UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11871
Commodore Applied Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-3312952
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150 East 58th Street, Suite 3238
New York, New York 10155
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 308-5800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common stock, par value $0.001 per share NASD Over the Counter Bulletin Board (OTCBB)
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Exchange Act Rule 12b-2). Yes ___ No __X__.
Non-affiliates of the registrant held shares of common stock as of
April 14, 2004 with an aggregate market value of approximately $3,334,203.34
(based upon the last sale price of the common stock on April 14, 2004 as
reported by the NASD Over the Counter Bulletin Board).
As of April 14, 2004, 126,773,071 shares of the registrant's common
stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
COMMODORE APPLIED TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
PART 1.........................................................................1
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ITEM 1. BUSINESS..........................................................1
General...........................................................1
Soil Decontamination--Commodore Solution
Technologies, Inc.............................................2
Environmental Management - Commodore Advanced
Sciences, Inc.................................................7
Markets and Customers.............................................9
Raw Materials....................................................10
Backlog..........................................................10
Research and Development.........................................10
Intellectual Property............................................11
Competition......................................................11
Environmental Regulation.........................................13
Employees........................................................14
ITEM 2. PROPERTIES.......................................................15
ITEM 3. LEGAL PROCEEDINGS................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS..........................................................16
PART II.......................................................................17
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................17
Market Information...............................................17
Dividend Information.............................................18
Recent Sales of Unregistered Securities..........................19
ITEM 6. SELECTED FINANCIAL DATA..........................................25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................26
Overview.........................................................26
Results of Operations............................................26
Liquidity and Capital Resources..................................29
Net Operating Loss Carryforwards.................................32
New Accounting Pronouncements....................................32
Forward Looking Statements.......................................33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK......................................................34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................34
ITEM 9A. CONTROLS AND PROCEDURES..........................................35
PART III......................................................................36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.......................................................36
Executive Officers and Directors.................................36
Key Employees....................................................38
Board Committees.................................................39
Compensation of Directors........................................39
Compliance with Section 16(a) of the Exchange Act................39
Audit Committee and Financial Expert.............................40
Code of Ethics...................................................40
ITEM 11. EXECUTIVE COMPENSATION...........................................41
Summary Compensation.............................................41
Stock Options....................................................43
Short Term Incentive Plan........................................45
New Plan Benefits Tables.........................................46
Employment Agreements............................................48
Compensation Committee Interlocks and Insider
Participation................................................48
Report of the Compensation Committee on Executive
Compensation.................................................48
Compensation, Stock Option and Benefits Committee................48
Equity Compensation Plan Information.............................49
Shareholder Return Performance...................................51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................53
Security Ownership of Certain Beneficial Owners..................53
Security Ownership of Management.................................55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................57
Organization and Capitalization of the Company...................57
Services Agreement...............................................61
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................62
PART IV.......................................................................62
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 10-K.............................................62
SIGNATURES....................................................................73
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SUPPLEMENTAL INFORMATION......................................................74
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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:
o the Company's critical need for additional cash to sustain
existing operations and meet existing obligations and capital
requirements; (the Company's auditor's opinion on our fiscal 2002
and 2003 financial statements contains a "going concern"
qualification in which they express doubt about the Company's
ability to continue in business, absent additional financing)
o the ability to generate profitable operations from a large scale
remediation project;
o the ability of the Company to renew its nationwide permit to treat
PCBs;
o the ability of the Company to implement its waste processing
operations, including obtaining commercial waste processing
contracts and processing waste under such contracts in a timely
and cost effective manner;
o the timing and award of contracts by the U.S. Department of Energy
for the cleanup of waste sites administered by it;
o the Company's ability to integrate acquired companies;
o the acceptance and implementation of the Company's waste treatment
technologies in the government and commercial sectors;
o the Company's ability to obtain and perform under other large
technical support services projects; developments in environmental
legislation and regulation;
o the ability of the Company to obtain future financing on favorable
terms;
o other circumstances affecting anticipated revenues and costs;
o the expiration of the Company's nationwide EPA permit in September
2001 (the permit may be renewed subject to providing additional
information. The Company has not resubmitted information for a new
permit) and
o the ability of the Company to replicate on a large scale,
economically viable basis, the results of its technology test
results.
