) 2,367
Interest expense (186) (2,090) (711)
Minority interest 50 (203) (341)
-----------------------------------------
Net (loss) gain before income
tax expense (933) (2,388) 155
Income tax expense - - -
-----------------------------------------
Net (loss) gain from discontinued
operations (933) (2,388) 155
-----------------------------------------
--------------------------------------------------------------------------------
F-36
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
18. Discontinued Net (liabilities) assets of discontinued operations
Operations consists of the following at December 31, 2001:
Continued
Cash $ 1,101
Accounts receivable 218
Prepaid assets and other current assets 46
Property and equipment, net 127
Covenants not to compete 1,925
Goodwill 23,409
Other long-term assets 2,581
--------------
Assets held for sale - component DRM $ 29,407
--------------
Accounts payable $ (51)
Current portion of long-term debt (2,650)
Notes payable (14,500)
Other accrued liabilities (2)
Long-term debt (4,340)
Minority interest (622)
--------------
Liabilities held for sale - component DRM $ (22,165)
19. Segment Using the guidelines set forth in SFAS No. 131,
Information "Disclosures About Segments of an Enterprise and Related
Information," Applied has identified two reportable
segments as follows:
1. CASI, which primarily provides various
engineering, legal, sampling and public
relations services to government agencies on
a cost plus basis.
2. Solution, which, through CASI, has equipment
to treat mixed and hazardous waste through a
patented process using sodium and anhydrous
ammonia.
DRM, from August 30, 2000 (date of acquisition) to May
16, 2002 (date of dissolution), provided a package of
services to help companies recover financial settlements
from insurance policies to defray costs associated with
environmental liabilities. Income (loss) from DRM is
recorded in the discontinued operations section of the
segment information.
--------------------------------------------------------------------------------
F-37
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
19. Segment Common overhead costs are allocated between segments
Information based on a record of time spent by executives.
Continued
Applied evaluates segment performance based on the
segment's net income (loss). The accounting policies of
the segments are the same as those described in the
summary of significant accounting policies. Applied's
foreign and export sales and assets located outside of
the United States are not significant. Summarized
financial information concerning Applied's reportable
segments is shown in the following tables.
2002
----
Corporate
Overhead
Total CASI Solution & Other
-----------------------------------------------------
Revenue $ 3,710 $ 3,448 $ 262 $ -
Costs and expenses:
Cost of sales 2,108 1,854 254 -
Research and development 297 - 297 -
General and administrative 1,792 754 203 835
Depreciation and amortization 314 30 247 37
-----------------------------------------------------
Total costs and expenses 4,511 2,638 1,001 872
-----------------------------------------------------
Income (loss) from operations (801) 810 (739) (872)
Interest income - - - -
Interest expense (104) - - (104)
Income taxes - - - -
-----------------------------------------------------
Income (loss) from continuing operations (905) 810 (739) (976)
Loss from discontinued operations (5,067) - - (5,067)
-----------------------------------------------------
Net (loss) income $ (5,972) $ 810 $ (739) $ (6,043)
-----------------------------------------------------
Total assets $ 736 $ 292 $ 353 $ 91
-----------------------------------------------------
Expenditures for long-lived assets $ 2 $ 2 $ - $ -
-----------------------------------------------------
--------------------------------------------------------------------------------
F-38
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
2001
----
Corporate
Overhead
Total CASI Solution & Other
-----------------------------------------------------
Revenue $ 4,590 $ 4,409 $ 181 $ -
Costs and expenses:
Cost of sales 3,369 3,080 289 -
Research and development 423 - 423 -
General and administrative 2,420 1,219 313 888
Depreciation and amortization 658 - 515 143
Impairment of machinery 776 - - 776
Impairment of patents 627 - - 627
-----------------------------------------------------
Total costs and expenses 8,273 4,299 1,540 2,434
-----------------------------------------------------
Income (loss) from operations (3,683) 110 (1,359) (2,434)
Interest income 38 38 - -
Interest expense (226) - (86) (140)
Equity in losses of unconsolidated
subsidiary (295) - - (295)
-----------------------------------------------------
Income (loss) from continuing operations (4,166) 148 (1,445) (2,869)
Loss from discontinued operations (2,388) - - (2,388)
-----------------------------------------------------
Net (loss) income $ (6,554) $ 148 $ (1,445) $ (5,257)
-----------------------------------------------------
Total assets $ 31,200 $ 1,277 $ 600 $ 29,323
-----------------------------------------------------
Expenditures for long-lived assets $ 51 $ 51 $ - $ -
-----------------------------------------------------
--------------------------------------------------------------------------------
F-39
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
2000
----
Corporate
Overhead
Total CASI Solution & Other
-----------------------------------------------------
Revenue $ 17,057 $ 16,786 $ 271 $ -
Costs and expenses:
