SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
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, 2001
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.)
2121 Jamieson Street, Suite 1406
Alexandria, Virginia 22314
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (703) 567-1284
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
common stock, par value $0.001 per share American Stock Exchange
Redeemable common stock Purchase Warrants American Stock Exchange
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 15, 2002 with an aggregate market value of approximately $2,228,248.40
(based upon the last sale price of the common stock on April 15, 2002 as
reported by the American Stock Exchange).
As of April 15, 2002; 57,645,290 shares of the registrant's
common stock were outstanding.
__________________________________
DOCUMENTS INCORPORATED BY REFERENCE
None
COMMODORE APPLIED TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART 1............................................................................................................1
------
ITEM 1. BUSINESS........................................................................................1
General.........................................................................................1
Soil Decontamination--Commodore Solution Technologies, Inc......................................3
Environmental Insurance Claim Resolution - Dispute Resolution Management, Inc...................8
Environmental Management - Commodore Advanced Sciences, Inc.....................................9
Markets and Customers..........................................................................12
Raw Materials..................................................................................13
Backlog........................................................................................14
Research and Development.......................................................................14
Intellectual Property..........................................................................14
Competition....................................................................................15
Environmental Regulation.......................................................................17
Employees......................................................................................18
ITEM 2. PROPERTIES.....................................................................................19
ITEM 3. LEGAL PROCEEDINGS..............................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................21
PART II..........................................................................................................21
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................21
Market Information.............................................................................21
Dividend Information...........................................................................21
Recent Sales of Unregistered Securities........................................................22
ITEM 6. SELECTED FINANCIAL DATA........................................................................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
Forward Looking Statements.....................................................................37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE...................................................................................38
PART III.........................................................................................................39
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................39
Executive Officers and Directors...............................................................39
Key Employees..................................................................................41
Board Committees...............................................................................42
Compensation of Directors......................................................................43
Compliance with Section 16(a) of the Exchange Act..............................................43
ITEM 11. EXECUTIVE COMPENSATION.........................................................................44
Summary Compensation...........................................................................44
Stock Options..................................................................................46
Employment Agreements..........................................................................47
Compensation Committee Interlocks and Insider Participation....................................47
Report of the Compensation Committee on Executive Compensation.................................48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................52
Security Ownership of Certain Beneficial Owners................................................52
Security Ownership of Management...............................................................54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................56
Organization and Capitalization of the Company.................................................56
Services Agreement.............................................................................60
Sale of Company Common Stock by Environmental..................................................60
February 1998 Intercompany Note................................................................62
September 1997 Intercompany Convertible Note...................................................62
Sale of Series D Preferred Stock by Environmental..............................................63
License of SET Technology......................................................................63
Future Transactions............................................................................64
PART IV..........................................................................................................65
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K...............................65
SIGNATURES.......................................................................................................73
----------
SUPPLEMENTAL INFORMATION.........................................................................................74
------------------------
Preliminary Note Regarding Certain Risks and Forward-Looking Statements
-----------------------------------------------------------------------
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: the Company's critical need
for additional cash to sustain existing operations and meet existing obligations
and capital requirements; the Company's dependence on its subsidiary, Dispute
Resolution Management, Inc., to meet its cash needs; the Company's need to raise
additional capital to meet obligations relating to the purchase of DRM or to
renegotiate such obligations; 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 fo the
cleanup of waste sites administered by it; the Company's ability to integrate
acquired companies; the acceptance and implementation of the Company's waste
treatment technologies in the government and commercial sectors; the Company's
ability to obtain and perform under other large technical support services
projects; developments in environmental legislation and regulation; the ability
of the Company to obtain future financing on favorable terms; and other
circumstances affecting anticipated revenues and costs. These risks and
uncertainties could cause actual results of the Company to differ materially
from those projected or implied by such forward-looking statements.
PART I
------
ITEM 1. BUSINESS
------- --------
GENERAL
Commodore Applied Technologies, Inc. (the "Company") is an
environmental solutions company offering a range of engineering, technical, and
financial 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)"), (ii) the settlement of complex, long-tail and latent insurance
claims by utilizing a series of tools including an internally developed risk
modeling program ("FOCUS(TM)"), and (iii) providing services related to,
environmental management for on-site and off-site identification, investigation
remediation and management of hazardous, mixed and radioactive waste.
1
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. Furthermore,
we believe that the proprietary FOCUS program developed by our 81% owned
subsidiary Dispute Resolution Management, Inc., ("DRM") is the only automated
risk management system that fully incorporates all of the variables that we view
as necessary to determine accurately the liability and settlement targeting
necessary to negotiate appropriate insurance recoveries.
The Company's corporate mission is to serve the environmental
remediation market from two primary operating centers: (a) to profitably provide
government and industry with engineering and remediation solutions to legacy
waste environmental problems, and (b) to profitably negotiate and settle
complex, long-tail environmental claims domestically and internationally. Our
strategy will focus the Company on the unique and high profit niches of
environmental claims settlement and recovery, hazardous materials conversion and
waste remediation.
Demand for our environmental technology and financial services 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 the need to obtain available insurance recoveries in a negotiated
manner (utilizing the FOCUS process) to compensate clients for a
portion of their past, current and anticipated obligations, while
minimizing the costs and time associated with a litigated recovery
environment;
o stricter legislation and regulations mandating new or increased levels
of air and water pollution control and solid waste management; and
o the need to provide appropriate risk management tools and mechanisms
associated with present and future remediation risks on impaired
properties and facilities.
Our business strategy is to expand our environmental technology and
financial services 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;
o focusing DRM's marketing efforts with aggressive joint working
alliances and marketing arrangements with established associations and
representatives of Fortune 1000 companies worldwide;
o developing strategic insurance brokerage arrangements and
collaborations through joint ventures or acquisitions, to further
expand the business offerings and services of DRM to their existing and
future clientele; and
2
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.
The Company has identified three operating segments. These three
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; Commodore Solutions, Inc., which is
commercializing technologies to treat mixed and hazardous waste; and Dispute
Resolution Management, Inc., which provides a package of services to help
companies recover financial settlements from insurance policies to defray costs
associated with environmental liabilities. 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 2121
Jamieson Avenue, Suite 1406, Alexandria, Virginia 22314, and its telephone
number at that address is (703) 567-1284.
SOIL DECONTAMINATION--COMMODORE SOLUTION TECHNOLOGIES, INC.
The Company, through Commodore Solutions, Inc. ("Solutions"), has
developed and is in the process of commercializing 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
Contract"). The Company substantially completed the base contract in 2000,
remediating approximately 260 tons of excavated soils to levels deemed
unregulated for disposal by the U.S. Environmental Protection Agency (the
"EPA"). The contract has since been modified to add another 50 tons of soils. In
November 2000, the Company demonstrated the S-10 system to the EPA at the
Harrisburg site, and has been advised informally by an EPA representative that
the system will be added to our existing nationwide permit for chemical
destruction of PCBs. This is the Company's fourth system to be so permitted.
In February 2001, the Company announced a multi-year contract with
Waste Control Specialists, LLC (the "WCS Contract") for the establishment of a
fixed facility utilizing the SET technology and the S-10 system for the
treatment of radioactive mixed waste. SET safely and effectively treats mixed
3
wastes, a mixture of radioactive materials and hazardous wastes, by destroying
the hazardous elements. The Company utilizes SET to remove Resource Conservation
and Recovery Act ("RCRA") and Toxic Substances Control Act ("TSCA") regulated
compounds from low-level mixed wastes, making the waste acceptable for on-site
disposal. Waste Control Specialists, LLC ("WCS") operates a broad-based waste
treatment, storage and disposal facility in Andrews County, Texas. As of
December 31, 2001, the Company has not generated any revenues relating to this
contract and the equipment remains in storage at this facility.
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.
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
4
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;
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. As of December 31, 2001, the SET technology has not generated
profitable operations or any significant revenues.
5
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
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.
6
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
7
ENVIRONMENTAL INSURANCE CLAIM RESOLUTION-DISPUTE RESOLUTION MANAGEMENT, INC.
The Company, through DRM, provides guidance to an environmentally
impacted Company through the strategic tactical and implementation issues that
are inherent to an insurance recovery effort. DRM has identified issues that are
important to insurers and it understands the process insurers use to evaluate
environmental claims. DRM operates five offices domestically and an
international office in London and has five primary business areas/profit
centers. The five areas include (1) U.S. and foreign environmental and asbestos
claims, including claims to insolvent London Market insurers; (2) environmental
and asbestos reinsurance claims; (3) business interruption claims; (4) products
liability; and (5) Y2K remediation claims. Currently, DRM generates about 85% of
its revenue from environmental claims, 5% from Y2K claims, and 10% from products
liability.
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
Company's consolidated financial statements include operations of DRM since
August 30, 2000. The principals of DRM retain the remaining 19%. DRM and Dispute
Resolution Management UK Limited ("DRM UK") are management consulting firms
specializing in business-oriented, non-litigious solutions for the settlement of
complex, long-tail and latent insurance and other claims.
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.
DRM offers a bundle of services to its clients which include:
construction of historical coverage flowcharts derived through old and lost
policy archaeology, insurance coverage analysis and prioritization, compilation
of all necessary claims data and computer assisted risk exposure modeling and
quantification. DRM accepts engagements to design and execute non-litigated
insurance recovery projects in the context of environmental, products liability,
Y2K, business interruption and insolvency claims. DRM commits to manage the
entire settlement process in exchange for a lump sum success fee (4% to 22%)
when the insurers settle with the client. In most cases, DRM also receives a
monthly retainer during the process. DRM avoids the litigation track, although
it may work in tandem with litigators. The settlement typically involves less
time and resources than litigation with insurers. DRM manages all aspects of
developing the settlement proposal and negotiating it with insurers. The client
relationship is based upon (1) DRM's knowledge of the insurers' procedures and
needs, (2) DRM's history of successfully concluding claims negotiations and (3)
DRM's commitment to business solutions in lieu of litigation to conclusion.
DRM has handled many complex insurance claim negotiations with the
majority of the major property/casualty carriers, resulting in several hundred
million dollars in recoveries for its clients, primarily on a contingent fee
basis. DRM enhances its marketing and client service capabilities by employing a
multi-disciplinary team of settlement experts drawn from both the policyholder
sector and from the claims departments of the major carriers. The DRM team has
over 100 years of combined claims settlement experience. DRM has 19 full-time
employees comprised of attorneys, MBAs and former insurance claim managers and
professionals.
8
The Company anticipates that it will be able to combine our
environmental-related management, engineering and technological services
experience with DRM's consulting expertise and pursue opportunities where there
exists:
o the need for financial solutions to a company's or quasi-governmental
group's environmental and other long-tail liabilities;
o the need for cost-effective and safe solutions to the on-going dangers
posed by toxic and radioactive waste;
o environmentally impacted or distressed properties where a "Brownfield"
environmental clean-up is warranted; and
o the urgent need to prevent proliferation of weapons of mass destruction
by efficiently converting existing, terrorist-vulnerable nuclear and
chemical components into energy and benign materials.
In addressing these opportunities, target markets will include:
o industrial companies in North America and Europe who have maintained
comprehensive general liability insurance coverages with potential or
demonstrated long-tail liabilities;
o mixed-waste (radioactive with hazardous and/or toxic content) U.S.
governmental and international nuclear waste streams;
o governmental entities that are named as additional insureds on historic
general liability coverages;
o spent nuclear fuel and the drying and dehydriding of nuclear fuel rods;
o U.S. governmental nuclear utilities;
o companies that require specialty environmental cost capping and finite
risk insurance products; and
o U.S. governmental programs for neutralizing nuclear and chemical
weapons and explosives.
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 DOE and 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 technologies and innovative skills related to the
identification, investigation, remediation and management of hazardous, mixed
9
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. Commodore 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 14.54% 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 Department
of Energy ("DOE") and the Department of Defense ("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.
10
Contracts
Rocky Flats Environmental Technology Site (RFETS) Contracts: Commodore
Advanced Sciences (CAS) has two contract vehicles at RFETS; a subcontract with
Kaiser-Hill Company LLC (Kaiser-Hill), prime integrating and management
responsible for cleanup of RFETS, and a lower-tier subcontract with Accelerated
Systems LLC. Under its fixed unit rate type subcontract with Kaiser Hill, CAS
provides 20 personnel who sample surface water or soils, collect SDWA and
bioassay samples in radiological controlled areas, and ship the samples to
Kaiser-Hill controlled laboratories. CAS' subcontract has recently been extended
through September 2002 to enable Kaiser Hill to compete for the subcontract
scope and make a new award by October 2002. CAS believes it is on a competitive
team for the re-bidding of this subcontract work. CAS also provides 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 BOA extends through June 2003.
Denver Regional Water Council of Governments: Commodore Advanced
Sciences' is contracted annually to sample surface waters, streams, groundwater
wells and watersheds to Chatfield damn located southwest of Denver. The current
contract term is complete December 2002.
Tetra Tech Contract: Commodore Advanced Sciences is in the fourth year
of 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. CAS, provides 1 to
3 engineering personnel on a time and material basis to Tetra Tech on a contract
basis through September 2002.
General Services Administration Contract: In January 2000, Commodore
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 CAS its expected backlog to $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.
American Technologies Incorporated (ATI) Contract: Commodore Advanced
Sciences, LLC, under a fixed price type subcontract with a three-year base
period is 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 base period
concludes March 31, 2002.
Parsons Infrastructure and Technology Group, Inc.: Commodore Advanced
Sciences, Inc. (CAS), 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
runs through September 2002. CAS provides general engineering, draftsmen and
maintenance of engineering drawings for the Y12 facility management group.
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
11
with Teledyne Environmental, Inc. ("Teledyne Environmental"), a subsidiary of
Allegheny Teledyne, Inc., as the exclusive means by which each party (and their
affiliates) will pursue the chemical weapons destruction and demilitarization
market on a worldwide basis. Teledyne Environmental is a major provider of
contract services to the Department of Defense (the "DOD") and the Department of
Energy (the "DOE"). The purpose of the joint venture, known as
Teledyne-Commodore, LLC (the "LLC"), a Delaware limited liability company,
encompasses all phases of chemical weapons demilitarization including design,
engineering, field work, ordinance and residue (heel) neutralization and
demilitarization, disposal and reclamation through the use, application and
commercialization of the SET process. 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. In dissolving the LLC, the companies have determined that
the application of SET technology to chemical weapons demilitarization under the
U.S. Army's ACWA II program is not likely to occur. Last year, the Program
Manager of the ACWA II program determined that its chemical weapons destruction
plans for stockpiles in Colorado and Kentucky would not include the technologies
offered by the LLC. Dissolution of the LLC will enable the companies to realize
significant savings in operations expenses. 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) will pursue the
mixed waste treatment on a limited, domestic basis. TRI is a provider of
contract services to the Department of Energy (the "DOE") and to the public
utilities market. The purpose of the joint venture, known as Nuvoset, LLC (the
"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 LLC
partners.
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 the Far East. 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, 2001, sales of approximately 47% of the Company's
environmental management services were to private sector customers and sales of
approximately 53% were derived from contracts with federal, state and municipal
government agencies. Contracts to private sector customers generally may not be
12
terminated at the option of the customer. Contracts with governmental customers
generally may be terminated at any time at the option of the customer. DRM
settlements and retainage accounted for 53% of the Company's revenues in 2001.
DRM's final settlement success fees were derived from a series of clients as the
result of 18 to 24 months of negotiated settlements with insurers. In 2001,
Advanced Sciences' Rocky Flats Contract and Oak Ridge Contract accounted for
approximately 72% and 28%, respectively of the Advanced Sciences' sales. The
Company benefits substantially 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 exist 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.