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
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ITEM 1. BUSINESS
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GENERAL
Commodore Applied Technologies, Inc. (the "Company") is an
environmental solutions company offering a range of engineering and technical
services to the public and private sectors related to (i) remediating
contamination in soils, liquids and other materials and disposing of or reusing
certain waste by-products by utilizing our Solvated Electron Technology
("SET(TM)"), and (ii) providing services related to, environmental management
for on-site and off-site identification, investigation remediation and
management of hazardous, mixed and radioactive waste.
We believe that SET is the only patented, non-thermal, portable and
scalable process that is currently available for treating and decontaminating
soils, liquids and other materials containing PCBs, pesticides, dioxins,
chemical weapons and warfare agents and other toxic contaminants.
The Company's corporate mission is to serve the environmental
remediation market from its primary operating center to profitably provide
government and industry with engineering and remediation solutions to legacy
waste environmental problems. Our strategy focuses the Company on the unique and
high profit niches of hazardous materials conversion and waste remediation.
Demand for our environmental technologies is anticipated to arise
principally from the following sources:
o the need for alternative environmental treatment and disposal methods
for toxic substances (such as the SET technology), which involve
limited safety risks with respect to air pollution and transportation
of hazardous materials and do not result in large volumes of residual
waste that require further treatment prior to disposal; and
o stricter legislation and regulations mandating new or increased levels
of air and water pollution control and solid waste management.
Our business strategy is to expand our environmental technologies
businesses by:
o implementing the SET technology in selected niche markets within
certain strategic environmental market segments, such as government
mixed waste remediation and chemical weapons demilitarization, where we
believe SET offers the greatest value and meets pressing customer
needs; and
o establishing additional collaborative joint working and marketing
arrangements with established engineering and environmental service
organizations to pursue commercial opportunities in the public and
private sector.
The Company currently has identified two operating segments. These two
segments are as follows: Commodore Advanced Sciences, Inc., which primarily
provides various engineering, sampling, and public relations services to
Government agencies on a cost plus basis; and Commodore Solutions, Inc., which
is commercializing technologies to treat mixed and hazardous wastes.
1
The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements. The
Company's current monthly operating expenses exceed cash revenues by
approximately $100,000 at December 31, 2003.
The Company's auditor's opinion on our fiscal 2002 and 2003 financial
statements contains a "going concern" qualification in which they express doubt
about the Company's ability to continue in business, absent additional
financing.
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 Government Environmental Technologies, Inc., and
Commodore Advanced Sciences, Inc. The Company's principal executive offices are
located at 150 East 58th Street, Suite 3238, New York, New York 10155, and its
telephone number at that address is (212) 308-5800.
SOIL DECONTAMINATION--COMMODORE SOLUTION TECHNOLOGIES, INC.
The Company, through Commodore Solutions, Inc. ("Solutions"), has
developed and has commercialized its patented process known as SET. Based on the
results of its extensive testing and commercial processing activities, the
Company believes that SET is capable of effectively treating and decontaminating
soils and other materials, including sludges, sediments, oils and other
hydrocarbon liquids, metals, clothing and porous and non-porous structures and
surfaces, by destroying PCBs, pesticides, dioxins, chlorinated substances and
other toxic contaminants to an extent sufficient to satisfy current federal
environmental guidelines. The Company also believes that, based on the results
of additional tests, SET is capable of neutralizing substantially all known
chemical weapons materials and warfare agents, explosives and concentrating
certain radioactive wastes for more effective disposal.
The SET process was commercialized during the calendar year 2000. In
May 2000, the Company mobilized its S-10 system to Harrisburg, Pennsylvania to
begin processing PCB contaminated soils at the Pennsylvania Air National Guard's
base located at the Harrisburg International Airport (the "Initial Harrisburg
Contract"). The Company completed the contract in July 2001, remediating
approximately 340 tons of excavated soils to levels deemed unregulated for
disposal by the U.S. Environmental Protection Agency (the "EPA"). The Company
believes this is the first time a non-thermal process has treated
PCB-contaminated soils to levels allowing them to be replaced in the original
excavation.
Additionally, the Company performed several treatability studies for
third party customers during 2000, as well as continued internal testing and
process development. At Envirocare of Utah ("Envirocare"), the SET process
successfully treated water treatment sludge from a waste stream provided by the
Brookhaven National Laboratory (the "Envirocare Study"). Under current,
non-Commodore technology 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
2
independent laboratories agreed upon by the Company and/or the respective
client. In the case of internal Company process development testing, results
were verified with Company owned analytical equipment in addition to periodic
independent off-site testing.