Cost of sales 14,452 13,962 490 -
Research and development 993 - 993 -
General and administrative 5,228 2,355 504 2,369
Depreciation and amortization 865 - 378 487
Impairment of goodwill 6,586 - - 6,586
-----------------------------------------------------
Total costs and expenses 28,124 16,317 2,365 9,442
-----------------------------------------------------
Income (loss) from operations (11,067) 469 (2,094) (9,442)
Interest income 57 - - 57
Interest expense (586) (123) (86) (377)
Income taxes - - - -
-----------------------------------------------------
Income (loss) from continuing operations (11,596) 346 (2,180) (9,762)
Income (loss) from discontinued operations 155 - - 155
-----------------------------------------------------
Net income (loss) $ (11,441) $ 346 $ (2,180) $ (9,607)
-----------------------------------------------------
Total assets $ 37,473 $ 4,255 $ 1,724 $ 31,494
-----------------------------------------------------
Expenditures for long-lived assets $ 302 $ 170 $ 132 $ -
-----------------------------------------------------
--------------------------------------------------------------------------------
F-40
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
20. Subsequent Applied issued a total of 20,705,790 shares of its
Event common stock from the period from January 1, 2003 to
April 11, 2003 in connection with various conversion
notices from the holders of Series E and F Convertible
Preferred Stock.
21. Recent In June 2001, the FASB issued SFAS No. 143, "Accounting
Accounting for Asset Retirement Obligations." This Statement
Pronounce- addresses financial accounting and reporting for
ments obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement
costs. This Statement is effective for financial
statements issued for fiscal years beginning after June
15, 2002. This Statement address financial accounting
and reporting for the disposal of long-lived assets.
Applied is currently assessing the impact of this
statement.
In April 2002, the FASB issued SFAS No. 145, "Rescission
of FASB Statements No. 4, 44, 64, Amendment of SFAS No.
13, and Technical Corrections." This statement
eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment. SFAS No.
145 also amends SFAS No. 13, "Accounting for Leases", to
require sale-leaseback accounting for certain lease
modifications that have economic effects that are
similar to sale-leaseback transactions and changes the
provisions under SFAS 13 related to original lessees
being relieved of primary obligation under an original
lease. SFAS No. 145 also makes various technical
corrections to existing pronouncements that are not
substantive in nature. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 are effective in
fiscal years beginning after May 15, 2002 with earlier
application encouraged. The provisions of SFAS No. 145
related to SFAS No. 13 are effective for transactions
occurring after May 15, 2002, with earlier application
encouraged. All other provisions of SFAS No. 145 are
effective for financial statements issued on or after
May 15, 2002, with earlier application encouraged. Our
adoption of this statement did not have a material
impact on our consolidated results of operations or
financial position.
--------------------------------------------------------------------------------
F-41
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
21. Recent In May 2002, the FASB issued SFAS No. 146, "Accounting
Accounting for Costs Associated with Exit or Disposal Activities."
Pronounce- SFAS No. 146 addresses financial accounting and
ments reporting for costs associated with exit or disposal
Continued activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability
for an exit cost or disposal activity be recognized when
the liability is incurred, whereas under EITF No. 94-3,
a liability was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 also
establishes that fair value is the objective for initial
measurement of the liability. The provisions of SFAS No.
146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of
this statement has changed the timing of recognition for
certain exit costs, so that certain exit costs are
recognized over the period in which the exit activities
occur.
In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and
Disclosure, an Amendment of FASB Statement No. 123".
SFAS No. 148 amends SFAS No. 123 "Accounting for
Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair
value based method of accounting for employee
stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to
require prominent disclosure in annual and interim
financial statements about the method of accounting for
stock-based compensation and its effect on reported
results. The disclosure provisions of SFAS No. 148 are
included in the accompanying Notes to Consolidated
Financial Statements. We continue to apply the
principles of APB Opinion No. 25 and related
interpretations in accounting for our stock-based
compensation plans.
--------------------------------------------------------------------------------
F-42
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
21. Recent In November 2002, FASB Interpretation No. 45,
Accounting "Guarantor's Accounting and Disclosure Requirements for
Pronounce- Guarantees, Including Indirect Guarantees and
ments Indebtedness of Others," ("FIN 45") was issued. This
Continued interpretation requires the initial recognition and
initial measurement, on a prospective basis only, of
guarantees issued or modified after December 31, 2002.