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
13
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, 2001, total possible backlog for the Company was
approximately $11,000,000 as compared with approximately $25,000,000 as of
December 31, 2000. Approximately $2,000,000 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 $9,000,000 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 $1,600,000 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 $423,000,
$993,000, and $1,145,000 for the years ended December 31, 2001, 2000 and 1999
respectively.
14
INTELLECTUAL PROPERTY
The Company currently has fifty-five (55) issued U.S. and foreign
patents. Additionally, the Company has fifty (50) 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 14 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
Environmental Insurance Claim Resolution.
DRM has been primarily engaged in providing environmental insurance
recovery services to corporations and entities within the United States. Based
on market data compiled by DRM, the largest market for environmental insurance
recovery services today is the United States industrial and manufacturing
sector. DRM estimates that there are insurer's reserves in excess of $30 billion
for environmental clean-up insurance claims in the U.S. DRM currently occupies a
position in the negotiated insurance recovery services arena by virtue of its
long-term record for providing these services to over 100 industrial clients to
date.
Insurance companies have long relied on computer based risk modeling
and allocation programs to develop desired settlement criteria. DRM's FOCUS
replicates the insurer's computer analysis and provides a three-tiered
probability structure for potential allocation and settlement. DRM believes that
the FOCUS product provides a significant performance advantage over its
competition in this industry.
15
The market for DRM's consulting services is highly competitive, and
they face competition from many other providers of consulting services. DRM's
competitors range from large organizations, such as national accounting firms
and the large management consulting companies that offer a full range of
consulting services, to small firms and independent contractors that provide
only one specialized service. Some of DRM's competitors have significantly more
financial and marketing resources, larger professional staffs or are more widely
recognized. There are few barriers to entry into the consulting business. DRM's
competitors include such firms as Arthur Anderson Consulting, Risk Management,
the Peterson Group (a division of Navigant) and Dickstein Shapiro Morin and
Oshinsky, LLP.
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 $3.9 billion for 2001. 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
2001 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
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.
16
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 2002. 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
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
17
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.
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
18
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.
EMPLOYEES
As of March 31, 2002, the Company (including all of its direct and
indirect subsidiaries) had a total of 52 full-time and 13 part-time employees,
of which approximately 35 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 Alexandria,
Virginia. 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.
In addition to the Alexandria, Virginia facilities, 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 Environmental and a
director of the Company, Solution, 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 and 2002 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.
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 Carlsbad and Los Alamos, New Mexico, Oak Ridge, Tennessee, and
Lakewood, Colorado.
19
DRM's principal executive and administrative offices are located in
Salt Lake City, Utah. DRM leases approximately 4,700 square feet of space for
rental payments in the amount of $5,300 per month under a lease that will expire
in March 2005.
DRM's principal sales and marketing offices are located in Denver,
Colorado. DRM leases approximately 2,581 square feet of space for rental
payments in the amount of $3,925 per month under a lease that will expire in
December 2004. DRM also leases various spaces for field operations in Cherry
Hill, New Jersey; Houston, Texas; Portland, Oregon; and Annapolis, Maryland.
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.
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 March 31, 2002, 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, 2002, 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 2002. 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 common stock and warrants are traded on the American Stock Exchange
("AMEX") under the symbols CXI and CXI.WS, respectively. As of March 15, 2002,
there were 215 record holders of the Company's common stock and 45 record
holders of the Company's warrants.
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 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
Fiscal 2000
First Quarter.................................................. $2.75 0.88 0.44 0.19
Second Quarter................................................. 1.94 0.75 0.31 0.13
Third Quarter.................................................. 1.63 0.81 0.34 0.13
Fourth Quarter................................................. 0.94 0.19 0.19 0.15
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, 2001, the Company had paid $134,000 in cash
dividends and the Company has accrued an additional $428,000 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 shares to date. See "Recent Sales of
Unregistered Securities -- November 1999 Private Placement of Series E Preferred
Stock."
21
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, 2001, the Company had paid $92,000 in cash
dividends and the Company has accrued an additional $388,000 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. On January 9,
2002 the Company paid $83,248.93 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."
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.
RECENT SALES OF UNREGISTERED 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 333,333 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
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 May
13, 2002.
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
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.
22
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. 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 is convertible into the Company's 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. The remaining principal balance of $250,000 is
outstanding as of April 15, 2002. The Company has not been notifed of a default
of the Brewer Note as of April 15, 2002. 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 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 May 31, 2002.
Effective April 5, 2001, the Company issued warrants to purchase
500,000 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."
23
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 226,000 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 $1.1963 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 the Company's 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 $200,000 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.
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.
24
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.
September 1998 Exchange of Debt for Series B, C, D, Preferred Stock and
Separation Stock
On December 25, 1998, the Company consummated the transferto
Environmental, effective as of September 28, 1998, of all 10,000,000 of its
shares of common stock, par value $.001 per share (the "Separation Stock"), of
Separation, representing approximately 87% of the issued and outstanding shares
of capital stock of Separation, as part of a debt repayment plan between the
Company and Environmental. As of September 28, 1998, Environmental owned
approximately 35% of the issued and outstanding shares of common stock of the
Company. As of April 30, 2001, Environmental owns approximately 16.58% of the
issued and outstanding shares of common stock of the Company.
As a result of the repayment, the Company has repaid all of its debt in
the amount of $6,756,000 (the "Debt") to Environmental by exchanging the Debt
for (i) the Separation Stock (as repayment of $1,250,000 of the Debt); (ii)
20,909 shares of newly authorized 6% Series B Convertible Preferred Stock of the
Company (as repayment of $2,090,870 of the Debt); (iii) 10,189 shares of newly
authorized 6% Series C Convertible Preferred Stock of the Company (as repayment
of $1,018,864 of the Debt); (iv) 20,391 shares of newly authorized 6% Series D
Convertible Preferred Stock of the Company (as repayment of $2,039,100 of the
Debt); (v) the assignment to Environmental of an account receivable due to the
Company from Separation in the amount of $357,000 (as repayment of $357,000 of
the Debt); and (vi) the amendment of an existing warrant owned by Environmental
to purchase 1,500,000 shares of the Company's common stock to reduce the
exercise price of such warrant from $10.00 per share to $1.50 per share.
Representatives of both the Company and Environmental determined the terms of
the debt restructuring as a result of arm's-length negotiations, and such
determinations were supported by fairness opinions by an independent, third
party appraiser. Since the Company and Environmental are deemed to be related
25
parties, the Company and Environmental recorded gains in the total amount of
$7,818,000 from these transactions as direct contributions to equity.
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 Environmental written information about the Company in accordance with Rule
502 of the Securities Act and advised Environmental of the limitations on resale
of such securities. In addition, Environmental 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. On November 24,
1999, Environmental converted all its shares Series B, C, and D Preferred Stock
into 7,258,533 shares of common stock, and there are no issued and outstanding
shares of the Company's Series B, Series C or Series D Preferred Stock.
February 1998 Intercompany Note
In February 1998, Environmental provided an unsecured loan in the
amount of $5,450,000 to the Company, evidenced by the non-convertible note
issued by the Company (the "Intercompany Note"). Pursuant to the Intercompany
Note, interest on the unpaid principal balance of the Intercompany Note is
payable at the rate of 8% per annum, semiannually in cash. The unpaid principal
amount of the Intercompany Note was due and payable, together with accrued and
unpaid interest, on the earlier to occur of (a) December 31, 1999 or (b) the
consummation of any public offering or private placement of securities of the
Company with net proceeds aggregating in excess of $6.0 million, other than with
respect to working capital financing or secured financing of assets received by
the Company in the ordinary course of business from any bank or other lending
institution, subject to certain conditions. The Company used the net proceeds of
the loan solely for working capital and general corporate purposes and not for
the satisfaction of any portion of Company debt or to redeem any Company equity
or equity-equivalent securities. The Company paid the Intercompany Note in full
effective as of September 28, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Certain Relationships and Related Transactions--February 1998 Intercompany
Note."
In connection with the loan, the Company amended and restated in its
entirety a five-year warrant issued to Environmental on December 2, 1996, to
purchase 7,500,000 shares of the Company's common stock to, reducing the
exercise price of the warrant from $15.00 per share to $10.00 per share and to
modify other terms of the warrant. In addition, the Company issued to
Environmental an additional five-year warrant to purchase 1,500,000 shares of
the Company's common stock at an exercise price of $10.00 per share. See
"Certain Relationships and Related Transactions--February 1998 Intercompany
Note."
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 Environmental, written information about the Company in accordance with Rule
502 of the Securities Act and advised Environmental of the limitations on resale
of such securities. In addition, Environmental was offered the opportunity,
26
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, 2001, and for the years ended December 31, 1997, 1998, 1999,
2000 and 2001. 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.
(in thousands, except per share data)
Consolidated Statement of Operations Data:
1997 1998 1999 2000 2001
---------- -------- --------- ---------- ---------
Revenue:
Contract revenue................ $ 19,493 $ 17,470 $ 18,147 $ 20,631 $ 10,551
Cost of sales:
Cost of sales................... 16,325 15,421 16,127 14,452 3,369
Research and development........ 3,074 2,722 1,145 993 423
General and administrative...... 12,196 8,118 4,037 6,989 6,643
Depreciation and amortization... 1,282 1,150 696 1,471 2,491
Impairment of Machinery 776
Impairment of Patents 627
Impairment of Goodwill.......... 6,586 --
Minority interests.............. (82) 300 -- 341 203
---------- -------- --------- ---------- ---------
Loss from operations................ (13,302) (10,241) (3,858) (10,201) (3,981)
Interest income................. 745 337 39 67 76
Interest expense................ (1,310) (1,066) (166) (1,307) (2,354)
Equity in net losses of
subsidiary................... (1,827) (2,383) -- -- (295)
---------- -------- --------- ---------- ---------
Loss before income taxes ........... (15,694) (13,353) (3,985) (11,441) (6,554)
Income taxes.................... -- -- -- -- --
---------- -------- --------- ---------- ---------
Net loss ........................... $ (15,694) (13,353) $ (3,985) $ (11,441) $ (6,554)
---------- -------- --------- ---------- ---------
Net loss per share -- basic
and diluted..................... $ (0.73) $ (0.58) $ (0.16) $ (0.34) $ (0.13)
---------- -------- --------- ---------- ---------
Weighted average number of shares... 21,844 23,194 24,819 35,866 53,241
---------- -------- --------- ---------- ---------
Consolidated Balance Sheet Data:
1997 1998 1999 2000 2001
---------- -------- --------- ---------- ---------
Cash and cash equivalents......... $ 13,151 $ 1,777 $ 1,797 $ 1,980 $ 1,271
Total assets...................... 29,696 15,617 16,047 37,473 26,462
Long term debt.................... 19 -- 716 5,182 4,430
Total liabilities................. 10,521 3,709 6,096 29,199 26,631
Minority interests................ 6,645 -- -- 419 622
Stockholders' equity.............. 11,654 11,908 9,951 7,855 1,571
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, technical,
and financial 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, (ii) the settlement of
complex, long-tail and latent insurance claims by utilizing a series of tools
including an internally developed risk modeling program, FOCUS, and (iii)
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).
Until September 1998, the Company was engaged in the separation of hazardous
waste through its 87% owned subsidiary, Separation. Effective September 28,
1998, the Company sold its investment in Separation, which has caused
significant variations in results for the periods presented.
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. Through DRM, an 81% owned subsidiary, the
Company has several engagements with various industrial, manufacturing and
mining companies in the U.S. and in Europe for the recovery of insurance claims.
The Company has identified three 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
three 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; Commodore Solutions, Inc.,
which is commercializing technologies to treat mixed and hazardous waste; and
Dispute Resolution Management, Inc., which provides a package of services to
help companies recover financial settlements from insurance policies to defray
costs associated with environmental liabilities.
Results of Operations
Year ended December 31, 2001 compared to Year ended December 31, 2000
Revenues were $10,551,000 for the year ended December 31, 2001,
compared to $20,631,000 for the year ended December 31, 2000. The decrease in
revenues is due to the decreases in revenue contribution by CAS and of the
Company's 81% interest in DRM, acquired August 30, 2000.
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
29
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 DRM, revenues were $5,961,000 for the year ended
December 31, 2001, compared to $7,609,316 on a full year basis, $3,574,000 for
the four month Company ownership basis, for the year ended December 31, 2000.
The Company purchased its 81% interest in DRM on August 30, 2000 and was able to
consolidate DRM's revenues and earnings as of that date. The decrease in total
year earnings was the result. The decrease in revenues is primarily due to the
interruption of business activities concerning insurance settlements and
recoveries in the fourth quarter of 2001 as a result of acts of terrorism. The
various insurers, in which DRM negotiates and receives their settlements, halted
or delayed their settlements until the insurers could operationally absorb the
impact of the terrorist acts in the United States. The insurers have resumed
traditionally settlement practices starting the first quarter of 2002.
Revenues in 2001 were primarily from completed settlement agreements
between their clients and major insurers. DRM has several client engagements, of
which two represented more than 10% of DRM's annual revenue. The combined
revenue for these two customers was $3,376,000 or 57% of the Company's total
2001 revenue. Settlements are the result of 18 to 24 months of effort by various
employees of DRM, of which the expenses are captured in the general and
administrative costs section. Selling, general and administrative costs
increased from $3,954,000 (on a full year basis) for 2000 to $4,223,000 for
2001. This increase reflects DRM's increased investment in the expanding the
office locations, staffing and marketing efforts, which have resulted in an
increase in new business, and contracts that will produce revenues in the
following 18-32 month periods. 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
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
30
capital expenditures and less in laboratory work and consultants than it had in
2000. DRM and 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 $6,643,000, as compared to $6,989,000 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 through-out 2001 due to the inability to replace
certain completed contracts. In the case of DRM, general and administrative
costs recognized by the Company were $4,223,000 for the year ended December 31,
2001. These costs represent the salaries and bonuses issued to all employees of
DRM. Solution incurred general and administrative costs of $700,000 for the year
ended December 31, 2001 as compared with $504,000 for the year ended December
31, 2000. This increase was primarily due to a greater sales and marketing
effort for Solution's services, which has resulted in contracts that will
produce revenue in 2002.
The increase in interest expense of $1,047,000 from 2000 to 2001 is
primarily related to amortization of non-cash interest costs associated with the
Company's purchase of 81% of DRM on August 30, 2000 ($1,716,000), Brewer Note
($29,000), Milford/Shaar ($53,000) and the Weiss Group Note ($275,000).
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.
Year ended December 31, 2000 compared to Year ended December 31, 1999
Revenues were $20,631,000 for the year ended December 31, 2000,
compared to $18,147,000 for the year ended December 31, 1999. The increase in
revenues is primarily due to the revenue contribution of the Company's 81%
interest in DRM, acquired August 30, 2000.
In the case of Advanced Sciences, revenues were $16,786,000 for the
year ended December 31, 2000, compared to $17,973,000 for the year ended 1999.
Revenues in 2000 were primarily from engineering and scientific services
performed for the United States government under a variety of contracts similar
to those in place in 1999. Advanced Sciences had three major customers in 2000,
each of which represents more than 10% of annual revenue. The combined revenue
for these three customers was $13,836,000 or 67% of the Company's total 2000
revenue. The decline in revenues at Advanced Sciences is primarily the result of
less subcontract work being performed in 2000. 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 $15,865,000 for 1999
to $13,962,000 for 2000. A reduction in cost of sales at Advanced Sciences
31
resulted from 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 DRM, revenues were $3,574,000 for the year ended
December 31, 2000. The Company purchased its 81% interest in DRM on August 30,
2000 and was able to consolidate DRM's revenues and earnings as of that date.
Revenues in 2000 were primarily from completed settlement agreements between
their clients and major insurers. DRM has several client engagements, of which
three represented more than 10% of DRM's annual revenue. The combined revenue
for these three customers was $2,300,000 or 64% of the DRM's total 2000 revenue
contribution to the Company. Settlements are the result of 18 to 24 months of
effort by various employees of DRM, of which the expenses are captured in the
general and administrative costs section. Anticipated losses on engagements, if
any, will be provided for by a charge to income during the period such losses
are first identified.