In January 2001 the Company entered into a contract with Waste Control
Specialists, LLC ("WCS") for the treatment of various mixed waste streams stored
at the WCS facility near Andrews, Texas. This work employed the Company's SL-2
SET system and was completed in August 2001. No large scale waste treatment was
performed at this site.
In November 2001 the Company entered into a contract with American
Ecology Recycle Center ("AERC", Oak Ridge, Tennessee) for the treatment of 32
drums of Freon still bottom mixed wastes, as well as consultation regarding the
regulatory requirements for the treatment. Work commenced in November, employing
the Company's SL-2 SET system, and was essentially completed in 2002. As an
adjunct to that work, the Company entered into a contract with the University of
California (prime contractor for the Department of Energy's Los Alamos National
Laboratory) in March 2002 to dispose approximately 12,000 pounds of activated
sodium remaining from tests involving the Clinch River Breeder Reactor performed
by Rensselaer Polytechnic Institute twenty five years ago. The Company believes
this is the first time activated sodium (Na22) has been employed as a reactant
to treat other regulated waste materials (the AERC still bottoms).
In July 2002 the Company acquired all the SET equipment formerly
associated with the Teledyne-Commodore LLC. The Company plans to utilize this
equipment for treating Department of Energy ("DOE") legacy mixed waste materials
for disposal at major DOE sites in the United States. The Company has not
utilized this equipment to date.
In October 2003 the Company entered into a contract with ToxCo Metals,
("ToxCo"), Oak Ridge. Advanced Sciences, teamed with ToxCo, is performing sodium
disposition for the Department of Energy at ToxCo's facility in Oak Ridge,
Tennessee. This contract commenced late in 2003, and is expected to be completed
late in 2004.
In December 2003 the Company entered into a contract with Envirocare of
Utah ("Envirocare"), Clive, Utah for the treatment of mixed wastes, as well as
consultation regarding the regulatory requirements for the treatment. Work
commenced in March 2004, employing the Company's SL-2 SET system. The Company is
hopeful this may result in the first multi-year installation and contract for
the SET technology.
The Company has generated aggregate revenues of less than $1,100,000
from the implementation of the SET technology since 1999.
3
The SET Technology
The SET technology, which is based upon solvated electron chemistry,
mixes anhydrous liquid ammonia and/or other similar solvents with reactive
metals and contaminated elements to effect the selective destruction or
neutralization of organic compounds (such as PCBs, pesticides and dioxins). The
Company has demonstrated that SET can achieve consistently high levels of
contaminant destruction when working with PCBs, dioxins and pesticides. SET has
treated soils containing up to 10,000 ppm of contaminants, and oils containing
up to 250,000 ppm, leaving residual soils and oils with contamination levels of
less than one ppm. In addition, SET has been successfully applied to other
PCB-contaminated surfaces such as concrete. The SET process can be used in
conjunction with selected post-treatment processes such that no hazardous or
toxic residues will result from the use of SET, nor will there be any toxic
emissions into the air, water, soils or other surfaces. For example, most
contaminated soils treated with SET can (subject, in some instances, to
re-blending the soil with organic matter) be used subsequently for planting or
for any other use for which non-contaminated soils are appropriate.
Equipment utilized in the SET process consists of tanks, pumps and
piping to handle anhydrous ammonia and other solvents in liquid and vapor forms,
and treatment vessels for holding contaminated materials and for the
introduction of solvating solutions. The system can be transported to field
sites and configured in numerous sizes.
The SET process requires placing the contaminated materials into a
treatment vessel where they are mixed with a solvent and charged with a base
metal (e.g. sodium). The chemical reaction produces metal salts such as calcium
chloride, calcium hydroxide and non-halogenated inert organics. The ammonia
within the treatment vessel is then removed to a discharge tank for later reuse.
The materials are removed, sampled for residual traces of PCB or other
halogenated organic compounds, and placed in storage for disposal. In many
cases, the decontaminated soil and metals can be replaced in their original
location, recycled or reused. The solvents do not enter the chemical reaction,
but merely serve as dissolving liquids for the solvated electron solution.