Additionally, certain disclosure requirements are
effective for financial statements ending after December
15, 2002. The disclosures required of us by FIN 45 in
its fiscal 2002 consolidated financial statements are in
note 13. We do not believe that the adoption of this
interpretation in 2003 will have a material impact on
our consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Ethics (FIN No. 46),
which addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities
in which equity investors do not have the
characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated
financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.
Applied does not expect to identify any variable
interest entities that must be consolidated. In the
event a variable interest entity is identified, Applied
does not expect the requirements of FIN No. 46 to have a
material impact on its financial condition or results of
operations.
--------------------------------------------------------------------------------
F-43
Exhibits.
--------
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement between the Company and National
Securities Corporation, as Representative of the several
Underwriters listed therein (the "Representative"). (1)
3.1 Certificate of Incorporation of the Company. (1)
3.2 By-Laws of the Company. (1)
4.1 Specimen common stock Certificate. (3)
4.2 Form of Warrant Agreement between the Company and The Bank of New
York. (1)
4.3 Specimen Warrant Certificate. (1)
4.4 Form of Representative's Warrant Agreement between the Company and
the Representative, including form of Representative's Warrant
therein. (1)
4.5 Registration Rights Agreement dated September 27, 1996, among the
Company, CXI-ASI Acquisition Corp., and certain stockholders. (5)
4.6 Registration Rights Agreement, dated September 27, 1996, among the
Company, CXI-ASE Acquisition Corp., and certain stockholders. (5)
4.7 Series A Convertible Preferred Stock Purchase Agreement, dated as
of August 15, 1997, among the Company and the Series A Preferred
Stock purchasers listed therein. (9)
4.8 Certificate of Designations, Rights and Preferences of Series A
Preferred Stock. (9)
4.9 Registration Rights Agreement between the Company and the Series A
Preferred Stock purchasers. (9)
4.10 Warrant to purchase 1,000,000 shares of common stock issued to
Environmental. (9)
4.11 Common Stock Purchase Agreements, dated as of September 26, 1997,
by and between the Company and each of certain private investors
listed therein. (9)
4.12 Warrant to purchase 7,500,000 shares of common stock issued to
Environmental. (10)
4.13 Warrant to purchase 1,500,000 shares of common stock issued to
Environmental. (10)
4.14 Registration Rights Agreement, dated as of February 9, 1998, among
the Company, Environmental and certain private investors listed
therein. (10)
4.15 Amended Warrant to purchase 1,500,000 shares of common stock
issued to Environmental. (15)
4.16 Certificate of Designation of 6% Series B Convertible Preferred
Stock of the Company. (15)
4.17 Certificate of Designation of 6% Series C Convertible Preferred
Stock of the Company. (15)
4.18 Certificate of Designation of 6% Series D Convertible Preferred
Stock of the Company. (15)
4.19 Warrant to purchase shares of common stock of Commodore Applied
Technologies, Inc. issued to The Shaar Fund Ltd. (16)
65
4.20 Certificate of Designation of Series E Preferred Stock. (16)
4.21 Warrant to purchase shares of common stock of Commodore Applied
Technologies, Inc. issued to Avalon Research Group, Inc. (16)
4.22 Warrant to purchase shares of common stock of Commodore Applied
Technologies, Inc. issued to The Shaar Fund Ltd. (20)
4.22 Certificate of Designation of Series F Preferred Stock. (20)
4.23 Warrant to purchase shares of common stock of Commodore Applied
Technologies, Inc. issued to Avalon Research Group, Inc. (20)
*4.24 Certificate of Designation of Series H Preferred Stock.
10.1 Employment Agreement, dated June 1, 1995, between Environmental
and Neil L. Drobny, and conditional assignment thereof by
Environmental to the Company, dated March 29, 1996. (1)
10.2 Employment Agreement, dated August 31, 1995, between Environmental
and Carl O. Magnell, and conditional assignment thereof by
Environmental to the Company, dated March 29, 1996. (1)
10.3 Form of Employment Agreement, dated July 28, 1993, between
Commodore Laboratories, Inc. and Albert E. Abel, with conditional
assignment thereof by Commodore Labs to the Company, dated March
29, 1996. (1)
10.4 Employment Agreement, dated October 3, 1994, between Environmental
and Vincent Valeri, and conditional assignment thereof by
Environmental to the Company, dated March 29, 1996. (1)
10.5 Non-Competition, Non-Disclosure and Intellectual Property
Agreement, dated March 29, 1996, between the Company and Gerry D.