In the case of Solution, revenues were $271,000 for the year ended
December 31, 2000 as compared with $174,000 for the year ended December 31,
1999. The increase is primarily due to the increase in feasibility studies and
commercial processing. Revenues in 2000 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 $271,000 or 100% of the Solution's total 2000 revenue. The increase in
revenues at Solution is primarily the result of more subcontract work being
performed in 2000. Cost of sales was $490,000 for the year ended December 31,
2000 as compared to $262,000 for the year ended December 31, 1999. The increase
in cost of sales is attributable to greater sales and marketing expenses for the
SET technology which the Company anticipates greater revenues from Solutions in
2001. 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, 2000, the Company incurred research and
development costs of $993,000, as compared to $1,145,000 for the year ended
December 31, 1999. 100% of the research and development costs are attributable
to the operations of Solution. In 2000, the Company invested more money in
capital expenditures and less in laboratory work and consultants than it had in
1999. DRM and Advanced Sciences did not incur research and development costs in
the years 1999 and 2000.
General and administrative expenses for the year ended December 31,
2000 were $6,989,000, as compared to $4,037,000 for the year ended December 31,
1999. This increase is the result of the addition of the DRM's general and
administrative costs as well as and increase in the costs from Solution.
In the case of Advanced Sciences, general and administrative costs
increased from $1,428,000 for the year ended December 31, 1999 to $2,355,000 for
the year ended December 31, 2000. This increase reflects the impact of some
restructuring steps in Advanced Sciences (including principally a reduction in
personnel and the associated severance cost) the Company made in the fourth
quarter of 2000 due to the inability to replace certain completed contracts. In
the case of DRM, general and administrative costs recognized by the Company were
$1,761,000 for the year ended December 31, 2000. These costs represent the
salaries and bonuses issued to all employees of DRM. Solution incurred general
and administrative costs of $504,000 for the year ended December 31, 2000 as
compared with $175,000 for the year ended December 31, 1999. This increase was
primarily due to a greater sales and marketing effort for Solution's services,
which has resulted in contracts that will produce revenue in 2001.
32
The increase in interest expense of $1,141,000 from 1999 to 2000 is
primarily related to amortization of non-cash interest costs associated with the
Company's purchase of 81% of DRM on August 30, 2000 ($658,000) and the Weiss
Group Note ($333,000).
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 to
their fair market value.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001 and December 31, 2000 ASI had a $108,000 and
$1,459,000 outstanding balance, respectively, on its revolving lines of credit.
At December 31, 2000 and 1999, Advanced Sciences had a $1,459,000 and
$948,000 outstanding balance, respectively, on various revolving lines of
credit. In August 1998, Advanced Sciences refinanced their line of credit with
Finova Capital Corporation (the "Finova Credit Line"). The Finova Credit Line
was not to exceed 75% of eligible receivable or $2,000,000 and was due in August
2000 with interest payable monthly at prime plus 1 1/2 percent (9 1/4 percent as
of December 31, 1999). The Finova Credit Line was extended on a month-to-month
basis through October 2000 when the Company secured a new line of credit. The
Finova Credit Line was collateralized by the assets of Advanced Sciences and was
guaranteed by the Company. The Finova Credit Line contained certain financial
covenants and restrictions including minimum ratios that Advanced Sciences had
to satisfy. Advanced Sciences was in compliance with the covenants throughout
the term of the Finova Credit Line.
In August 1999, Advanced Sciences received $1,000,000 as a "new
advance" under a First Amendment to its existing revolving line of credit. This
advance is evidenced by a secured promissory note (the "1999 Term Note"). The
1999 Term Note was repayable in monthly installments in the principal amount of
$16,667 plus interest accrued and unpaid interest. The first payment was paid
August 1999. Interest was set at prime plus 1 1/2 percent. Security for the 1999
Term Note included virtually all property and equipment owned by Advanced
Sciences and the Company. This 1999 Term Note was shown as long-term debt in the
consolidated balance sheet. The 1999 Term Note and the outstanding balances of
the Finova Credit Line were paid in full when Advanced Sciences refinanced their
line of credit in October 2000.
In November 1999, the Company completed $2.5 million in financing
through private placement. The Company issued 335,000 shares of a new Series E
Convertible Preferred Stock, convertible into common stock at the market price,
after April 30, 2000 and up through April 30, 2003 at which time it
automatically converts to common stock. The Series E Convertible Preferred Stock
has a variable rate dividend averaging 8.15% over the term of the security. The
Company reserved the right to redeem all the Series E Convertible Preferred
Stock on or before April 30, 2000 by payment of $2.8 million plus any accrued
dividends.
33
In March 2000, the Company completed $2.0 million in financing through
private placement. The Company issued 226,000 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. The
Company reserved the right to redeem all the Series F Convertible Preferred
Stock on or before September 30, 2000 by payment of $2.3 million plus any
accrued dividends.
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 is 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. The remaining principal balance of $250,000 is
outstanding as of April 15, 2002. The Company has not been notified of the
holder's intent to declare a default on the Brewer Note.
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 with interest payable monthly at prime plus 2 percent (7.0 percent
as of November 12, 2001). 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, 2002.
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 October 2001, ASI repaid their line of credit with KBK Financial,
Inc. (the "KBK Credit Line"). The KBK Credit Line was not to exceed 85 percent
of eligible receivables or $2,500,000 and was due October 2002 with interest
payable monthly at prime plus 2 percent (8.00 percent as of September 30, 2001).
The KBK Credit Line was collateralized by the assets of ASI and was guaranteed
by the Company. The KBK Credit Line contained certain financial covenants and
restrictions including minimum ratios that ASI must satisfy. ASI was in
compliance with the covenants of the KBK Credit Line through the repayment in
October 2001.
34
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 Common Stock, transferred to the investors a total
of 1,000,000 shares of common stock. All holders of the Weiss Group Note have
granted payment extensions until May 31, 2002.
Effective April 5, 2001, the Company issued warrants to purchase
500,000 shares of its common stock at an exercise price of $0.22 per share (the
closing price of our common stock on the American Stock Exchange on such date)
to all holders of the Weiss Group Note in consideration of such persons
extension of the due date of such loans from February 12, 2001 to June 30, 2001.
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 American Stock Exchange on such date)
to all holders of the Weiss Group Note in consideration of such persons
extension of the due date of such loans from June 30, 2001 to May 31, 2002.
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
shares of the Company's common stock at an exercise price of $0.22 per share.
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
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 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 May
13, 2002.
The Company has an irrevocable obligation to repurchase from the former
shareholders of DRM, by May 16, 2002, that number of 9.5 million shares of the
Company's common stock (at a per share price equal to the greater of $1.50 or
the closing price of our common stock 30 days prior to purchase) as shall be
necessary to provide the holders of such shares with a total of $14.5 million.
The original repurchase obligation deadline of August 30, 2001, subsequently
extended through May 16, 2002 by a series of extensions (initially extended to
September 29, 2001, further extended to October 29, 2001, further extended to
January 16, 2002 and subsequently extended until May 16, 2002). As partial
security for the payment of such obligation, all of the shares of DRM common
stock owned by the Company have been pledged to Messrs. William J. Russell and
Tamie P. Speciale, the former sole stockholders of DRM. In the event the Company
35
is unable to make such $14.5 million payment, when due, the pledgees may
foreclose on the DRM stock; in which event the Company would lose its entire
equity ownership in the DRM subsidiary.
The Company originally intended to meet its repurchase obligation to
the former shareholders of DRM by reacquiring their shares and selling those
shares to generate the cash necessary to meet the obligation; however, the
Company's ability to effect the repurchase obligation in this manner is heavily
dependent on the stock price of the Company's common stock at the time of the
repurchase. At April 15, 2002, the closing price of the Company's common stock
on the American Stock Exchange, Inc. was $0.09 per share.
The Company currently requires additional cash to sustain existing
operations and meet current obligations (including those described above) and
the Company's ongoing capital requirements. Excluding the Company's DRM
subsidiary, the Company's current monthly operating expenses exceed its cash
revenues by approximately $200,000. The continuation of the Company's operations
is dependent in the short term upon its ability to obtain additional financing
and, in the long term, to generate sufficient cash flow to meet its obligations
on a timely basis, to obtain additional financing as may be required, and
ultimately to attain profitability.
The Company's auditor's opinion on our fiscal 2001 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, 2001, the Company incurred a net loss
of $6,554,000, as compared to a net loss of $11,441,000 for the year ended
December 31, 2000.
As shown in the financial statements for the years ended December 31,
2001, 2000, and 1999, the Company incurred losses of $6,554,000, $11,441,000 and
$3,985,000 respectively. The Company has also experienced net cash inflow
(outflows) from operating activities of $1,910,000, ($2,002,000), and
($2,905,000) for the years ended December 31, 2001, 2000 and 1999 respectively.
At December 31, 2001, 2000 and 1999 the Company had working capital (deficit) of
$(19,571,000), $(16,876,000) and $621,000 respectively. The negative working
capital balance for the year ended December 31, 2001 is primarily due to the
payment obligations of the Company to the former shareholders of DRM
($14,500,000 of the purchase price obligation and approximately $2,500,000 of
the earn-out guarantee) under the Stock Purchase Agreement for the acquisition
of 81% of DRM on August 30, 2000.
As shown in the financial statements for the years ended December 31,
2001, 2000 and 1999 the Company had stockholders' equity of $1,571,000,
$7,855,000 and $9,951,000 respectively. The Company's net decrease in
stockholders' equity from December 31, 2000 to December 31, 2001 is primarily
due to the loss for the period ($6,554,000).
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.
36
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards (the "NOLs") of
approximately $31,000,000, which expire in the years 2010 through 2021. 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 Company has determined a maximum of approximately $2.4 million of NOLs is
available to be used annually. 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.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These forward-looking statements
can generally be identified as such because the context of the statement will
include words such as the Company "believes," "anticipates," "expects" or words
of similar import. Similarly, statements that describe the Company's future
plans, objectives or goals are also forward-looking statements.
Such statements may address future events and conditions concerning,
among other things, the Company's results of operations and financial condition;
the consummation of acquisition and financing transactions and the effect
thereof on the Company's business; capital expenditures; litigation; regulatory
matters; and the Company's plans and objectives for future operations and
expansion. Any such forward-looking statements would be subject to the risks and
uncertainties that could cause actual results of operations, financial
condition, acquisitions, financing transactions, operations, expenditures,
expansion and other events to differ materially from those expressed or implied
in such forward-looking statements. Any such forward-looking statements would be
subject to a number of assumptions regarding, among other things, future
economic, competitive and market conditions generally. Such assumptions would be
based on facts and conditions as they exist at the time such statements are made
as well as predictions as to future facts and conditions, the accurate
prediction of which may be difficult and involve the assessment of events beyond
the Company's control.
Further, the Company's business is subject to a number of risks and
uncertainities that would affect any such forward-looking statements. These
risks and uncertainties include, but are not limited to: the Company's critical
need for additional cash to sustain existing operations and meet existing
obligations and capital requirements; the Company's dependence on its
subsidiary, Dispute Resolution Management, Inc., to meet its cash needs; the
Company's need to raise additional capital to meet obligations relating to the
purchase of DRM or to renegotiate such obligations; 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; the
Company's ability to integrate acquired companies; the acceptance and
implementation of the Company's waste treatment technologies in the government
and commercial sectors; the Company's ability to obtain and perform under other
large technical support services projects; developments in environmental
legislation and regulation; the ability of the Company to obtain future
financing on favorable terms; and other circumstances affecting anticipated
37
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-41 of this Annual Report and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
None.
38
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, 2002 are as
follows:
Name Age Position
-------------------------- ---------------- -----------------------------------
Shelby T. Brewer, Ph.D. 63 Chairman of the Board, President
and Chief Executive Officer
-------------------------- ---------------- -----------------------------------
James M. DeAngelis 41 Chief Financial and Administrative
Officer, Treasurer
-------------------------- ---------------- -----------------------------------
Bentley J. Blum 60 Director
-------------------------- ---------------- -----------------------------------
Herbert A. Cohen 68 Director
-------------------------- ---------------- -----------------------------------
Paul E. Hannesson 61 Director
-------------------------- ---------------- -----------------------------------
David L. Mitchell 71 Director
-------------------------- ---------------- -----------------------------------
Edward L. Palmer 84 Director
-------------------------- ---------------- -----------------------------------
William R. Toller 70 Director
-------------------------- ---------------- -----------------------------------
SHELBY T. BREWER, Ph.D. was appointed Chairman, Chief Executive Officer
and President of the Company since 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.
James M. 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 International
39
Management degree from the American Graduate School of International Management.
Mr. DeAngelis holds B.S. degrees in Biology and Physiology from the University
of Connecticut.
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
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.
Herbert A. Cohen has served as a director of the Company and
Environmental since July 1996 and served as a director of Separation from March
1998 to March 2000. Mr. Cohen has been a practicing negotiator for the past
three decades acting in an advisory capacity in hostage negotiations and crisis
management. He has been an advisor to Presidents Carter and Reagan in the
Iranian hostage crisis, the government's response to the skyjacking of TWA
Flight 847 and the seizure of the Achille Lauro. Mr. Cohen's clients have
included large corporations and government agencies such as the Department of
State, the Federal Bureau of Investigation, the Conference of Mayors, the Bureau
of Land Management, Lands and Natural Resources Division in conjunction with the
EPA, and the United States Department of Justice. In addition, Mr. Cohen was an
advisor and consultant to the Strategic Arms Reduction Talks negotiating team.
Mr. Cohen holds a law degree from New York University School of Law and has
lectured at numerous academic institutions.
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.
David L. Mitchell has served as a director of the Company and
Environmental since July 1996 and as a director of Separation from April 1997 to
March 2000. Mr. Mitchell has also served as a consultant to the Company from
July 1997 to July 1998. For the past sixteen years, Mr. Mitchell has been
President and co-founder of Mitchell & Associates, Inc., a banking firm
providing financial advisory services in connection with corporate mergers,
acquisitions and divestitures. Prior to forming Mitchell & Associates in 1982,
Mr. Mitchell was a Managing Director of Shearson/American Express Inc. from 1979
to 1982, a Managing Director of First Boston Corporation from 1976 to 1978, and
a Managing Director of the investment-banking firm of S.G. Warburg & Company
from 1965 to 1976. Mr. Mitchell holds a bachelor's degree from Yale University.
Edward L. Palmer has served as a director of the Company since August
1998. Mr. Palmer currently serves as President of the Mill Neck Consulting
40
Group, founded in 1983. Mr. Palmer retired in September 1982 as Chairman of the
Executive Committee and Director of CitiCorp and Citibank, N.A. after 23 years
of service. Mr. Palmer served as Vice President of the New York Trust, serving
in several executive positions since 1940. Mr. Palmer is Trustee Emeritus of
Brown University, New York Philharmonic and The Metropolitan Museum of Art. Mr.
Palmer served as Director of Borg-Warner Corp., CitiCorp, Corning Incorp., Del
Monte Corp., First Boston Corp., Grindlays Banks, plc Kissinger Associates,
Monsanto Co., Mutual Life Ins., Phelps Dodge Corp., Union Pacific Corp., and
Washington National Bank Corp.
William R. Toller has served as a director of the Company since March
1998. Mr. Toller has also served as a member of the Board of Directors of
Separation from April 1997 to March 2000 and has served as a consultant to
Environmental since July 1997. Mr. Toller served as the Vice Chairman of Lanxide
from July 1997 to February 1998. Mr. Toller also currently serves as Chairman
and Chief Executive Officer of Titan Consultants, Inc. (August 1996 - Present).