Operational Characteristics. Substantially all existing systems in use
for the destruction of PCBs and other halogenated compounds involve incineration
or other thermal processes, and either the permanent installation of highly
complex and expensive incinerators and waste disposal equipment at the affected
site, or the removal of contaminated materials to off-site facilities. The
Company believes that SET represents an approach to resolving serious
environmental remediation issues that does not create or entail the safety risks
of air pollution and transportation of hazardous materials. The Company believes
that SET is more effective than incineration and other destruction processes for
toxic substances in that:
o SET does not emit toxic fumes into the atmosphere, as is sometimes the
case with thermal or incineration methods;
o SET is portable and can be moved directly to the contaminated site,
thereby reducing the risk of off-site contamination;
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;
4
o SET equipment can be installed and operated inside industrial plant
facilities to treat hazardous wastes on line as a continuation of the
manufacturing process;
o SET, when used to treat soils, yields nitrogen-enriched soils that can
be reused on-site, avoiding replacement and the post-treatment costs of
off-site disposal; and
o SET has been shown to neutralize or destroy all chemical weapons
material and warfare agents in the United States stockpile, and
Lewisite (the primary chemical weapons material and warfare agent of
the former Soviet Union), in tests conducted by an independent,
federally certified surety laboratory.
The Company believes that SET is the only technology currently
available that possesses all of these features and is capable of treating a wide
variety of contaminants. The above characteristics (non-thermal, no air
emissions, mobile) are particularly applicable when dealing with mixed waste.
Wastes that contain radioactive material and hazardous waste regulated by RCRA
and TSCA are particularly difficult to treat and have extremely limited disposal
options. By applying the SET process to remove the RCRA and TSCA components,
leaving only radioactive waste material, disposal options expand. SET not only
removes the hazardous components but also does so by an efficient, non-thermal
process that can control and contain the radioactive material so that it remains
in the treated material and does not enter the environment in an uncontrolled
fashion.
EPA Nationwide Permit. In order to treat PCBs within the United States
on all non-Superfund sites, a treating entity must obtain a permit from the EPA.
Most EPA permits granted to date for PCB destruction are solely for single-site
incineration treatment centers. In August 1995, SET was demonstrated to the EPA
in order to obtain the Nationwide Permit, which was issued to the Company in
March 1996. The Nationwide Permit allows the Company to use SET on-site to treat
PCB-contaminated soil at any location in the United States. In addition to soil
treatment, the Nationwide Permit allows the Company to treat PCB contaminated
metallic surfaces and waste oils, as well as wastewater (the wastewater is
treated by a non-SET process). The Company has also successfully demonstrated
SET as a treatment process for organic materials contaminated with PCBs and
radionuclides and has received a draft revised EPA permit for these matrices.
This permit revision covers the destruction of PCBs in soils, waste oils,
organic materials, water, and on metallic surfaces.
The Nationwide Permit expired in September 2001, and may be renewed
subject to providing any requested additional information to the EPA at the time
of renewal. The Company is in the process of obtaining a permit revision for its
commercial SET processing system, the S-10. The S-10 system is capable of
processing up to 10 tons of contaminated material daily. The Company believes
that 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.
5
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.
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
6
ENVIRONMENTAL MANAGEMENT--COMMODORE ADVANCED SCIENCES, INC.
The Company, through Commodore Advanced Sciences, Inc. ("Advanced
Sciences"), provides specialized technical and project management products and
services primarily to government-sector customers, including the Department of
Energy ("DOE") and the Department of Defense ("DOD"), and also to private-sector
domestic and foreign industrial customers. Advanced Sciences engages in all
aspects of environmental regulation and compliance, as well as access to leading
technologies and innovative skills related to the identification, investigation,
remediation and management of hazardous, mixed and radiological waste sites.
Advanced Sciences currently operates a network of three offices located in three
states, with its principal executive offices located in Richland, Washington.
The Company's strategy in acquiring Advanced Sciences was to
incorporate its process technology into the products and services offered to
Advanced Sciences' customers, with a view to increasing the quality and scope of
services offered and providing the Company with a broader customer base for its
technology.