Getman. (1)
10.6 Employment Agreement, dated as of March 29, 1996. between the
Company and Paul E. Hannesson. (2)
10.7 1996 Stock Option Plan of the Company. (1)
10.8 Executive Bonus Plan of the Company. (1)
10.9 Nationwide Permit for PCB Disposal issued by the EPA to Commodore
Remediation Technologies, Inc. (1)
10.10 Memorandum of Understanding, dated April 9, 1996, between Teledyne
Brown Engineering (a Division of Teledyne Industries, Inc.) and
Commodore Government Environmental Technologies, Inc. (1)
10.11 Memorandum of Understanding. dated March 28, 1996, between Sharp
Associates, Inc. and the Company. (1)
10.12 Memorandum of Understanding, dated April 12, 1996, between
Sverdrup Environmental, Inc. and the Company. (1)
10.13 Credit Facility Agreement and Promissory Note, dated April 5,
1996, between the Company and Chemical Bank, and Guaranty and
General Loan and Collateral Agreement, each dated April 5, 1996,
between Bentley J. Blum and Chemical Bank. (1)
10.14 Demand Promissory Note, dated December 31, 1995, in the principal
amount of $8,925,426, issued by Commodore Labs to Environmental.
(1)
66
10.15 Form of $4,000,000 Promissory Note issued by the Company to
Environmental, in partial replacement of the $8,925,426 Demand
Promissory Note, dated December 31, 1995, issued by Commodore Labs
to Environmental. (1)
10.16 Bond Purchase Agreement, dated December 3, 1993, by and between
Environmental and Credit Agricole Deux Sevres. (1)
10.17 License Agreement, dated as of March 29, 1996, by and between the
Company and Environmental, relating to the use of SET in the CFC
Business. (2)
10.18 Form of Technology and Technical Services Agreement entered into
between the Company and CFC Technologies.(2)
10.19 Voting Agreement, dated June 28, 1996, among Environmental,
Bentley J. Blum, the Company and National Securities Corporation.
(4)
10.20 Agreement and Plan of Merger, dated September 27, 1996, by and
between the Company, CXI-ASI Acquisition Corp. and Advanced
Sciences, Inc. (5)
10.21 Agreement and Plan of Merger, dated September 27, 1996, by and
between the Company CXI-ASE Acquisition Corp. and A.S.
Environmental, Inc. (5)
10.22 Agreement of Transfer, dated as of December 1, 1996 by and between
the Company and Advanced Sciences. (11)
10.23 Bill of Sale, dated as of December 1, 1996, by and between the
Company and Commodore Advanced Sciences, Inc. (11)
10.24 Stock Purchase Agreement, dated as of December 2, 1996, between
the Company and Environmental. (6)
10.25 Employment Agreement, dated as of October 31, 1996, between
Environmental and Edwin L. Harper. (7)
10.26 Employment Agreement, dated as of October 1, 1996, between the
Company and Thomas E. Noel. (5)
10.27 Form of Employment Agreement between Environmental and Paul E.
Hannesson. (8)
10.28 8% convertible note for $4.0 million from the Company to
Environmental. (9)
10.29 8% non-convertible note for $5,450,000 from the Company to
Environmental. (10)
10.30 Teaming Agreement, dated March 18, 1997, by and between ICF Kaiser
Engineers, Inc. and Advanced Sciences. (14)
10.31 Memorandum of Understanding between Lockheed Martin Advanced
Environmental Systems, Inc. and Advanced Sciences. (14)
10.32 Services Agreement, dated as of September 1, 1997, by and among
the Company, Environmental, Separation, Advanced Sciences and
other affiliated companies named therein. (14)
10.33 Amended and Restated 1996 Stock Option Plan. (13)
10.34 Securities Purchase Agreement, dated November 4, 1999, between
Commodore Applied Technologies, Inc. and The Shaar Fund Ltd. (16)
10.35 Registration Rights Agreement, dated November 4, 1999, between
Commodore Applied Technologies, Inc. and the Shaar Fund Ltd. (16)
10.36 Finder's Agreement, dated August 17, 1999, between Commodore
Applied Technologies, Inc. and Avalon Research Group, Inc. (16)
67
10.37 Securities Purchase Agreement, dated March 15, 2000, between
Commodore Applied Technologies, Inc. and The Shaar Fund Ltd. (16)
10.38 Registration Rights Agreement, dated March 15, 2000, between
Commodore Applied Technologies, Inc. and the Shaar Fund Ltd. (16)
10.39 Warrant to purchase 340,000 shares of common stock of Commodore
Applied Technologies, Inc. issued to William J. Russell. (20)
10.40 Warrant to purchase 340,000 shares of common stock of Commodore
Applied Technologies, Inc. issued to Tamie P. Speciale. (20)
10.41 Warrant to purchase 300,000 shares of common stock of Commodore
Applied Technologies, Inc. issued to Diane Archangeli. (20)
10.42 Warrant to purchase 20,000 shares of common stock of Commodore
Applied Technologies, Inc. issued to Arthur Berry & Company, Inc.