Mr. Toller had been the Chairman and Chief Executive Officer of Witco
Corporation since October 1990 and retired in July 1996. Mr. Toller joined Witco
in 1984 as an executive officer when it acquired the Continental Carbon Company
of Conoco, Inc., of which he had been the President and an officer since 1955.
Mr. Toller is a graduate of the University of Arkansas with a Bachelor's degree
in Economics, and the Stanford University Graduate School Executive Program. Mr.
Toller serves on the Board of Directors of Chase Industries, Inc., Fuseplus,
Inc., of which he is also Chairman of the Organization and Compensation
Committee, and the United States Chamber of Commerce, of which he is also a
member of the Labor Relations and International Policy Committees. Mr. Toller is
also a member of the Board of Trustees and the Executive and Finance Committees
of the International Center for the Disabled, a member of the Board of
Associates of the Whitehead Institute for Biomedical Research, a member of the
National Advisory Board of First Commercial Bank in Arkansas, a member of the
Dean's Executive Advisory Board and the International Business Committee at the
University of Arkansas, College of Business Administration, and a member of the
Board of Presidents of the Stamford Symphony Orchestra.
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
----
William J. Russell 51 Chairman and Chief Executive Officer, DRM
Tamie P. Speciale 39 President and Chief Operating Officer, DRM
O. Mack Jones 61 President of Advanced Sciences
41
WILLIAM J. RUSSELL has served as Chairman and Chief Executive Officer
of DRM since December 1996. Mr. Russell served as Managing Director of KPMG Peat
Marwick, LLP's Environment Management Alternative Dispute Resolution Group from
March 1995 to December 1996. Mr. Russell served as Vice President of Atlantic
Environmental Management from March 1994 to March 1995. Mr. Russell served as
General Counsel of Pintlar Corporation (formerly the Bunker Hill Company). Mr.
Russell served as Vice President to Gulf Resources & Chemical a NYSE resource
company located in Washington, D.C., from February 1992 to March 1994 and was
responsible for the company's environmental matters with regard to its status as
the owner and primary potentially responsible person of one of the nation's
largest Superfund sites. Mr. Russell was engaged in the private practice of law
at Elam Burke & Boyd from August 1977 to October 1991, and maintained a practice
with an emphasis on environmental law and insurance defense representation. Mr.
Russell holds a law degree from the University of Denver. Mr. Russell holds a
B.A. degree from the University of Kansas.
TAMIE P. SPECIALE has served as President and Chief Operating Officer
of DRM since December 1996. Ms. Speciale served as a manager of KPMG Peat
Marwick, LLP's Environment Management Alternative Dispute Resolution Group from
January 1996 to December 1996. Ms. Speciale was engaged in the private practice
of law at Watkiss Dunning & Watkiss, P.C., from January 1995 to December 1995,
and maintained a practice with a concentration in environmental law and
commercial business law. Ms. Speciale is certified as an arbitrator with the
National Association of Security Dealers (NASD). Ms. Speciale holds an MBA, a
law degree and a B.S. degree from the University of Utah.
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
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 its function would be performed by the entire
Board of Directors.
42
As of December 31, 2001, the Audit Committee was composed of David L.
Mitchell, as Chairman, Herbert A. Cohen, Edward L. Palmer and William R. Toller.
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, 2001, the Compensation, Stock Option and Benefits
Committee, was composed of Herbert A. Cohen, as Chairman, David L. Mitchell,
Edward L. Palmer and William R. Toller. 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.
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, 2001, and upon a
review of Forms 5 and amendments thereto furnished to the Company with respect
to the year ended December 31, 2001, 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, 2001.
43
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 2001, 2000 and 1999 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 $100,000 during any
such year.
Summary Compensation Table
-------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------------------------------- -----------------------------------
Other Securities
-------------------------------- Annual Restricted Under- All Other
Compen- Stock Lying LTIP Compen-
Name and Principal Salary Bonus sation Award(s) Options Pay-outs sation
Position Year ($) ($) ($) ($) (#) ($) ($)
------------------ -------- -------------- ------- -------------- ------------ --------------------- --------------
(a) (b) (c) (d) (e) (g) (g) (h) (i)
Shelby T. Brewer, Ph.D.(1) 2001 90,317(2) -0- -0- -0- 200,000(3) -0- -0-
Chief Executive Officer 2000 58,707(2) -0- -0- -0- 640,000(3) -0- -0-
1999 -0- -0- -0- -0- -0- -0- -0-
Paul E. Hannesson 2001 77,242(4) -0- -0- -0- -0- -0- -0-
Former Chief Executive 2000 358,934(4) -0- -0- -0- -0- -0- -0-
Officer 1999 331,416(4) -0- 12,000(5) -0- 2,400,000(6) -0- 33,638(7)
Kenneth L. Adelman, Ph.D. 2001 -0- -0- -0- -0- -0- -0- -0-
Former Executive Vice 2000 -0- -0- -0- -0- -0- -0- -0-
President 1999 -0- -0- 238,756(8) -0- -0- -0- -0-
James M. DeAngelis(9) 2001 133,453(10) -0- -0- -0- 300,000(11) -0- -0-
Senior Vice President 2000 164,368(10) -0- -0- -0- -0- -0- -0-
& Chief Financial Officer 1999 147,614(10) -0- -0- -0- 200,000(11) -0- 12,225(12)
William E. Ingram 2001 20,645(13) -0- -0- -0- -0- -0- -0-
Former Vice President & 2000 147,842(13) -0- -0- -0- -0- -0- -0-
Controller 1999 150,426(13) -0- -0- -0- 100,000(14) -0- -0-
O. Mack Jones(15) 2001 134,805(16) -0- -0- -0- 100,000(17) -0- -0-
President 2000 143,755(16) -0- -0- -0- -0- -0- -0-
Advanced Sciences 1999 152,663(16) -0- -0- -0- 200,000(17) -0- -0-
Peter E Harrod 2001 49,460(18) -0- -0- -0- -0- -0- -0-
Former President 2000 187,036(18) -0- -0- -0- -0- -0- -0-
Advanced Sciences 1999 170,501(18) -0- -0- -0- 200,000(19) -0- -0-
------------------------------------------------------------------------------------------------------------------------------
44
(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 allocated to the
Company. Mr. Brewer's base salary for 2001 was $250,000 of which
$160,000 originally deferred until December 31, 2001, and remains
unpaid as of March 25, 2002. 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.
(4) Represents the amount of Mr. Hannesson's base salary allocated to 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.
(5) Represents the amount of Mr. Hannesson's automobile allowance allocated
to the Company. 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.
(7) Represents moving allowances paid to Mr. Hannesson in 1999.
(8) Represents amounts paid to Mr. Adelman in 1999 in satisfaction of his
employment agreement. Dr. Adelman resigned his management positions
effective December 31, 1998. Mr. Adelman concluded his term as a
Director of the Company on August 30, 2000.
(9) 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.
(10) Represents the amount of Mr. DeAngelis' base salary allocated to the
Company. Mr. DeAngelis' 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. DeAngelis' base salary for 2000 and
1999 was $165,000 and $145,000 respectively.
(11) Represents shares of common stock underlying stock options granted to
Mr. DeAngelis by the Company in his capacity as an officer of the
Company.
(12) Represents moving allowances paid to Mr. DeAngelis in 1999.
(13) Represents the amount of Mr. Ingram's base salary allocated to 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.
(14) 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.
(15) 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.
(16) Represents the amount of Mr. Jones' base salary allocated to the
Company. 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.
(17) Represents shares of common stock underlying stock options granted to
Mr. Jones the Company in his capacity as an officer of the Company.
(18) Represents the amount of Mr. Harrod's base salary allocated to 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 $190,000 respectively. Mr. Harrod resigned his management
position effective February 28, 2001.
(19) Represents shares of common stock underlying stock options granted to
Mr. Harrod by the Company in his capacity as an officer of the Company.
Mr. Harrod resigned his management position effective February 28,
2001.
45
STOCK OPTIONS
The following table sets forth certain information concerning options
granted during the year ended December 31, 2001 to the individuals listed in the
Summary Compensation Table pursuant to the Company's 1998 Stock Option Plan (the
"1998 Plan"). The Company has no outstanding stock appreciation rights and
granted no stock appreciation rights during the year ended December 31, 2001.
Option Grants in Last Fiscal Year
Individual Grants
---------------------------------------------------------------------
Potential Realizable Value
at Assumed
Number of Percent of Annual Rates of
Securities Total Options Exercise of Stock Price Appreciation
Underlying Granted to Base for Option Term(5)
Options Employees in Price Expiration ---------------------------
Name Granted (#) Fiscal Year(4) ($/Share) Date 5% ($) 10% ($)
---- ---------------- -------------------- ------------- --------------- ---------------------------
(a) (b) (c) (d) (e) (f) (g)
Shelby T. Brewer........ 200,000(1) 21.74% 0.28 12/14/08 -0- 11,437
James M. DeAngelis...... 300,000(2) 32.61% 0.28 12/14/08 -0- 17,156
O. Mack Jones........... 100,000(3) 10.87% 0.28 12/14/08 -0- 5,719
(1) Options to purchase 200,000 shares of common stock were issued on
March 9, 2001 of which 100% vested upon issuance.
(2) Options to purchase 300,000 shares of common stock were issued on
March 9, 2001 of which 100% vested upon issuance.
(3) Options to purchase 100,000 shares of common stock were issued on
March 9, 2001 of which 100% vested upon issuance.
(4) Percentages based on 920,000 stock options granted (the 1998 Plan)
during the year ended December 31, 2001.
(5) The closing price for the Company's common stock on December 31,
2001 was $0.13. The closing price is used for all the subsequent
stock appreciation calculations.
46
The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the 1998
Plan at December 31, 2001 by the individuals listed in the Summary Compensation
Table.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares Value at Fiscal Year-End(#) at Fiscal Year-End($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($)(1) Un-exercisable Un-exercisable(2)
----------------------------------- ------------------ --------------- ------------------------------ --------------------------
(a) (b) (c) (d) (e)
Shelby T. Brewer................ -0- -0- 840,000 / -0- -0- /-0-
Paul E. Hannesson............... -0- -0- 1,147,500/ 1,000,000 -0- /-0-
James M. DeAngelis.............. -0- -0- 681,250 / -0- -0- / -0-
O. Mack Jones................... -0- -0- 437,500/ -0- -0- / -0-
Peter E. Harrod................. -0- -0- 353,000 / 102,000 -0- / -0-
(1) Represents the difference between the last reported sale price of
the Common Stock on December 31, 2001 ($0.13), and the exercise
price of the option ($0.28 to $0.688) multiplied by the applicable
number of options exercised.
(2) Represents the difference between the exercise price and the
closing price on December 31, 2001, multiplied by the applicable
number of securities.
EMPLOYMENT AGREEMENTS
William J. Russell and Tamie P. Speciale, former owners of DRM, entered
into employment agreements with DRM for a term expiring on August 31, 2005.
Pursuant to such employment agreement, Mr. Russell and Ms. Speciale agreed to
devote their business and professional time and efforts to the business of DRM
as senior executive officers. The employment agreements provide that Mr. Russell
and Ms. Speciale, each shall receive, among other things, a base salary at an
annual rate of $262,500 through December 31, 2001, and will receive not less
than $275,000 through December 31, 2002 and not less than $290,000 through
December 31, 2003, for services rendered to DRM and certain of its affiliates,
including the Company.
The Company has no other employment contracts.
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
47
December 31, 2001 were Herbert A. Cohen (Chairman), David L. Mitchell, Edward L.
Palmer and William R. Toller. Mr. Mitchell served as a consultant to the Company
from July 15, 1997 to August 14, 1998, and received compensation in the amount
of $10,000 per month for services rendered to the Company in such capacity.
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 Herbert A. Cohen (Chairman), David L. Mitchell, Edward L. Palmer and
William R. Toller at December 31, 2001, all of whom 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. Cohen, Mr. Mitchell and Mr. Toller
in their capacities as members of the Compensation Committee at December 31,
2001, addressing the Company's compensation policies for 2001 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;
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
48
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 2001, 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, of which $160,000 was
deferred until December 31, 2001 and remains unpaid as of April 15, 2001, for
services rendered to the Company.
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 2001,
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 2000
goals and his individual contributions to the Company and its affiliates. The
Compensation Committee concluded that he had achieved his 2000 goals and had
provided a leadership role in achieving the Company's and its affiliates'
strategic priorities for 2000. 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
49
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, 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 was deferred until December 31, 2001 and
remains unpaid as of April 15, 2001.
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 2001, 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. 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 920,000, 2,243,769 and 3,259,323 stock options were granted
pursuant to the 1998 Plan in 2001, 2000 and 1999 respectively. 200,000 and
640,000 of such options were granted to Mr. Brewer in 2001 and 2000
respectively, and 400,000, 0, and 3,100,000 of such options were granted (in the
aggregate) to other individuals named in the Summary Compensation Table in 2001,
2000 and 1999 respectively. The number of stock options granted in 2001, 2000
and 1999 were determined by reference to the long-term compensation for
comparable positions at other similar public companies and based upon an
assessment of individual performance.
Impact of Section 162(m) of the Internal Revenue Code
The Compensation Committee's policy is to structure compensation awards
for executive officers that will be consistent with the requirements of Section
162(m) of the 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
50
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 2001, 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
Herbert A. Cohen (Chairman)
David L. Mitchell
Edward L. Palmer
William R. Toller
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.
51
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,
2001, 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(4) Beneficially Owned
------------------- --------------------- -------------------------
Commodore Environmental 8,382,302(5) 14.54%
Services, Inc.(1)....................
Credit Agricole Deux Sevres(2)....... 7,759,048(6) 13.43%
William J. Russell(3)................ 7,952,071(7) 13.17%
Tamie P. Speciale(3)................. 7,952,071(8) 13.17%
Bentley J. Blum(1)................... 3,742,481(9) 6.49%
(1) The address of Commodore Environmental Services, Inc., Bentley J.
Blum and Paul E. Hannesson 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 Tamie P. Speciale and William J. Russell is 132
West Pierpoint Avenue, Suite 400, Salt Lake City, Utah 84101.
(4) 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.
(5) Excludes warrants to purchase an aggregate of 17,901,988 shares of
common stock at exercise prices ranging from $1.24 per share to
$5.49 per share. See "Market for Registrant's Common Equity and
Related Stockholder Matters--Recent Sales of Unregistered
Securities" and "Certain Relationships and Related Transactions."
(6) 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
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.
(7) Consists of (i) 6,960,000 shares of our common stock issued to Mr.
William J. Russell and Nancy E. Russell with joint tenancy and
rights of survivorship, by the company in connection with our
acquisition of 81.0% of DRM; (ii) 300,000 shares of our common
stock underlying currently exercisable employee stock options
granted to Mr. Russell at an exercise price of $1.125 per share;
and (iii) 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 Mr. William J. Russell and Nancy E.
52
Russell with joint tenancy and rights of survivorship, by the
Company in connection with our acquisition of 81.0% of DRM.
(8) Consists of (i) 6,960,000 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 our
acquisition of 81.0% of DRM; (ii) 300,000 shares of our common
stock underlying currently exercisable employee stock options
granted to Ms. Speciale at an exercise price of $1.125 per share;
and (iii) 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 our acquisition of 81.0% of DRM.
(9) Consists of: (i) 105,000 shares of the Company common stock
underlying currently exercisable options granted to Mr. Blum by
the Company under the Plan; and (ii) 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 March 15, 2001, 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.