Services
Environmental Services. Advanced Sciences' analytic and scientific
abilities enable it to become involved in environmental issues and problems at
their outset. Initially, Advanced Sciences provides its customers with a broad
outline of the types of environmental problems, health risks and liabilities
associated with a particular activity. Advanced Sciences also conducts
environmental audits and assessments, underground storage tank site
investigations, remedial investigations/feasibility studies, environmental
impact assessments, and statements and studies to identify any potential
environmental hazards.
Remediation Services. Having already established a market position in
the consulting and front-end analysis phase, Advanced Sciences is poised to
follow market demand into remediation services. After an environmental problem
is identified, Advanced Sciences offers alternative remediation approaches that
may involve providing on-site waste containment or management of
on-site/off-site remediation and waste removal. Advanced Sciences can also
redesign its customers' ongoing production processes and develop engineering
plans and technical specifications to minimize or eliminate the generation of
hazardous waste. The Company believes that Advanced Sciences' integration of
engineering and environmental skills, plus its access to innovative
technologies, provide Advanced Sciences with a competitive advantage in
redesigning production processes.
Technical Services. New technologies play a critical role in both the
remediation of existing waste sites and in the reduction of waste generated by
ongoing production processes. Advanced Sciences has access to the SET technology
and all its derivatives. Additionally, Advanced Sciences has access to the
Supported Liquid Membrane ("SLiM(TM)") technology held by Commodore Separation
Technologies, Inc. ("Separation"). This technology has the ability to
selectively extract heavy metals and radioactive nuclides from liquids and
gasses. The SLiM technology is held in an 85% owned subsidiary of Commodore
Environmental Services, which owns 6.82% of the Company. Advanced Sciences has
at its disposal, on a per project basis, what it believes are among the most
qualified professionals in the environmental consulting business. Advanced
Sciences' scientists have participated on national boards for risk assessment
and quality assurance, were instrumental in the development of environmental
regulations for the DOE and the DOD, and have served as expert witnesses before
the U.S. Congress and the Nuclear Regulatory Commission. To maintain its
competitive position, Advanced Sciences intends to continue to develop viable
remediation technologies and attract and retain qualified personnel.
7
Contracts
UT Battelle: Advanced Sciences provides one engineering person on a
time and material basis to UT Battelle, supporting the site closure at Oak Ridge
National Laboratories (ORNL). The Advanced Sciences personnel provide structural
engineering assessment services under this contract. The time and material
contract remains on-going through 2004.
Denver Regional Water Council of Governments: Advanced Sciences is
contracted annually to sample surface waters, streams, groundwater wells and
watersheds to Chatfield Watershed Authority located southwest of Denver. The
contract is ongoing. A similar and ongoing contract for Cherry Creek Basin Water
Authority is also ongoing.
Tetra Tech Contract: Advanced Sciences provides engineering support
under Tetra Tech's general engineering support contract with Bechtel Jacobs Co,
LLC. Bechtel Jacobs is responsible for environmental oversight of the U.S. DOE's
Oak Ridge, TN site. Advanced Sciences provides 1 to 3 engineering personnel on a
time and material basis to Tetra Tech on a contract basis which is expected to
continue through September 2004.
ToxCo Metals, Oak Ridge: Advanced Sciences, teamed with ToxCo Metals,
is performing sodium disposition for the Department of Energy at ToxCo's
facility in Oak Ridge, Tennessee. This contract commenced late in 2003, and is
expected to be completed late in 2004.
Envirocare of Utah: Advanced Sciences is performing mixed waste
treatment operations for specific waste streams at the Envirocare of Utah Clive
facility northwest of Salt Lake City, using its SL-2 solvated electron system.
The contract commenced in December 2003, and is based on unit treatment costs
for wastes designated for treatment by the client.
Joint Ventures
Nuvotec, Inc., Joint Venture. In April 2002, Commodore Government
Environmental Technologies, Inc. ("Government Technologies"), a wholly-owned
subsidiary of the Company, entered into a LLC agreement with Technical Resources
International, Inc., ("TRI"), a wholly owned subsidiary of Nuvotec, Inc., as a
non-exclusive means by which each party (and their affiliates) may pursue mixed
waste treatment contracts on a limited, domestic basis. TRI is a provider of
contract services to the DOE and to the public utilities market. The purpose of
the joint venture, known as Nuvoset, LLC (the "Nuvoset LLC"), a Delaware limited
liability company, encompasses all aspects of mixed waste characterization,
treatment, storage, transportation and disposal through the use, application and
commercialization of the technologies of the Nuvotec LLC partners. There was no
activity in the Nuvoset, LLC during the year 2003. The Nuvoset, LLC was
dissolved in 2003 as per agreement between the parties.