(20)
10.43 Specimen Form of Common Stock Certificate. (1)
10.44 Promissory Note, dated September 15, 2000, issued to Shelby T.
Brewer in the principal amount of $500,000. (20)
10.45 Registration Rights Agreement, dated September 15, 2000 issued to
Shelby T. Brewer. (20)
10.46 Stock Pledge Agreement, dated September 15, 2000 between Commodore
Environmental Technologies, Inc., and Shelby T. Brewer. (20)
10.47 Warrant to purchase 100,000 shares of common stock of Commodore
Applied Technologies, Inc. issued to Shelby T. Brewer. (20)
10.48 Amended and Restated Promissory Note, dated September 15, 2000,
issued to Shelby T. Brewer in the principal amount of $500,000.
(20)
10.49 Registration Rights Agreement, dated March 15, 2001 issued to
Shelby T. Brewer. (20)
10.50 Secured Promissory Note, dated November 13, 2000, issued to Klass
Partners Ltd. in the principal amount of $250,000. (20)
10.51 Secured Promissory Note, dated November 13, 2000, issued to
Mathers Associates in the principal amount of $150,000. (20)
10.52 Secured Promissory Note, dated November 13, 2000, issued to Jon
Paul Hannesson in the principal amount of $75,000. (20)
10.53 Secured Promissory Note, dated November 13, 2000, issued to
Stephen A. Weiss in the principal amount of $25,000. (20)
10.54 Amended and Restated Stock Purchase Agreement, dated August 30,
2000, by and among Commodore Applied Technologies, Inc., Dispute
Resolution Management, Inc., William J. Russell and Tamie P.
Speciale. (18)
10.55 Securities Purchase Agreement, dated November 13, 2000, by and
among Commodore Applied Technologies, Inc., Commodore
Environmental Services, Inc., Mathers Associates, Klass Partners,
Ltd., Jon Paul Hannesson and Stephen A. Weiss. (20)
10.56 Security Agreement, dated November 13, 2000 by and among Mathers
Associates, Klass Partners, Ltd., Jon Paul Hannesson, Stephen A.
Weiss and Commodore Applied Technologies, Inc. (20)
10.57 Registration Rights Agreement, dated November 13, 2000, among
Mathers Associates, Klass Partners, Ltd., Jon Paul Hannesson,
Stephen A. Weiss and Commodore Applied Technologies, Inc. (20)
10.58 Dispute Resolution Management, Inc. Undertaking Letter, dated
November 13, 2000. (20)
10.59 Nationwide Permit Extension for PCB Disposal issued by the EPA to
Commodore Remediation Technologies, Inc. (20)
10.60 Contract between Commodore Solutions and Waste Control Specialists
dated February 12, 2000. (20)
68
10.70 Conversion Notice, dated April 9, 2001 between S. Brewer
Enterprises, Inc. and the Company for the conversion of $250,000
of the Restated Brewer Note. (20)
10.71 Memorandum of Understanding for Amendment of $500,000 CXI Bridge
Loan Documents, dated April 16, 2001, by and among the Company,
Commodore Environmental Services, Inc., Mathers Associates, Jon
Paul Hannesson and Stephen A. Weiss. (20)
10.72 Klass Partners Ltd. Agreement for Amendment of CXI Bridge Loan
Documents, dated April 16, 2001, by the Company and Klass
Partners, Ltd. (20)
10.73 Warrant to purchase 300,000 shares of common stock of the Company
issued to Mathers Associates. (20)
10.74 Warrant to purchase 75,000 shares of common stock of the Company
issued to Jon Paul Hannesson. (20)
10.75 Warrant to purchase 75,000 shares of common stock of the Company
issued to Krista S. Hannesson. (20)
10.76 Warrant to purchase 50,000 shares of common stock of the Company
issued to Stephen A. Weiss. (20)
10.77 Memorandum of Understanding for Amendment of $500,000 CXI Bridge
Loan Documents, dated April 16, 2001, by and among the Company,
Commodore Environmental Services, Inc., Mathers Associates, Klass
Partners, Jon Paul Hannesson and Stephen A. Weiss. (23)
10.78 Warrant to purchase 222,222 shares of common stock of the Company
issued to Klass Partners. (23)
10.79 Warrant to purchase 166,667 shares of common stock of the Company
issued to Mathers Associates. (23)
10.80 Warrant to purchase 41,666 shares of common stock of the Company
issued to Jon Paul Hannesson. (23)
10.81 Warrant to purchase 41,666 shares of common stock of the Company
issued to Krista S. Hannesson. (23)