53
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of common stock as of April 15, 2002 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
Name and Address of Number of Shares Shares of Common Stock
Beneficial Owner(1) Beneficially Owned(4) Beneficially Owned
------------------------------------------------ --------------------------------- --------------------------------------
Commodore Environmental
Services, Inc........................ 8,456,677(5) 14.54%
Credit Agricole(2) .................. 7,759,048(6) 13.43%
William J. Russell(3)................ 7,600,000(7) 13.17%
Tamie P. Speciale(3)................. 7,600,000(8) 13.17%
Bentley J. Blum...................... 3,742,481(9) 6.55%
Shelby T. Brewer, PhD................ 1,985,167(11) 3.42%
Paul E. Hannesson.................... 1,491,978(10) 2.59%
James M. DeAngelis................... 734,679(12) 1.30%
Herbert A. Cohen..................... 141,000(16) *
David L. Mitchell.................... 140,000(17) *
Edward L. Palmer..................... 140,000(18) *
William R. Toller.................... 140,000(19) *
All executive officers and Directors as a 10,196,025 17.62%
group (10 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 Tamie P. Speciale and William J. Russell is 132
West Pierpoint Avenue, Suite 400, Salt Lake City, Utah 84101.
(4) 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.
(5) Excludes warrants to purchase an aggregate of 19,185,171 shares of
common stock at exercise prices ranging from $1.17 per share to
$5.11 per share. See "Market for Registrant's Common Equity and
Related Stockholder Matters--Recent Sales of Unregistered
Securities" and "Certain Relationships and Related Transactions."
54
(6) 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)
(7) Consists of (i) 6,960,000 shares of our common stock issued to Mr.
William J. Russell and Nancy E. Russell with joint tenancy and
rights of survivorship, by the Company in connection with our
acquisition of 81.0% of DRM; (ii) 300,000 shares of our common
stock underlying currently exercisable employee stock options
granted to Mr. Russell at an exercise price of $1.125 per share;
and (iii) 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 Mr. William J. Russell and Nancy E.
Russell with joint tenancy and rights of survivorship, by the
Company in connection with our acquisition of 81.0% of DRM.
(8) Consists of (i) 6,960,000 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 our
acquisition of 81.0% of DRM; (ii) 300,000 shares of our common
stock underlying currently exercisable employee stock options
granted to Ms. Speciale at an exercise price of $1.125 per share;
and (iii) 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 our acquisition of 81.0% of DRM.
(9) Consists of: (i) 140,000 shares of the Company's common stock
underlying currently exercisable options granted to Mr. Blum by
the Company under the Plan; and (ii) 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 March 15, 2002, 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: (i) 830,000 shares of common stock; (ii) 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 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 1,000,000 shares of
Environmental common stock owned by each of Jon Paul and Krista
Hannesson, the adult children of Mr. Hannesson. Mr. Hannesson
disclaims any beneficial interest in the shares of 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.
(11) Consists of: (i) 3,500 shares of common stock; (ii) 840,000 shares
of common stock underlying currently exercisable stock options
granted to Mr. Brewer by the Company under the 1998 Plan; (iii)
100,000 shares of common stock underlying a currently exercisable
2-year warrant at an exercise price of $1.06 per share granted to
SB Enterprises by the Company in connection with the Brewer Note;
and (iv) 1,041,667 shares of our 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.
(12) Consists of (i) 16,500 shares of common stock; (ii) 681,250 shares
of common stock underlying currently exercisable stock options
granted to Mr. DeAngelis by the Company under the Company's 1998
Plan; and (iii) Mr. DeAngelis' indirect beneficial ownership of
common stock based upon his ownership of 580,000 shares of
Environmental.
55
(13) Consists of 353,000 shares of common stock underlying currently
exercisable stock options granted to Mr. Harrod by the Company
under the Company's 1998 Plan. (Disclose on Table)
(14) Consists of (i) 90,000 shares of common stock; and (ii) 100,000 of
common stock underlying currently exercisable stock options
granted to Mr. Ingram by the Company under the Company's 1998
Plan. (Disclose on Table)
(15) All stock options granted to Mr. Adelman by the Company under the
Company's 1998 Plan have expired by their terms and conditions.
(16) Consists of (i) 1,000 shares of common stock; and (ii) 140,000
shares of common stock underlying currently exercisable stock
options granted to Mr. Cohen 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. Mitchell 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. Palmer by the Company
under the Company's 1998 Plan.
(19) Consists of 140,000 shares of common stock underlying currently
exercisable stock options granted to Mr. Toller by the Company
under the Company's 1998 Plan.
Messrs. Blum and Hannesson are brothers-in-law.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-------- -----------------------------------------------
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
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%
56
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 April 1996, Bentley J. Blum personally guaranteed a $2.0 million
line of credit for the Company from a commercial bank. The initial borrowings
under the line of credit, in the approximate amount of $1.0 million, were
utilized to repay advances made by Environmental to the Company in 1996, and
Environmental, in turn, utilized such funds to repay Kraft the funds provided by
Kraft to Environmental for purposes of the advances to the Company. The Company
applied $2.0 million of the net proceeds of its IPO to repay the line of credit,
and Mr. Blum's guarantee was released at such time. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Upon completion of the IPO in June 1996, Environmental acquired from
Albert E. Abel the remaining 9.95% of the outstanding shares of common stock of
Commodore Laboratories, Inc. and contributed such shares to the Company for no
additional consideration. To acquire the remaining shares of Commodore
Laboratories, Inc., Environmental paid Mr. Abel the sum of $750,000 in cash, and
issued a ten-year, 8% promissory note to Mr. Abel in the principal amount of
$2,250,000, payable as to interest only until the maturity of the note on the
tenth anniversary of the date of issuance. Simultaneously, the Company settled
all outstanding obligations for accrued compensation payable to Mr. Abel and for
amounts receivable by the Company from Mr. Abel, and the net payment to Mr. Abel
arising therefrom approximated $120,000. The Company paid such amount to Mr.
Abel from the proceeds of its IPO.
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."
57
In December 1996, as part of a corporate restructuring to consolidate
all of its current environmental technology businesses within the Company,
Environmental transferred to the Company all of the capital stock of Separation
and CFC Technologies. In addition, Environmental assigned to the Company notes
aggregating $976,200 at December 2, 1996, representing advances previously made
by Environmental to Separation. Such advances have been capitalized by the
Company as its capital contribution to Separation. In consideration for such
transfers, the Company paid Environmental $3.0 million in cash and issued to
Environmental a warrant expiring December 2, 2003 to purchase 7,500,000 shares
of the Company's common stock at an exercise price of $15.00 per share, valued
at $2.4 million. Such warrant was subsequently amended to, among other things,
reduce the exercise price thereof to $10.00 per share. See "--February 1998
Intercompany Note" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
On August 30, 2000, the Company entered into a stock purchase agreement
with DRM and its two shareholders, William J. Russell and Tamie P. Speciale.
Under terms of the agreement, the Company purchased 81% of the issued
and outstanding capital stock of DRM from the two shareholders. The
consideration to these shareholders (and their designees) consisted of:
a) 10,500,000 shares of common stock, of which 9,500,000 subject to a
one-year option to repurchase any or all shares, which expired on
August 30, 2001.
b) 5 million shares of common stock in exchange for an option to
purchase the remaining 19% interest in DRM at the end of five
years. The option price will be based upon the relative appraised
values of DRM and the Company at the end of the five-year period.
c) Five-year warrants to purchase up to an aggregate of 1,000,000
shares of the Company's 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. The Company has agreed that if DRM has
not distributed to these shareholders a total of $10.0 million in
cash in earn-out payments by December 31, 2003, the Company will
pay to the two shareholders the difference between $10.0 million
and the actual cash distributed. The Company may, in its sole
discretion, pay such difference by issuing shares of its common
stock.
The Company has an irrevocable obligation to repurchase from the former
shareholders of DRM, by May 16, 2002, that number of 9.5 million shares of the
Company's common stock (at a per share price equal to the greater of $1.50 or
the closing price of our common stock as of 30 days prior to purchase) as shall
be necessary to provide the holders of such shares with a total of $14.5
million. The original repurchase obligation deadline of August 30, 2001,
subsequently extended through May 16, 2002 by a series of extensions (initially
extended to September 29, 2001, further extended to October 29, 2001, further
extended to January 16, 2002 and subsequently extended until May 16, 2002). As
partial security for the payment of such obligation, all of the shares of DRM
common stock owned by the Company have been pledged to Messrs. William J.
Russell and Tamie P. Speciale, the former sole stockholders of DRM. In the event
58
the Company is unable to make such $14.5 million payment when due, the pledgees
may foreclose on the DRM stock, and the Company would lose its entire equity
ownership in the DRM subsidiary.
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. 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 is 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. The remaining principal balance of $250,000 is
outstanding as of April 15, 2002. The Company has not been notified of the
holder's intent to declare a default on the Restated Brewer Note.
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 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 May 31, 2002.
Effective April 5, 2001, the Company issued warrants to purchase
500,000 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.
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.
On May 23, 2001, a private investor purchased $250,000 of the Company's
common stock at the market price. The Company issued to 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 to 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.
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
59
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
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 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 May
13, 2002.
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 1999 and 2000, although, insurance
costs were allocated between Affiliated Parties when it was beneficial to insure
the family of companies under one policy.
SALE OF COMPANY COMMON STOCK BY ENVIRONMENTAL
In February 1998, Environmental sold (i) 1,381,692 shares of common
stock of the Company and (ii) three-year warrants to purchase an aggregate of
150,000 shares of Company common stock at an exercise price equal to $6.00 per
share, for an aggregate purchase price of $6.0 million (the "First Tranche
Sale") in a private placement (the "Environmental Private Placement") to certain
"accredited investors" as defined in Rule 501 of the Securities Act. After
deduction of fees and transaction costs associated with the First Tranche Sale
totaling approximately $550,000, Environmental received aggregate net proceeds
of approximately $5,450,000 from the First Tranche Sale. The shares of the
Company's common stock issued and to be issued to the investors in connection
with the Environmental Private Placement have been and will be issued from the
account of Environmental, which, immediately prior to the First Tranche Sale,
owned approximately 52% of the outstanding shares of the Company's common stock.
60
As of March 31, 1999, Environmental owned approximately 35% of the outstanding
shares of Company common stock. [Update]
Pursuant to the terms of the Environmental Private Placement,
Environmental was required to issue up to a maximum of 1,618,308 additional
shares of the Company's common stock to the investors, for no additional
consideration, in the event that 90% of the average closing bid price of the
common stock for a certain period of time is less than the $4.3425 per share
purchase price of the common stock sold in the First Tranche Sale. Environmental
was required to issue an additional 1,400,981 shares of the Company's stock in
satisfaction of the price-reset provisions. (Verify whether these shares have
been issued and any effect or beneficial ownership calculations) Environmental
will, for a certain period of time, have the right and option (but not the
obligation) to require the investors to purchase (i) an aggregate amount of
additional shares of the Company's common stock equal to 4,000,000 divided by
90% of the average closing price per share of the common stock for the five
trading days immediately prior to the closing date of such sale and (ii)
warrants to purchase an aggregate of 100,000 shares of the Company's common
stock at an exercise price per share equal to the greater of $6.00 or 125% of
the per share purchase price of the shares of the Company's common stock sold
pursuant to (i) above, for an aggregate purchase price of $4.0 million (the
"Second Tranche Sale"). As in the case of the First Tranche Sale, Environmental
may be required to issue additional shares of the Company's common stock to the
investors in connection with the Second Tranche Sale, for no additional
consideration, in the event that 90% of the average closing bid price of the
common stock for a certain period of time is less than the per share purchase
price of the common stock sold in the Second Tranche Sale.
Pursuant to the terms of the Environmental Private Placement, if during
a certain period of time Environmental sells, or the Company issues, any shares
of common stock ("First Future Shares") at a price per share that is less than
the per share purchase price of the common stock sold in the First Tranche Sale
or Environmental sells, or the Company issues, any shares of common stock
("Second Future Shares") at a price per share that is less than the per share
purchase price of the common stock sold in the Second Tranche Sale,
Environmental will issue to the investors, for no additional consideration, a
number of additional shares of the Company's common stock equal to (a) with
respect to First Future Shares, an amount equal to the difference between (i)
6,000,000 divided by the price at which the First Future Shares were sold or
issued and (ii) 1,381,692, and (b) with respect to Second Future Shares, an
amount equal to the difference between (i) 4,000,000 divided by the price at
which the Second Future Shares were sold or issued and (ii) the amount equal to
the number of shares of common stock sold in the Second Tranche Sale.
Notwithstanding the foregoing, the terms "First Future Shares" and "Second
Future Shares" do not include any shares of common stock which may be issued in
the future upon conversion or exercise of, or pursuant to the terms of any
agreement entered into by the Company or Environmental in respect of, securities
of the Company and/or Environmental which have been issued prior to February 9,
1998.
The Company has agreed to file registration statements (the
"Registration Statements") on Form S-3, or other applicable form of registration
statement, under the Securities Act covering all of the shares of common stock
that have been and may be issued to the investors in the Environmental Private
Placement, and to keep such Registration Statements continuously effective under
the Securities Act for a period of two years after their respective effective
dates or such earlier date when all shares covered by the Registration
Statements have been sold or may be sold without volume restrictions under the
Securities Act (the "Effective Period").
61
FEBRUARY 1998 INTERCOMPANY NOTE
Upon receipt of the net proceeds of the Environmental Private
Placement, Environmental provided a $5,450,000 uncollateralized loan to the
Company, evidenced by a promissory note (the "Intercompany Note"). Pursuant to
the terms of the Intercompany Note, interest on the unpaid principal balance of
the Intercompany Note was payable at the rate of 8% per annum semi-annually in
cash. The unpaid principal amount of the Intercompany Note was due and payable,
together with accrued and unpaid interest, on the earlier to occur of (a)
December 31, 1999 or (b) the consummation of any public offering or private
placement (other than the Environmental Private Placement) of securities of the
Company with net proceeds aggregating in excess of $6.0 million, other than in
respect of working capital financing or secured financing of assets received by
the Company in the ordinary course of business from any bank or other lending
institution, provided that if such funds are raised in a private placement
during the period commencing on February 9, 1998 and ending on the last day of
the Effective Period, then the Intercompany Note was not payable unless a
Registration Statement has been effective for 75 consecutive days and is
effective on the date of such repayment. The Company used the net proceeds of
the loan solely for working capital and general corporate purposes and not for
the satisfaction of any portion of Company debt or to redeem any Company equity
or equity-equivalent securities. The Intercompany Note was fully paid off
effective September 28, 1998. See "Market for Registrant's Common Equity and
Related Stockholder Matters--Recent Sales of Unregistered Securities--February
1998 Intercompany Note" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
In connection with the loan, the Company amended and restated in its
entirety a five-year warrant to purchase 7,500,000 shares of common stock issued
to Environmental on December 2, 1996 to, among other things, reduce the exercise
price of the warrant from $15.00 per share to $10.00 per share. In addition, the
Company issued to Environmental an additional five-year warrant to purchase
1,500,000 shares of common stock at an exercise price of $10.00 per share. See
"Market for Registrant's Common Equity and Related Stockholder Matters--Recent
Sales of Unregistered Securities--February 1998 Intercompany Note."
SEPTEMBER 1997 INTERCOMPANY CONVERTIBLE NOTE
In September 1997, Environmental provided a $4.0 million
uncollateralized loan to the Company, evidenced by a convertible promissory note
(the "Convertible Note"). Pursuant to the terms of the Convertible Note, the
Company is obligated to pay Environmental interest only at the rate of 8% per
annum, payable quarterly. Unless converted into the Company's common stock at
any time, the unpaid principal amount of the Convertible Note is due and
payable, together with accrued and unpaid interest, on August 31, 2002. Payment
of principal and accrued interest under the Convertible Note is subordinated to
all other indebtedness for money borrowed of the Company. Environmental has the
right to convert the Convertible Note into shares of the Company's common stock
at a conversion price of $3.89 per share. Such conversion price was fixed at
approximately 85% of the five-day average closing bid price of the Company's
common stock ($4.575 per share) prior to August 22, 1997, the date on which the
executive committees of the respective Boards of Directors of the Company and
Environmental authorized such loan. In connection with the $4.0 million loan,
the Company issued the Environmental a five-year warrant to purchase 1,000,000
shares of the Company's common stock at an exercise price of $5.0325 per share
(approximately 110% of the $4.575 five day average closing bid price of the
Company's common stock prior to August 22, 1997).