8
MARKETS AND CUSTOMERS
General
The Company markets its services and technologies to governmental and
industrial customers throughout the United States. The Company also plans to
target customers in markets abroad, particularly in Eastern Europe and the
Middle 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, 2003, sales of
approximately 14% of the Company's environmental management services were to
private sector customers and sales of approximately 86% were derived from
contracts with federal, state and municipal government agencies. Contracts to
private sector customers generally may not be terminated at the option of the
customer. Contracts with governmental customers generally may be terminated at
any time at the option of the customer. In 2003, Advanced Sciences' Rocky Flats
Contracts, Oak Ridge Contracts, Toxco Contracts and the AERC Contract accounted
for approximately 33%, 53%, 11% and 3%, respectively of the Advanced Sciences'
sales. The Company has benefited from its long-term relationships with many of
its customers that result in repeat business.
Soil Decontamination
The Company anticipates that the initial market for commercial
applications of SET will be the hazardous and mixed waste and industrial
by-products treatment and disposal market. Mixed waste is material that contains
both a hazardous and radioactive component. The most common methods of treatment
and disposal of hazardous wastes and industrial by-products include landfilling,
chemical and biological treatment and incineration. Most of the current
treatment and disposal methods entail air pollution and transportation risks. In
a mixed waste, both hazardous and nuclear regulations apply, making disposal
difficult, if not impossible. Currently, there exists very limited disposal
options and these may not provide a permanent solution. Certain of these
treatment and disposal methods result in large volumes of residual waste, which
may require further treatment prior to disposal. As a result, a number of these
methods are encountering increased public resistance and added regulatory
oversight.
As with any new technology or process, there has been initial
resistance to the use of SET on a large scale, especially in connection with a
strong vested interest on the part of the U.S. Military (based on substantial
expenditures and commitments previously made) to use incineration for the
destruction of weapons. In addition, other prospective projects for the Company
have already been committed to other forms of destruction technology, including
incineration, plasma arc, vitrification, molten metal, molten salt, chemical
neutralization, biological treatment, catalytic electrochemical oxidation and
supercritical wet oxidation. The Company, and its collaborative partners, have
been attempting to overcome such competition by introducing SET in smaller
clean-up projects and through feasibility studies demonstrating its
applicability to larger projects, such as the Initial Harrisburg Contract and
the WCS Fixed Facility Processing Contract. The SET process provides a
significant advantage by allowing the processed material to be disposed of as a
non-mixed waste by destroying the hazardous component.
It may also be anticipated that, over an extended period, the market
for decontamination of hazardous materials will continue to decline as past
environmental degradation is corrected, and as the private and public sectors
limit further pollution through prohibitions on production and use of a broad
range of hazardous materials and through the modification and improved
efficiency of various manufacturing processes. The mixed waste market is one of
the few areas that shows growth and has limited competition when compared to the
general hazardous waste market. The SET process brings a unique solution to the
problem of remediating mixed waste.
9
Environmental Management
Based on market data compiled by Advanced Sciences, the largest market
for environmental services today within the United States is the U.S.
Government. Government wide spending levels for environmental services exceed
$10 billion per year. The DOD and DOE are expected to account for approximately
66% of such expenditures and together expect to spend in excess of $200 billion
for environmental work. Advanced Sciences has a long-term record for providing
environmental services to the U.S. Government with the DOD and DOE being its
primary customers.
RAW MATERIALS
The Company has historically experienced no difficulty in obtaining
components used in the SET process for which it relies on a broad range of
suppliers. Nevertheless, business disruptions or financial difficulties of such
suppliers, shortages or other causes beyond the Company's control, could
adversely affect the Company by increasing the cost of goods sold or reducing
the availability of such components. If the Company was unable to obtain a
sufficient supply of required components, it could experience significant delays
in the furnishing of components used in the SET process, which could result in
the loss of orders and customers and could have a material adverse affect on the
Company's business, financial condition and results of operations. In addition,
if the cost of finished components was to increase, there can be no assurance
that the Company would be able to pass such increase on to its customers. The
use of outside suppliers also entails risks of quality control and disclosure of
proprietary information.