10.82 Warrant to purchase 27,778 shares of common stock of the Company
issued to Stephen A. Weiss. (23)
10.83 Securities Purchase Agreement dated May 22, 2001, between
Commodore Applied Technologies, Inc., and Dr. Marion Dana. (23)
10.84 Registration Rights Agreement dated May 22, 2001, between
Commodore Applied Technologies, Inc., and Dr. Marion Dana. (23)
10.85 Warrant to purchase 500,000 shares of common stock of the Company
issued to Dr. Marion Dana. (23)
10.86 Secured Promissory Note, dated June 13, 2001, issued to Milford
Capital & Management in the principal amount of $500,000. (23)
10.87 Secured Promissory Note, dated June 13, 2001, issued to the Shaar
Fund, Ltd. in the principal amount of $500,000. (23)
10.88 Registration Rights Agreement dated June 13, 2001, between
Commodore Applied Technologies, Inc., and Milford Capital &
Management. (23)
69
10.89 Registration Rights Agreement dated June 13, 2001, between
Commodore Applied Technologies, Inc., and the Shaar Fund, Ltd.
(23)
10.90 Warrant to purchase 166,667 shares of common stock of the Company
issued to Milford Capital & Management. (23)
10.91 Warrant to purchase 166,667 shares of common stock of the Company
issued to the Shaar Fund, Ltd. (23)
10.92 Amended and Restated Stock Purchase Agreement, dated September 21,
2001, by and among Commodore Applied Technologies, Inc., Dispute
Resolution Management, Inc., William J. Russell and Tamie P.
Speciale. (21)
10.93 Amended and Restated Stock Purchase Agreement, dated October 31,
2001, by and among Commodore Applied Technologies, Inc., Dispute
Resolution Management, Inc., William J. Russell and Tamie P.
Speciale. (22)
10.94 Forbearance Agreement dated January 11, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management. (23)
10.95 Forbearance Agreement dated January 11, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd. (23)
10.96 Forbearance Agreement dated February 13, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management. (23)
10.97 Forbearance Agreement dated February 13, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd. (23)
10.98 Forbearance Agreement dated March 13, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management. (23)
10.99 Forbearance Agreement dated March 13, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd. (23)
10.100 LLC Agreement, dated April 2, 2002, between Technical Resources,
Inc. (a wholly owned subsidiary of Nuvotec, Inc.) and Commodore
Government Environmental Technologies, Inc. (23)
*10.101 Forbearance Agreement dated April 1, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd.
*10.102 Forbearance Agreement dated April 1, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management.
*10.103 Memorandum of Understanding for Amendment of $500,000 CXI Bridge
Loan Documents, dated April 29, 2002, by and among the Company,
Commodore Environmental Services, Inc., Mathers Associates, Klass
Partners, Jon Paul Hannesson and Stephen A. Weiss.
*10.104 Forbearance Agreement dated May 13, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd.
70
*10.105 Forbearance Agreement dated May 13, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management.
*10.106 Forbearance Agreement dated June 13, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd.
*10.107 Forbearance Agreement dated June 13, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management.
*10.108 Settlement Agreement dated August 19, 2002 by and among Commodore
Applied Technologies, Inc., Dispute Resolution Management, Inc.,
William J. Russell and Tamie P. Speciale.
*10.109 Liability Release Agreement dated August 19, 2002 by Dispute
Resolution Management, Inc., William J. Russell and Tamie P.
Speciale to Commodore Applied Technologies, Inc.
*10.110 Liability Release Agreement dated August 19, 2002 by Commodore
Applied Technologies, Inc. to Dispute Resolution Management, Inc.,
William J. Russell and Tamie P. Speciale.
*10.111 Amended and Restated Promissory Note, dated October 2, 2002,
issued to Shelby T. Brewer in the principal amount of $250,000.