62
In March 1998, the Company prepaid $2.0 million of the Convertible Note
by (i) paying Environmental the sum of $500,000 in cash and (ii) transferring to
Environmental the LPM Note. (?) To induce Environmental to accept the Company's
prepayment of $2.0 million of the Convertible Note (and thereby give up the
right to convert $2.0 million of the Convertible Note into the Company's common
stock), the Company issued to Environmental an additional warrant to purchase up
to 514,000 shares of the Company's common stock at an exercise price of $4.50
per share. Such exercise price was fixed at approximately 110% of the closing
sale price of the Company's common stock on February 20, 1998, the trading day
immediately prior to the date the Board of Directors of the Company approved
such prepayment. The estimated fair value of such warrant is approximately
$340,000. The remaining balance of this Intercompany Convertible Note was paid
off effective September 28, 1998. See "Transactions with Lanxide," "Market for
Registrant's Common Equity and Related Stockholder Matters--Recent Sales of
Unregistered Securities--September 1997 Intercompany Convertible Note" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SALE OF SERIES D PREFERRED STOCK BY ENVIRONMENTAL
(Did Environmental convert or sell these shares? See p. 27)
In May and August 1997, Environmental sold an aggregate of 88,000
shares of its 7% Series D Convertible Preferred Stock, par value $0.01 per
share, with a liquidation preference of $100 per share (the "Series D Preferred
Stock"), for an aggregate purchase price of approximately $7.8 million. The
Series D Preferred Stock is convertible into shares of the Company's common
stock held by Environmental, at a conversion price equal to 85% of the lower of
(a) the average of the low prices, or (b) the average of the closing bid prices
of the common stock of the Company for the previous five business days ending on
the day prior to conversion (the "Average Closing Bid Price"). The conversion
price of the Series D Preferred Stock will be equal to certain amounts set forth
in the Certificate of Designation, Rights and Preferences for the Series D
Preferred Stock if the Average Closing Bid Price of the common stock for any
consecutive 30 days is equal to or less than $2.00, provided that in no event
will the conversion price of the Series D Preferred Stock be less than $1.50. As
of December 31, 1998, the 88,000 shares of Series D Preferred Stock have been
converted into an aggregate 4,019,210 shares of the Company's common stock.
The purchasers of the Series D Preferred Stock also received five-year
warrants to purchase an aggregate of 1,175,000 shares of the Company's common
stock held by Environmental at exercise prices ranging from $5.15 per share to
$7.14 per share. Such exercise prices were reset on August 18, 1998 to an
exercise price of $0.825. In addition, if the common stock trades at less than
50% of the August 17, 1998 closing bid price for any 10 consecutive trading
days, the exercise price is subject to further reset (on one occasion only) to
50% of such August 17, 1998 closing bid price. In addition, affiliates of the
finder received warrants to purchase an aggregate of 85,000 shares of common
stock from Environmental at exercise prices ranging from $5.15 per share to
$7.14 per share. The Company has an effective registration statement on file
with the Commission covering the shares of common stock into which the Series D
Preferred Stock are convertible, as well as the 1,260,000 shares of common stock
transferable by Environmental upon exercise of the foregoing warrants.
LICENSE OF SET TECHNOLOGY
As a result of its acquisition of the capital stock of Commodore Labs,
the Company acquired all patents, discoveries, technology and other intellectual
property in connection with the SET process, which it later transferred to
Solution effective December 1, 1996. Environmental licenses from Solution the
63
exclusive worldwide right with the right to sublicense, to make, use, sell and
exploit, itself or jointly with other third parties, for the life of all patents
now or hereafter owned by Solution, the SET process and all related technology
underlying such patents and intellectual property in all domestic and
international commercial and industrial applications, in connection with the
destruction of CFCs and other ozone-depleting substances (the "CFC Business");
provided that such license expressly limits the rights of the licensee(s) and
others who may be sub-licensees or users of the Company's patents and
technologies to the CFC Business.
FUTURE TRANSACTIONS
In June 1996, the Company's Board of Directors adopted a policy whereby
any future transactions between the Company and any of its subsidiaries,
affiliates, officers, directors and principal stockholders, or any affiliates of
the foregoing, will be on terms no less favorable to the Company than could
reasonably be obtained in "arm's-length" transactions with independent
third-parties, and any such transactions will also be approved by a majority of
the Company's disinterested non-management Directors.
64
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
-------- ------------------------------------------------------
FORM 10-K
---------
The following documents are filed as part of this Annual Report:
Page No.
Financial Statements.
Commodore Applied Technologies, Inc.
Independent Auditor's Report...................................................... F-1
Consolidated Balance Sheet as of December 31, 2001 and 2000....................... F-2
Consolidated Statements of Operations for the years ended December 31, 2002, 2000
and 1999.......................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.................................................. F-7
Notes to Consolidated Financial Statements........................................ F-11
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.
65
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)
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)
66
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)
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)
67
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.
10.31 Memorandum of Understanding between Lockheed Martin Advanced
Environmental Systems, Inc. and Advanced Sciences.
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)
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)
68
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)
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.
69
*10.78 Warrant to purchase 222,222 shares of common stock of the
Company issued to Klass Partners.
*10.79 Warrant to purchase 166,667 shares of common stock of the
Company issued to Mathers Associates.
*10.80 Warrant to purchase 41,666 shares of common stock of the
Company issued to Jon Paul Hannesson.
*10.81 Warrant to purchase 41,666 shares of common stock of the
Company issued to Krista S. Hannesson.
*10.82 Warrant to purchase 27,778 shares of common stock of the
Company issued to Stephen A. Weiss.
*10.83 Securities Purchase Agreement dated May 22, 2001, between
Commodore Applied Technologies, Inc., and Dr. Marion Dana.
*10.84 Registration Rights Agreement dated May 22, 2001, between
Commodore Applied Technologies, Inc., and Dr. Marion Dana.
*10.85 Warrant to purchase 500,000 shares of common stock of the
Company issued to Dr. Marion Dana.
*10.86 Secured Promissory Note, dated June 13, 2001, issued to
Milford Capital & Management in the principal amount of
$500,000.
*10.87 Secured Promissory Note, dated June 13, 2001, issued to the
Shaar Fund, Ltd. in the principal amount of $500,000.
*10.88 Registration Rights Agreement dated June 13, 2001, between
Commodore Applied Technologies, Inc., and Milford Capital &
Management.
*10.89 Registration Rights Agreement dated June 13, 2001, between
Commodore Applied Technologies, Inc., and the Shaar Fund,
Ltd.
*10.90 Warrant to purchase 166,667 shares of common stock of the
Company issued to Milford Capital & Management.
*10.91 Warrant to purchase 166,667 shares of common stock of the
Company issued to the Shaar Fund, Ltd.
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.
*10.95 Forbearance Agreement dated January 11, 2002, between
Commodore Applied Technologies, Inc., and the Shaar Fund,
Ltd.
*10.96 Forbearance Agreement dated February 13, 2002, between
Commodore Applied Technologies, Inc., and Milford Capital &
Management.
*10.97 Forbearance Agreement dated February 13, 2002, between
Commodore Applied Technologies, Inc., and the Shaar Fund,
Ltd.
*10.98 Forbearance Agreement dated March 13, 2002, between
Commodore Applied Technologies, Inc., and Milford Capital &
Management.
70
*10.99 Forbearance Agreement dated March 13, 2002, between
Commodore Applied Technologies, Inc., and the Shaar Fund,
Ltd.
*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.
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)
* 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).
(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).
71
(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).
Reports on Form 8-K:
--------------------
1. The Company filed a Current Report on Form 8-K, dated January 18,
2001, with respect to a press release regarding the appointment of
Shelby T. Brewer as our new President and Chief Executive Officer
and the resignation of Paul E. Hannesson as President and Chief
Executive Officer.
2. The Company filed a Current Report on Form 8-K, dated September
26, 2001, regarding a 30-day extension to its repurchase
obligation under the Stock Purchase Agreement with Dispute
Resolution Management, Inc., until October 29, 2001.
3. The Company filed a Current Report on Form 8-K, dated October 31,
2001, regarding an 80-day extension to its repurchase obligation
under the Stock Purchase Agreement with Dispute Resolution
Management, Inc., until January 16, 2002.
4. The Company filed a Current Report on Form 8-K, dated January 16,
2002, regarding a 120-day extension to its repurchase obligation
under the Stock Purchase Agreement with Dispute Resolution
Management, Inc., until May 16, 2002.
72
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, 2002 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, 2002
----------------------- Executive Officer (principal
Shelby T. Brewer executive officer)
/s/ James M. DeAngelis Senior Vice President and Chief April 15, 2002
----------------------- Financial Officer (principal
James M. DeAngelis financial officer)
/s/ Bentley J. Blum Director April 15, 2002
-----------------------
Bentley J. Blum
/s/ Herbert A. Cohen Director April 15, 2002
-----------------------
Herbert A. Cohen
/s/ Paul E. Hannesson Director April 15, 2002
-----------------------
Paul E. Hannesson
/s/ David L. Mitchell Director April 15, 2002
-----------------------
David L. Mitchell
/s/ Edward L. Palmer Director April 15, 2002
-----------------------
Edward L. Palmer
/s/ William R. Toller Director April 15, 2002
-----------------------
William R. Toller
73
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 2001 fiscal year.
74
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2001 and 2000
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Index
--------------------------------------------------------------------------------
Page
----
Commodore Applied Technologies, Inc.
Independent Auditors' Report F-1
Consolidated Balance Sheet as of December 31, 2001 and 2000 F-2
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-9
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, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2001, 2000, and 1999. 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, 2001 and 2000, and the
results of their operations and their cash flows for the years ended December
31, 2001, 2000, and 1999, 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 22, 2002
F-1
-----------------------------------------------------------------------------------------------------------
2001 2000
------------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 1,271 $ 1,980
Accounts receivable, net 817 4,536
Prepaid assets and other current assets 373 625
------------------------------------
Total current assets 2,461 7,141
Property and equipment, net 724 1,983
Intangible assets:
Goodwill, net of accumulated amortization of $1,686
and $419, respectively 23,409 24,676
Covenants not to compete, net of accumulated
amortization of $700 and $175, respectively 1,925 2,450
Patents and completed technology, net of accumulated
amortization of $1,375 and $613, respectively 100 862
------------------------------------
Total intangible assets 25,434 27,988
Other assets 36 361
------------------------------------
Total assets $ 28,655 $ 37,473
------------------------------------
------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2001 and 2000
(Amounts in thousands except shares)
------------------------------------------------------------------------------------------------------------
2001 2000
----------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,422 $ 2,490
Related party payable 160 247
Current portion of long-term debt 2,650 2,650
Line of credit 108 1,459
Notes payable 15,655 14,682
Other accrued liabilities 2,037 2,489
----------------------------------
Total current liabilities 22,032 24,017
Long-term debt 4,430 5,182
----------------------------------
Total liabilities 26,462 29,199
Minority interest in subsidiary 622 419
Commitments and contingencies - -
Stockholders' Equity:
Convertible Preferred Stock, Series E and F, par value
$.001 per share, aggregate liquidation value of
$5,403,000 and $7,332,000 at December 31, 2001 and
2000, respectively, 12% cumulative dividends, 601,700
shares authorized, 410,200 shares and 556,700 shares
issued and outstanding at December 31, 2001 and 2000,
respectively - 1
Common Stock, par value $.001 per share, 125,000,000
shares authorized, 55,417,354 and 48,330,385 issued
and outstanding, at December 31, 2001 and 2000,
respectively 55 48
Additional paid-in capital 66,759 66,495
Accumulated deficit (65,243) (58,689)
----------------------------------
Total stockholders' equity 1,571 7,855
----------------------------------
Total liabilities and stockholders' equity $ 28,655 $ 37,473
----------------------------------
------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-2
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended December 31, 2001, 2000 and 1999
(Amounts in thousands except per share data)
----------------------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------
Revenue $ 10,551 $ 20,631 $ 18,147
---------------------------------------
Costs and expenses:
Cost of revenues 3,369 14,452 16,127
Research and development 423 993 1,145
General and administrative 6,643 6,989 4,037
Depreciation and amortization 2,491 1,471 696
Impairment of machinery 776 - -
Impairment of patents 627 - -
Impairment of goodwill - 6,586 -
Minority interest 203 341 -
---------------------------------------
Total costs and expenses 14,532 30,832 22,005
---------------------------------------
Loss from operations (3,981) (10,201) (3,858)
Interest income 76 67 39
Interest expense (2,354) (1,307) (166)
Equity in losses of unconsolidated subsidiary (295) - -
---------------------------------------
Loss before income taxes (6,554) (11,441) (3,985)
Income tax benefit - - -
---------------------------------------
Net loss $ (6,554) $ (11,441) $ (3,985)
---------------------------------------
Net loss per share - basic and diluted $ (.13) $ (.34) $ (.16)
---------------------------------------
Number of weighted average shares outstanding 53,241 35,866 24,819
---------------------------------------
----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-3
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 2001, 2000, and 1999
(Amounts in thousands except shares)
-----------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------------------------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
--------------------------------------------------------------------------------
Balance January 1, 1999 51,489 $ - 23,702,263 $ 24 $ 55,147 $ (43,263)
Conversion of series B, C, and D
preferred stock into common stock (51,489) - 7,258,533 7 (7) -
Issuance of Series E Convertible
preferred stock at redemption value 335,000 - - - 2,030 -
Warrants issued in connection with
Series E convertible preferred stock - - - - 60 -
Preferred stock dividends - - - - (63) -
Exercise of stock options - - 2,142 - 1 -
Net loss - - - - - (3,985)
--------------------------------------------------------------------------------
Balance, December 31, 1999 335,000 - 30,962,938 31 57,168 (47,248)
Issuance of Series F convertible
preferred stock at redemption value 266,700 1 - - 1,770 -
Conversion of series E and F
preferred stock into common stock (45,000) - 440,581 - - -
Warrants issued in compensation
with short term note payable
to affiliated party - - - 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 -
Preferred stock dividends - - - - (634) -
-----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-4
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Continued
-----------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------------------------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
--------------------------------------------------------------------------------
Exercise of stock options - - 1,326,866 1 596 -
Net loss - - - - - (11,441)
-----------------------------------------------------------------------------------
Balance, December 31, 2000 556,700 1 48,330,385 48 66,495 (58,689)
Conversion of Series E and F
Preferred Stock into common
stock (146,500) (1) 4,072,225 4 (3) -
Sale of common stock for cash - - 1,973,077 2 146 -
Sale of warrants for cash - - - - 105 -
Conversion of debt to common
stock - - 1,041,667 1 249 -
Issuance of warrants in
financing agreements - - - - 175 -
Preferred stock dividends - - - - (408) -
Net loss - - - - - (6,554)
--------------------------------------------------------------------------------
Balance, December 31, 2001 410,200 $ - 55,417,354 $ 55 $ 66,759 $ (65,243)
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-5
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31, 2001, 2000, and 1999
(Amounts in thousands, except shares and per share data)
----------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------
Cash flows from operating activities:
Net loss $ (6,554) $ (11,441) $ (3,985)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and impairment 2,491 1,471 696
Loss on disposition of property and equipment - 12 -
Interest expense from common stock 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 -
Minority interest in subsidiary income 203 341 -
Amortization of debt discount 1,903 718 -
Changes in assets and liabilities:
Accounts receivable, net 3,719 (827) (410)
Restricted cash - 21 -
Prepaid assets 208 414 (95)
Accounts payable and accrued liabilities (1,928) 261 889
--------------------------------------------
Net cash provided by (used in)
operating activities 1,907 (2,002) (2,905)
--------------------------------------------
Cash flows from investing activities:
Equipment purchased or constructed (51) (114) (353)
Patents acquired - (36) (113)
Purchase of Dispute Resolution Management, Inc.,
net of cash acquired - 508 -
Contribution from minority interest in DRM - 78 -
Advances to related parties, net (87) (97) (135)
Contributions to affiliate - (325) -
--------------------------------------------
Net cash (used in) provided by
investing activities (138) 14 (601)
--------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants 253 597 1
Proceeds from sale of preferred stock - 1,771 2,090
Preferred stock dividends - (214) (63)
(Repayments)/borrowings under line of credit (1,351) (256) 587
Borrowings on debt and warrants 1,000 1,000 1,000
Payments on long term debt and notes payable (2,380) (727) (89)
--------------------------------------------
Net cash (used in) provided by
financing activities (2,478) 2,171 3,526
--------------------------------------------
(Decrease) increase in cash and cash equivalents (709) 183 20
Cash and cash equivalents, beginning of year 1,980 1,797 1,777
--------------------------------------------
Cash and cash equivalents, end of year $ 1,271 $ 1,980 $ 1,797
--------------------------------------------
----------------------------------------------------------------------------------------------------------
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
Continued
----------------------------------------------------------------------------------------------------------
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Interest $ 281 $ 158 $ 166
--------------------------------------------
Income taxes $ - $ - $ -
--------------------------------------------
Non-Cash Investing and Financing Activities:
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
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
--------------
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
2000 - Continued
----
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 and prepaid assets with notes
payable and long-term debt of $459.
o The Company accrued $420 of unpaid dividends to holders of
Preferred Stock.