*10.112 Warrant to purchase 1,000,000 shares of common stock of Commodore
Applied Technologies, Inc. issued to Shelby T. Brewer.
*10.113 Registration Rights Agreement, dated October 2, 2002 issued to
Shelby T. Brewer.
*10.114 Memorandum of Understanding for Amendment of $500,000 CXI Bridge
Loan Documents, dated November 18, 2002, by and among the Company,
Commodore Environmental Services, Inc., Mathers Associates, Klass
Partners, Jon Paul Hannesson and Stephen A. Weiss.
*10.115 Warrant to purchase 222,222 shares of common stock of the Company
issued to Klass Partners.
*10.116 Warrant to purchase 166,667 shares of common stock of the Company
issued to Mathers Associates.
*10.117 Warrant to purchase 41,667 shares of common stock of the Company
issued to Jon Paul Hannesson.
*10.118 Warrant to purchase 41,666 shares of common stock of the Company
issued to Krista S. Hannesson.
*10.119 Warrant to purchase 27,778 shares of common stock of the Company
issued to Stephen A. Weiss.
*10.120 Warrant to purchase 500,000 shares of common stock of the Company
issued to Klass Partners.
*10.121 Warrant to purchase 300,000 shares of common stock of the Company
issued to Mathers Associates.
*10.122 Warrant to purchase 75,000 shares of common stock of the Company
issued to Jon Paul Hannesson.
*10.123 Warrant to purchase 75,000 shares of common stock of the Company
issued to Krista S. Hannesson.
71
*10.124 Warrant to purchase 50,000 shares of common stock of the Company
issued to Stephen A. Weiss.
*10.125 Conversion Notice, dated March 14, 2003 between S. Brewer
Enterprises, Inc. and the Company for the conversion of $250,000
of the Restated Brewer Note.
16.1 Letter regarding change in certifying accountant. (12)
16.2 Letter regarding change in certifying accountant. (17)
*22.1 Subsidiaries of the Company.
99.1 Debt Repayment Agreement, dated September 28, 1998, between the
Company and Environmental. (15)
99.2 Registration Rights Agreement, dated September 28, 1998, between
the Company and Environmental. (15)
*99.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant by Section 906 of the Sarbanes-Oxley Act of 2002.
*99.4 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant by Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
(1) Incorporated by reference and filed as Exhibit to Registrant's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on May 2, 1996 (File No. 333-4396).
(2) Incorporated by reference and filed as Exhibit to Registrant's
Amendment No. 1 to Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on June 11, 1996 (File No.
333-4396).
(3) Incorporated by reference and filed as Exhibit to Registrant's
Amendment No. 2 to Registration Amendment No.2 to Registration
Statement on Form S-1 filed with the Securities and Exchange Commission
on June 25, 1996 (File No. 333-4396).
(4) Incorporated by reference and filed as Exhibit to Registrant's
Post-Effective Amendment No. 1 to Registration Statement on Form S-1
filed with the Securities and Exchange Commission on July 1, 1996 (File
No. 333-4396).
(5) Incorporated by reference and filed as Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
October 15, 1996 (File No. 1-11871).
(6) Incorporated by reference and filed as Exhibit to Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 27, 1997 (File No. 1-11871).
(7) Incorporated by reference and filed as Exhibit to Amendment No. 3 to
Registration Statement on Form S-1 of Separation filed with the
Securities and Exchange Commission on January 23, 1997 (File No.
333-11813).
(8) Incorporated by reference and filed as Exhibit to Annual Report on Form
10-K for the fiscal year ended December 31, 1996 of Environmental filed
with the Securities and Exchange Commission on April 15, 1997 (File No.
0-10054).
(9) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 3, 1997 (File No. 1-11871).
(10) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 23, 1998 (File No. 1-11871).
(11) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996
filed with the Securities and Exchange Commission on April 15, 1997
(File No. 1-11871).
(12) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 24, 1996 (File No. 1-11871).
72
(13) Incorporated by reference and filed as an Exhibit to the Registrant's
Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on December 5, 1997 (File No. 333-41643).
(14) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
filed with the Securities and Exchange Commission on March 31, 1998
(File No. 1-11871).
(15) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 5, 1999 (File No. 1-11871).
(16) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 5, 1999 (File No. 1-11871).
(17) Incorporated by reference and filed as Exhibit to Amendment No. 5 to
Registrant's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on September 12, 1999 (File No.
333-95445).
(18) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 23, 1999 (File No. 1-11871).
(19) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 13, 2000 (File No. 1-11871).