1999
----
In 1999, 51,489 shares of Series B, C and D Preferred Stock held by Commodore
with an aggregate value of $2,001 were converted into common stock (Note 12).
--------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements. F-8
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(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, Applied provides a
package of services to help companies recover financial
settlements from insurance policies to defray costs
associated with environmental liabilities.
Principles of Consolidation
The consolidated financial statements include the
accounts of Applied and its majority-owned subsidiaries.
Dispute Resolution Management, Inc. is included in the
consolidated operations from August 30, 2000 (date of
acquisition) (see Note 6). 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. During the year ended December 31, 2001, the joint
venture was dissolved, and the Company's share of the
related loss was included in losses of unconsolidated
subsidiaries.
--------------------------------------------------------------------------------
F-9
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Cash and Cash Equivalents
Significant Applied considers cash and highly liquid debt
Accounting instruments with original maturities of three months or
Policies less at the date of purchase to be cash equivalents.
Continued
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.
Sales to major customers which exceeded 10 percent of
revenues are as follows:
Years Ended December 31,
------------- -------------- ---------------
2001 2000 1999
------------- -------------- ---------------
Customer A $ 3,252 $ 1,476 $ 3,692
Customer B $ 1,148 $ 742 $ 1,006
Customer C $ - $ 11,618 $ 12,287
The contract with Customer C ended on December 31, 2000.
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, Applied is not permitted to
service any contracts which utilize Applied's separation
and destruction technology related to the treatment of
PCB's. Presently, there is no information to suggest
that the EPA will not renew Applied's permit or grant
them the requested revision.
--------------------------------------------------------------------------------
F-10
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Property and Equipment
Significant Property and equipment are recorded at cost.
Accounting Improvements which substantially increase the useful
Policies lives of assets are capitalized. Maintenance and repairs
Continued 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
Goodwill represents the fair value of securities issued
plus the fair value of net liabilities assumed in
connection with the acquisition of DRM (see Note 6).
Goodwill is being amortized on a straight-line basis
over its estimated 20 year life. Completed technology
represents certain technology and related patents
acquired in connection with the purchase of third-party
interests in Commodore Laboratories, Inc. ("Labs").
Completed technology and patents are being amortized on
a straight-line basis over their estimated 7 and 17 year
lives, respectively. Covenants to compete are amortized
over 5 years which is the life of the covenant (see Note
6).
Impairment of Long-Lived Assets
Applied reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be
recoverable through undiscounted future cash flows. If
it is determined that an impairment loss has occurred
based on expected cash flows, such loss is recognized in
the Statement of Operations.
During the year ended December 31, 2001 the Company
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.
--------------------------------------------------------------------------------
F-11
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Revenue Recognition
Significant Substantially all of Applied's revenues are generated by
Accounting its subsidiaries, CASI and DRM. CASI revenues consist of
Policies engineering and scientific services performed for the
Continued 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.
DRM revenue is recognized on retainers according to the
terms of each contract. Revenue is recognized on
contingent success fees as each dispute with each
insurer is resolved and a binding settlement agreement
has been executed by all parties.
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-12
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Stock-Based Compensation
Significant Compensation costs attributable to stock option and
Accounting similar plans are recognized based on any difference
Policies between the quoted market price of the stock on the date
Continued of the grant over the amount the employee is required to
pay to acquire the stock (in the intrinsic value method
under Accounting Principles Board Opinion 25). SFAS 123,
"Accounting for Stock-Based Compensation," requires
companies electing to continue to use the intrinsic
value method to make pro forma disclosures of net income
and earnings per share as if the fair value based method
of accounting had been applied. Applied has adopted the
disclosure only provisions of SFAS 123.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by
reference to various market data and other valuation
techniques as appropriate. Accounts receivable, notes
receivable, cash equivalents, long term debt and the
line of credit are financial instruments that are
subject to possible material market variations from the
recorded book value. The Company 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, 2001 and 2000.
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.
--------------------------------------------------------------------------------
F-13
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
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, 2001, 2000 and 1999. Applied also has a
working capital deficit at December 31, 2001. The
consolidated financial statements do not include any
adjustments that might be necessary should Applied be
unable to continue as a going concern.
Applied's continuation as a going concern is dependent
upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis, to obtain
additional financing as may be required, and ultimately
to attain profitability. Potential sources of cash
include new contracts, external debt, the sale of new
shares of Company stock or alternative methods such as
mergers or sale transactions. No assurances can be
given, however, that the Company will be able to obtain
any of these potential sources of cash.
3. Receivables The components of Applied's trade receivables are as
follows as of December 31, 2001 and 2000:
2001 2000
--------------------------------
Contract receivables:
Amounts billed $ 1,202 $ 4,807
Retainages 26 25
--------------------------------
1,228 4,832
Less: Allowance for doubtful accounts
and potential disallowances (411) (296)
--------------------------------
Total receivables, net $ 817 $ 4,536
--------------------------------
--------------------------------------------------------------------------------
F-14
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
3. Receivables The balances billed but not paid by customers pursuant
Continued to retainage provisions are due upon completion and
acceptance of the contracts.
Substantially all of CASI trade receivables are pledged
to collateralize its line of credit (see Note 8).
4. Property Property and equipment consist of the following:
and
Equipment Average December 31
Useful Life 2001 2000
--------------------------------------
Machinery and equipment 3 $ 599 $ 2,386
Furniture and fixtures 5 469 417
Computer equipment 4 882 944
Leasehold improvements 5 19 19
------------------------
1,969 3,766
Less: accumulated depreciation
and amortization (1,245) (1,783)
------------------------
Total property and equipment $ 724 $ 1,983
------------------------
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 has no obligation to fund these 2000 and 1999
losses. During the year ended December 31, 2001, the
joint venture was dissolved, and the Company's share of
the related loss to dissolve the joint venture was
included in losses of unconsolidated subsidiaries. The
Company recorded a loss of $295, for the year ended
December 31, 2001, from its investment in the joint
venture.
--------------------------------------------------------------------------------
F-15
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
5. Other Assets The Company received its equipment back as a
Continued distribution in dissolving the joint venture. The
Company recorded the equipment at the net book value of
the joint venture which is the lower of cost or market.
6. Acquisition On August 30, 2000, Applied completed a stock purchase
of Dispute agreement with Dispute Resolution Management, Inc. (DRM)
Resolution and its two shareholders. This agreement amended and
Management restated in its entirety the terms of an agreement and
plan of merger, dated August 30, 2000, which Applied had
previously entered into with DRM and its shareholders.
Under terms of the current 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 option has been extended and
currently expires 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 will 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 has agreed that if DRM
has not distributed to these shareholders a total
of $10.0 million in cash in earn-out payments by
December 31, 2003, Applied will make up the
difference between $10.0 million and the actual
cash distributed. This difference can be paid in
cash or Applied common shares at Applied's sole
discretion.
--------------------------------------------------------------------------------
F-16
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Acquisition Applied has an absolute and irrevocable obligation to
of Dispute repurchase, by the end of the option period, that number
Resolution of 9.5 million shares of Applied common stock necessary
Management to provide the holders of those shares with a total of
Continued $14.5 million. It is Applied's intention to exercise its
option to reacquire these shares during the period 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 has been imputed
on the note payable to record debt at the time of
acquisition of $13,122.
The former owners of DRM have 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 have
entered into five-year non-competition agreements with
DRM.
Applied has 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-17
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Acquisition Covenants not to compete are amortized over their 5
of Dispute year life. Goodwill is amortized over 20 years.
Resolution
Management
Continued
7. Other Other accrued liabilities consist of the following:
Accrued
Liabilities 2001 2000
------------------------------
Dividend payable $ 816 $ 408
Compensation and employee benefits 658 652
Loss reserve 200 357
Related parties 185 185
Accrued consulting - 185
Severance payments - 76
Other 178 626
------------------------------
$ 2,037 $ 2,489
------------------------------
8. Line of At December 31, 2001 and 2000, CASI had a $108 and
Credit $1,459 outstanding balance, respectively, on a revolving
line of credit. The line of credit is not to exceed 85%
of eligible receivables or $2,500 and is due October
2002 with interest payable monthly at prime plus 2.0
percent (6.75% at December 31, 2001). The credit line is
collateralized by the assets of CASI and is guaranteed
by Applied. The line of credit contains certain
financial covenants and restrictions including minimum
ratios that CASI must satisfy.
--------------------------------------------------------------------------------
F-18
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Notes Payable Notes payable consist of the following at December 31:
2001 2000
-------------------------------
Obligation to minority shareholders of DRM
wherein the minority shareholders are to
receive $14,500 cash from the Company
through the repurchase of the 9.5 million
option common shares issued to the minority
shareholders' (see note 6). The Company has
imputed an interest rate of 10.5% on the
obligation which is secured by Commodore's
ownership of DRM. The obligation was
originally due in August 2001 and has been
extended through May 2002 $ 14,500 $ 14,500
Unamortized discount for imputed interest
rate through original maturity date of
August 2001. - (919)
Notes payable to individuals with interest at
15%, due in aggregate monthly installments,
beginning in July 2001, of $83,33 plus
interest, maturing through June 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 583 -
Unamortized discount for warrants (18) -
--------------------------------------------------------------------------------
F-19
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, secured by DRM
accounts receivable. In connection with this
note, one of the majority shareholders of the
Company sold 1 million shares of the Company's
common stock it owned to the note holders at a
discount. The discounted amount of $500,000
was recorded as interest expense over the
original term of the loan 216 500
Note payable to an officer of the Company with
interest at 9.75%. The note is unsecured and
is convertible into common stock of the Company
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 December 31, 2001. The Company
also has imputed a discount for warrants issued
for $89 in connection with the note which is
being amortized over the original term of the
note 250 500
Unamortized discount imputed for warrants - (29)
Notes payable to an insurance company with
interest at 8.18%, secured by an insurance
contract and due December 2001.
124 130
-------------------------------
$ 15,655 $ 14,682
-------------------------------
--------------------------------------------------------------------------------
F-20
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
10. Long-Term The Company has the following long-term debt at December
Debt 31:
2001 2000
-------------------------------
Obligation to the minority shareholders of
DRM wherein the Company has guaranteed to
distribute 35% of the cash flows of DRM to
the 19% minority shareholders in amounts not
less than $10,000 by December 31, 2003 (see
note 6). The Company has imputed interest
on the obligation at 10.5%, and the
obligation is secured by the Company's
ownership of DRM. The Company has also
estimated the current and long-term portions
of the obligation $ 8,583 $ 10,000
Unamortized discount for imputed interest
rate (1,592) (2,389)
Notes payable to an entity requiring monthly
payments of $11, plus interest at 8.5%
secured by an insurance contract 89 221
-------------------------------
7,080 7,832
Less current maturities (2,650) (2,650)
-------------------------------
$ 4,430 $ 5,182
-------------------------------
Future maturities on long-term debt are as follows:
Year
----
2002 $ 2,650
2003 4,430
-------------
Total $ 7,080
-------------
--------------------------------------------------------------------------------
F-21
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Income Taxes Applied provides for deferred income taxes on temporary
differences which represent tax effects of transactions
reported for tax purposes in periods different than for
book purposes.
The provision for income taxes for the years ended
December 31 results in an effective tax rate which
differs from federal income tax rates as follows:
2001 2000 1999
-----------------------------------------
Expected tax benefit at federal
statutory rate $ (2,228) $ (3,890) $ (1,355)
State income tax benefit, net of
federal income tax benefit (393) (686) (239)
Interest accretion 753 333 -
Other 226 453 -
Change in valuation allowance 1,642 3,790 1,594
-----------------------------------------
Income tax benefit $ - $ - $ -
-----------------------------------------
The components of the net deferred tax as of December
31, are as follows
2001 2000
---------------------------
Reserve for uncollectable
receivables and potential
disallowances $ 226 $ 242
Depreciation and Amortization (41) 88
Net operating loss carryforward 11,500 10,192
Impairment charges 2,480 2,034
Other 99 66
---------------------------
14,264 12,622
Valuation allowance (14,264) (12,622)
---------------------------
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 2001,
2000 and 1999, Applied has established a valuation
allowance for the entire amount of net deferred tax
assets.
--------------------------------------------------------------------------------
F-22
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Income Taxes Applied has net operating loss ("NOL") carryforwards at
Continued December 31, 2001 of approximately $31,000 which expire
in years 2010 through 2021. The NOL carryforwards are
limited to use against future taxable income due to
changes in ownership and control.
12. Stockholders' Series B, C & D Convertible Preferred Stock
Equity Effective September 28, 1998, Applied authorized and
issued three new series of Preferred Stock. Series B, C
and D Preferred Stock were authorized up to 25,000,
15,000 and 25,000 shares, respectively, all at $.001 par
value.
Each of the Series B, C and D Preferred Stock is
convertible into common shares of Applied; each has a
par value of $.001 and a stated value of $100 per share;
each carries a dividend rate of $6.00 per share per
annum from the date of issuance, payable quarterly
commencing December 31, 1998, when, and if declared by
the Board of Directors; and each has non-cumulative
dividends. During 1998 the Company issued 20,909 shares
of Series B, 10,189 shares of Series C, and 20,391
shares of Series D Convertible Preferred Stock for an
aggregate amount of $2,001 (see Note 15). Applied did
not declare any dividend payment as of December 31,
1998.
The Series B, C and D Convertible Preferred Stock is
convertible into Common Stock at any time prior to
redemption at a conversion rate of 142.9 shares of
Common Stock for each share of Series B and D
Convertible Preferred Stock and 133.3 shares of Common
Stock for each share of Series C Convertible Preferred
Stock (an effective conversion price of $.70 and $.75
per share of Common Stock, respectively). The conversion
price is subject to adjustment under certain
circumstances, including Applied taking action to change
the number of Common Shares outstanding, such as
declaring a stock dividend.
In November 1999, all of the outstanding shares of
Series B, C and D Convertible Preferred Stock was
converted into 7,258,533 shares of common stock.
Series E Convertible Preferred Stock
Effective November 4, 1999, Applied issued 335,000
shares of Series E Convertible Preferred Stock with a
stated value of $10 per share.