(20) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K/A for the fiscal year ended December 31,
2000 filed with the Securities and Exchange Commission on May 04, 2001
(File No. 1-11871).
(21) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 26, 2001 (File No. 1-11871).
(22) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 31, 2001 (File No. 1-11871).
(23) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001
filed with the Securities and Exchange Commission on April 15, 2002
(File No. 1-11871).
Reports on Form 8-K:
-------------------
1. The Company filed a Current Report on Form 8-K, dated May 21,
2002, regarding the receipt of a Notice of Default regarding the
Stock Purchase Agreement and the Stock Pledge Agreement with
Dispute Resolution Management, Inc.
2. The Company filed a Current Report on Form 8-K, dated August 16,
2002, regarding the failure of its wholly owned subsidiary,
Commodore Advance Sciences, Inc., to obtain a further extension of
its Analytical Services Support subcontract to provide sampling
and analytical work in support of the closure of the Department of
Energy's Rocky Flats site.
73
SIGNATURES
Pursuant to the requirements to Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 2003 COMMODORE APPLIED TECHNOLOGIES, INC.
By: /s/ James M. DeAngelis
-----------------------------------------
James M. DeAngelis, Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Shelby T. Brewer Chairman of the Board and Chief April 15, 2003
------------------------ Executive Officer (principal
Shelby T. Brewer executive officer)
/s/ James M. DeAngelis Senior Vice President and Chief April 15, 2003
------------------------ Financial Officer (principal
James M. DeAngelis financial officer)
/s/ Bentley J. Blum Director April 15, 2003
------------------------
Bentley J. Blum
/s/ Frank E. Coffman Director April 15, 2003
------------------------
Frank E. Coffman
/s/ Paul E. Hannesson Director April 15, 2003
------------------------
Paul E. Hannesson
/s/ Michael P. Kalleres Director April 15, 2003
------------------------
Michael P. Kalleres
/s/ William A. Wilson Director April 15, 2003
------------------------
William A. Wilson
74
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
----------------------------------------
I, Shelby T. Brewer, certify that:
1. I have reviewed this annual report on Form 10-K of Commodore Applied
Technologies, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Commodore Applied Technologies, Inc. as of, and for, the periods presented in
this annual report.
4. Commodore Applied Technologies, Inc.'s other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for Commodore Applied
Technologies, Inc. and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Commodore Applied Technologies, Inc., including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of Commodore Applied Technologies,
Inc.'s disclosure controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the Evaluation Date); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Commodore Applied Technologies, Inc.'s other certifying officer and I have
disclosed, based on our most recent evaluation, to Commodore Applied
Technologies, Inc.'s auditors and the audit committee of Commodore Applied
Technologies, Inc.'s board of directors (or persons performing the equivalent
functions):
75
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect Commodore Applied Technologies, Inc.'s
ability to record, process, summarize and report financial data and have
identified for Commodore Applied Technologies, Inc.'s auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Commodore Applied Technologies,
Inc.'s internal controls; and
6. Commodore Applied Technologies, Inc.'s other certifying officer and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Shelby T. Brewer
-----------------------
Shelby T. Brewer
Chief Executive Officer
April 15, 2003
76
CERTIFICATION OF CHIEF FINANCIAL OFFICER
----------------------------------------
I, James M. DeAngelis, certify that:
1. I have reviewed this annual report on Form 10-K of Commodore Applied
Technologies, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Commodore Applied Technologies, Inc. as of, and for, the periods presented in
this annual report.
4. Commodore Applied Technologies, Inc.'s other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for Commodore Applied
Technologies, Inc. and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Commodore Applied Technologies, Inc., including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of Commodore Applied Technologies,
Inc.'s disclosure controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the Evaluation Date); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Commodore Applied Technologies, Inc.'s other certifying officer and I have
disclosed, based on our most recent evaluation, to Commodore Applied
Technologies, Inc.'s auditors and the audit committee of Commodore Applied
Technologies, Inc.'s board of directors (or persons performing the equivalent
functions):
77
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect Commodore Applied Technologies, Inc.'s
ability to record, process, summarize and report financial data and have
identified for Commodore Applied Technologies, Inc.'s auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in Commodore Applied Technologies,
Inc.'s internal controls; and
6. Commodore Applied Technologies, Inc.'s other certifying officer and I have
indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ James M. DeAngelis
-----------------------
James M. DeAngelis
Chief Financial Officer
April 15, 2003
78
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
The Company has not sent to its security holders any annual report or
proxy material during the 2002 fiscal year.
79