--------------------------------------------------------------------------------
F-23
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
12. Stockholders' Series E Convertible Preferred Stock - Continued
Equity This stock has a dividend rate of 12% per annum through
Continued 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, 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.
The Series E Convertible Preferred Stock has a
liquidation preference of $10 per share. In connection
with the issuance of the Series E Convertible Preferred
Stock, the Company issued warrants to purchase 572,500
shares of common stock at a purchase price equal to 110%
of the market price on the date of closing ($1.20).
These warrants 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
American Stock Exchange for the ten trading days
immediately preceding the date of conversion.
During the years ended December 31, 2001 and 2000,
70,000 shares and 35,000 shares of Series E Convertible
Preferred Stock were converted into 2,000,000 shares and
330,992 shares of common stock, respectively. As of
December 31, 2001 there are 230,000 shares of Series E
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 the Company of $1,770.
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, payable on October 1, 2001. The special
dividend will not be paid on stock converted to common
stock on or before September 30, 2001.
--------------------------------------------------------------------------------
F-24
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 has a
Continued liquidation preference of $10 per share. In connection
with the issuance of Series F Convertible Preferred
Stock, the Company issued warrants to purchase 363,475
shares of common stock at $1.93875 per share. These
warrants expire on March 16, 2005.
The Series F Convertible Preferred Stock is convertible
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, 2001 and 2000,
76,500 shares and 10,000 shares of Series F Convertible
Preferred Stock were converted to 2,072,225 shares and
109,589 shares of common stock, respectively. The
Company has 180,200 shares of Series F convertible stock
outstanding at December 31, 2001.
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 $816
and $408 at December 31, 2001 and 2000.
--------------------------------------------------------------------------------
F-25
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
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.
Had compensation expense for Applied's employee stock
options been determined based on the fair value at the
grant date for awards in 2001, 2000 and 1999 consistent
with the provisions of FAS 123, Applied's net loss per
share would have been increased to the pro forma amounts
indicated below:
2001 2000 1999
------------------------------------------------
Net loss - as reported $ (6,554) $ (11,441) $ (3,985)
Net loss - pro forma $ (6,810) $ (12,619) $ (6,335)
Loss per share - as reported $ (.13) $ (.34) $ (0.16)
Loss per share - pro forma $ (.14) $ (.37) $ (0.26)
FAS 123 requires stock options to be valued using an
approach such as the Black-Scholes option pricing model.
The Black-Scholes model calculates the fair value of the
grant based upon the following assumptions about the
underlying stock: The expected dividend yield of the
stock is zero, the assumed volatility is 212%, the
expected risk-free rate of return is 4.6 - 6.5 percent,
calculated as the rate offered on U.S. Government
securities with the same term as the expected life of
the options, and the expected term is the maximum
possible term under the option.
Stock Options
In December 1998, Applied adopted its 1998 Stock Option
Plan pursuant to which officers, directors, key
employees and/or consultants of Applied can receive
non-qualified stock options to purchase up to an
aggregate 5,000,000 shares of Applied's Common Stock.
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.
--------------------------------------------------------------------------------
F-26
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
13. Stock Options A summary of the status of options granted under the
and Stock Plan as of December 31, 2001, 2000 and 1999 and changes
Warrants during the periods then ended is presented below
Continued
2001 2000 1999
------------------------------------------------------------------
Shares Weighted Shares Weighted Shares Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
------------------------------------------------------------------
Options
outstanding -
beginning of
year 7,529,056 $ 0.86 7,169,747 $ .61 4,155,012 $ 1.08
Granted 920,000 0.28 2,243,769 1.05 3,259,323 0.56
Exercised - - (1,326,866) .46 (2,142) 0.44
Forfeited (3,329,648) 0.49 (557,594) .59 (242,396) 4.86
--------------------------------------------------------------------
Options
outstanding -
end of year 5,119,408 $ 0.99 7,529,056 $ 0.87 7,169,797 $ 0.61
--------------------------------------------------------------------
The following table summarizes information about
employee stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable
-----------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------------------------------------------------------------------------
$0.25 - $0.44 2,257,200 7.00 years $0.37 2,384,765 $ 0.38
$0.63 - $1.44 2,504,833 7.00 years $0.99 1,289,827 $ 0.89
$2.00 - $6.00 357,375 4.10 years $4.86 357,375 $ 4.86
-----------------------------------------------------------------
5,119,408 6.80 years $0.99 4,031,937 $ 0.94
-----------------------------------------------------------------
--------------------------------------------------------------------------------
F-27
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, 2001 are asfollows:
Warrants
Continued
Granted Number of Current
1998 and Granted Granted Granted Warrants Exercise Expiration
Prior 1999 2000 2001 2001 Price Date
-------------------------------------------------------------------------------
7,500,000 3,405,444 2,764,141 - 13,669,585 $ 5.50 December 2003
19,407 - - - 19,407 5.80 August 2002
60,000 - - - 60,000 3.68 September 2002
1,000,000 356,092 270,568 - 1,626,660 3.09 August 2002
514,000 148,267 127,596 - 789,863 2.93 March 2003
1,500,000 266,861 49,020 - 1,815,881 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
- - 113,475 - 113,475 1.94 March 2005
- - 100,000 - 100,000 1.06 September 2002
- - 1,000,000 - 1,000,000 2.00 August 2005
- - - 1,000,000 1,000,000 0.22 May 2003
- - - 333,334 333,334 0.22 June 2006
------------------------------------------------------
10,593,407 4,739,164 4,699,800 1,333,334 21,365,705
------------------------------------------------------
There were no warrants exercised in 2001, 2000 or 1999.
As of December 31, 2001 all warrants are exercisable.
14. Earnings Per All earnings per share amounts reflect the
Share implementation of SFAS 128 "Earnings per Share". Basic
earnings per share are computed by dividing net income
available to common shareholders by the weighted average
number of shares outstanding during the period. Diluted
earnings per share are computed using the weighted
average number of shares determined for the basic
computations plus the number of shares that would be
issued assuming all contingently issuable shares having
a dilutive effect on earnings per share were outstanding
for the period.
--------------------------------------------------------------------------------
F-28
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
14. Earnings Per
Share
Continued Years Ended December 31,
--------------------------------------------
2001 2000 1999
--------------------------------------------
Net loss $ (6,554) $ (11,441) $ (3,985)
Preferred stock dividends (408) (634) (63)
--------------------------------------------
Net loss available to
common shareholders $ (6,962) $ (12,075) $ (4,048)
--------------------------------------------
Weighted average common shares
outstanding (basic) 53,241,000 35,866,000 24,819,000
Series E Convertible Preferred
Stock (*) (*) (*)
Series F Convertible Preferred
Stock (*) (*) -
Employee Stock Options (*) (*) (*)
Warrants issued in connection with
various transactions
(*) (*) (*)
-------------- -------------- ------------
Weighted average common shares
outstanding (diluted) 53,241,000 35,866,000 24,819,000
-------------- -------------- ------------
Net loss per share - basic and
diluted $ (.13) $ (.34) $ (.16)
-------------- -------------- ------------
(*) Due to Applied's loss from continuing operations in
2001, 2000 and 1999, the incremental shares issuable in
connection with these instruments are anti-dilutive and
accordingly not considered in the calculation.
--------------------------------------------------------------------------------
F-29
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
15. Related Party The Company had the following material related party
Transactions transactions:
Effective September 20, 2000, Applied received a $500
loan from an affiliated individual. This loan matures on
December 31, 2001 and bears interest at 9.75%, payable
monthly. The note can be converted into Applied common
shares at an exchange rate of one share for every
$1.0625 of loan value. In addition, the Company issued a
warrant to purchase 100,000 Applied common shares at
$1.0625. The warrant expires September 20, 2002 and was
valued at $89, which will be amortized to interest
expense over the life of the related debt. During 2001
the individual converted $250 of debt to 1,041,667
shares of common stock leaving a note payable of $250 to
the individual at December 31, 2001.
The Company at December 31, 2001 and 2000 has
obligations relating to the purchase of 81% of DRM (see
Notes 6, 9 and 10).
During the year ended December 31, 2000 a shareholder of
the Company 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 $160 and $247 as of
December 31, 2001 and 2000, respectively.
In addition, the Company has payables to related parties
of $185 at December 31, 2001 and 2000 recorded in
accrued liabilities. The Company expensed as bad debt
$109 of related party receivables during the year ended
December 31, 2000.
The Company has notes payable and long-term debt to
officers and shareholders of the Company. See Notes 9
and 10.
--------------------------------------------------------------------------------
F-30
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
16. Commitments Operating Leases
and Applied and its subsidiaries are committed under
Contingencies non-cancelable operating leases for office space and
other equipment. Future obligations under the leases
are as follows:
2002 $ 216
2003 147
2004 116
2005 11
---------------
$ 490
---------------
Rent expense approximated $429, $403 and $332 in 2001,
2000 and 1999, 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, 2001 and 2000.
Employment Agreements
The Company has entered into employment agreements with
the two former owners of DRM which provide for salaries
of not less than $275 each through December 31, 2002 and
not less than $290 each through December 31, 2003.
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.
Guarantee
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 will be. The maximum
exposure is approximately $390.
17. 401(K) The Company has adopted a 401(K) savings plan for all
Savings Plan employees who qualify as to age and service.
Contributions by the Company are discretionary. The
Company made annual contributions to the plan of
approximately $0, $48 and $91 during the years ended
December 31, 2001, 2000 and 1999, respectively.
--------------------------------------------------------------------------------
F-31
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
18. Segment Using the guidelines set forth in SFAS No. 131,
Information "Disclosures About Segments of an Enterprise and Related
Information," Applied has identified three reportable
segments 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.
3. DRM from August 30, 2000 (date of acquisition) to
December 31, 2000, which provides a package of
services to help companies recover financial
settlements from insurance policies to defray costs
associated with environmental liabilities.
Common overhead costs are allocated between segments
based on a record of time spent by executives.
Applied evaluates segment performance based on the
segment's net income (loss). The accounting policies of
the segments are the same as those described in the
summary of significant accounting policies. Applied's
foreign and export sales and assets located outside of
the United States are not significant. Summarized
financial information concerning Applied's reportable
segments is shown in the following tables.
--------------------------------------------------------------------------------
F-32
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------------------------------------
2001
----
Corporate
Overhead
Total CASI Solution DRM & Other
------------------------------------------------------------------
Revenue $ 10,551 $ 4,409 $ 181 $ 5,961 $ -
Costs and expenses:
Cost of sales 3,369 3,080 289 - -
Research and development 423 - 423 - -
General and administrative 6,643 1,219 313 4,223 888
Depreciation and
amortization 2,491 - 515 41 1,935
Impairment of machinery 776 - - - 776
Impairment of patents 627 - - - 627
Minority interest 203 - - - 203
------------------------------------------------------------------
Total costs and expenses 14,532 4,299 1,540 4,264 4,429
------------------------------------------------------------------
Income (loss) from operations (3,981) 110 (1,359) 1,697 (4,429)
Interest income 76 38 - 38 -
Interest expense (2,354) - (86) - (2,268)
Equity in losses of
unconsolidated subsidiary (295) - - - (295)
------------------------------------------------------------------
Net (loss) income $ (6,554) $ 148 $ (1,445) $ 1,735 $ (6,992)
------------------------------------------------------------------
Total assets $ 28,655 $ 1,277 $ 600 $ 3,995 $ 22,783
------------------------------------------------------------------
Expenditures for long-lived
assets $ 51 $ - $ - $ 51 $ -
------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
F-33
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
----------------------------------------------------------------------------------------------------------
2000
---- Corporate
Overhead
Total CASI Solution DRM & Other
-------------------------------------------------------------------
Revenue $ 20,631 $ 16,786 $ 271 $ 3,574 $ -
Costs and expenses:
Cost of sales 14,452 13,962 490 - -
Research and development 993 - 993 - -
General and administrative 6,989 2,355 504 1,761 2,369
Depreciation and
amortization 1,471 - 378 12 1,081
Impairment of goodwill 6,586 - - - 6,586
Minority interest 341 - - - 341
-------------------------------------------------------------------
Total costs and expenses 30,832 16,317 2,365 1,773 10,377
-------------------------------------------------------------------
Income (loss) from operations (10,201) 469 (2,094) 1,801 (10,377)
Interest income 67 - - 10 57
Interest expense (1,307) (123) (86) (12) (1,086)
Income taxes - - - - -
-------------------------------------------------------------------
Net income (loss) $ (11,441) $ 346 $ (2,180)$ 1,799 $ (11,406)
-------------------------------------------------------------------
Total assets $ 37,473 $ 4,255 $ 1,724 $ 2,562 $ 28,932
-------------------------------------------------------------------
Expenditures for long-lived
assets $ 302 $ 40 $ 132 $ 130 $ -
-------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
F-34
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
-------------------------------------------------------------------------------------------------------------
1999 Corporate
---- Overhead
Total CASI Solution & Other
-------------------------------------------------------------------
Revenue $ 18,147 $ 17,973 $ 174 $ -
Costs and expenses:
Cost of sales 16,127 15,865 262 -
Research and development 1,145 - 1,145 -
General and administrative 4,037 1,428 175 2,434
Depreciation and
amortization 696 64 247 385
Minority interest - - - -
-------------------------------------------------------------------
Total costs and expenses 22,005 17,357 1,829 2,819
-------------------------------------------------------------------
Income (loss) from operations (3,858) 616 (1,655) (2,819)
Interest income 39 - - 39
Interest expense (166) (103) (63) -
Income taxes - - - -
-------------------------------------------------------------------
Net income (loss) $ (3,985)$ 513 $ (1,718) $ (2,780)
-------------------------------------------------------------------
Total assets $ 16,047 $ 4,108 $ 2,035 $ 11,713
-------------------------------------------------------------------
Expenditures for long-lived
assets $ 353 $ 12 $ 337 $ 4
-------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
F-35
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
19. Recent In June 2001, the Financial Accounting Standards Board
Accounting ("FASB") issued SFAS No. 141, "Business Combinations,"
Pronounce- and SFAS No. 142, "Goodwill and Other Intangible
ments Assets." SFAS No. 141 requires the purchase method of
accounting for all business combinations initiated after
June 30, 2001 and that certain acquired intangible
assets in a business combination be recognized as assets
separate from goodwill. SFAS No. 142 requires that
goodwill and other intangibles determined to have an
indefinite life are no longer to be amortized but are to
be tested for impairment at least annually. SFAS No. 142
requires that an impairment test related to the carrying
values of existing goodwill be completed within the
first six months of 2002. Impairment losses on existing
goodwill, if any, would be recorded as the cumulative
effect of a change in accounting principle as of the
beginning of 2002. The adoption of this accounting
standard may have a significant impact on the Company's
future results of operations and financial condition.
In June 2001, the FASB issued SFAS No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 requires
an asset retirement obligation to be recorded at fair
value during the period incurred and an equal amount
recorded as an increase in the value of the related
long-lived asset. The capitalized cost is depreciated
over the useful life of the asset and the obligation is
accreted to its present value each period. SFAS No. 143
is effective for the Company beginning January 1, 2003
with earlier adoption encouraged. The Company is
currently evaluating the impact the standard will have
on its future results of operations and financial
condition.
In August 2001, the FASB issued SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets",
effective beginning January 1, 2002. SFAS No. 144
retains the requirement to recognize an impairment loss
only where the carrying value of a long-lived asset is
not recoverable from its undiscounted cash flows and to
measure such loss as the difference between the carrying
amount and fair value of the asset. SFAS No. 144, among
other things, changes the criteria that have to be met
to classify an asset as held-for-sale and requires that
operating losses from discontinued operations be
recognized in the period that the losses are incurred
rather than as of the measurement date. The Company
adopted the accounting standard effective January 1,
2002 which may have a significant impact on the
Company's financial condition or results of operations.
--------------------------------------------------------------------------------
F-36