BACKLOG
At December 31, 2003, total potential backlog for the Company was
approximately $524,000 as compared with approximately $1,200,000 as of December
31, 2002. 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 Company
estimates that all 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 $70,000,
$297,000, and $423,000 for the years ended December 31, 2003, 2002 and 2001
respectively.
10
INTELLECTUAL PROPERTY
The Company currently has twelve (12) issued U.S. and foreign patents.
Additionally, the Company has seventeen (17) 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 12.87 years. As patents are
issued, the U.S. Patent and Trademark Office assigns the Company a twenty (20)
year patent-life for each patent issued.
The Company believes that its patent portfolio provides the Company the
necessary "proprietary turf" in which it can market, distribute, and license the
full range of the SET technology and all of its derivatives. Additionally, the
Company's strength of its patent portfolio may operate as an effective "barrier
to entry" in several of the markets in which the Company is presently conducting
business.
To protect its trade secrets and the un-patented proprietary
information in its development activities, the Company requires its employees,
consultants and contractors to enter into agreements providing for the
confidentiality and the Company's ownership of such trade secrets and other
un-patented proprietary information originated by such persons while in the
employ of the Company. The Company also requires potential collaborative
partners to enter into confidentiality and non-disclosure agreements.
There can be no assurance that any patents that may hereafter be
obtained, or any of the Company's confidentiality and non-disclosure agreements,
will provide meaningful protection of the Company's confidential or proprietary
information in the case of unauthorized use or disclosure. In addition, there
can be no assurance that the Company will not incur significant costs and
expenses, including the costs of any future litigation, to defend its rights in
respect of any such intellectual property.
COMPETITION
Soil Decontamination
The Company anticipates that the initial market for commercial private
sector applications of SET will be the hazardous and non-hazardous waste and
industrial by-products treatment and disposal market. Several large domestic and
international companies and numerous small companies, many of whom have
substantially greater financial and other resources than the Company, compete
with the Company in this market. The Company primarily competes in the hazardous
waste treatment market in the U.S., a market valued at over $3.7 billion for
2004. 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 2003 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 (currently expired) 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.
11
The domestic and international governmental public sector of the market
is dominated by many large multinational corporations who are presently engaged
in providing incineration and other conventional technologies in decontaminating
chemical weapons and warfare agents, concentration of nuclear wastes and the
decontamination of military vessels and other hardware. These competitors
include Raytheon Corporation (the current general contractor for the Johnston
Atoll incinerator), EG&G, Inc. (the general contractor for the Tooele Army
Depot), Mason and Hanger (the general contractor for the Newport News Naval
Facility), Waste Management Corporation (a bidder for domestic "large burial"
stockpile weapons decontamination), and others, including Browning-Ferris
Industries, Inc., Jacobs Engineering, Inc., Fluor Daniel Corporation and
Lockheed Martin Marietta Corporation. All of these corporations have
substantially greater financial, personnel and other resources than the Company.
In addition, many prospective users of SET have already committed substantial
resources to other forms of environmental remediation technology, including
incineration, plasma arc, vitrification, molten metal, molten salt, chemical
neutralization, catalytic electrochemical oxidation and supercritical wet
oxidation.
The Company believes that its ability to compete in both the commercial
private and governmental public sectors is dependent upon SET being accepted in
these sectors as a superior, more cost-effective method to achieve
decontamination of a variety of materials.
Environmental Management
Advanced Sciences has been primarily engaged in providing environmental
engineering and scientific support services to United States government
agencies, such as the DOE and DOD. Based on market data compiled by Advanced
Sciences, the largest market for environmental services today is the United
States government, which is expected to continue its spending level for
environmental services at approximately $11 to $12 billion for 2004. 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, all of which have greater
financial and other resources than the Company. 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.
12
ENVIRONMENTAL REGULATION
The environmental legislation and policies which the Company believes
are applicable to SET in the United States primarily include TSCA, RCRA, and the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of
1986 ("SARA"), and may include, on a case by case basis, the Clean Air Act of
1970, as amended (the "Clean Air Act"). These laws regulate the management and
disposal of toxic and hazardous substances, provide for the protection of land
and groundwater resources, and control the discharge of pollutants into the air.
Many of these laws have international counterparts, particularly in Europe and
elsewhere in North America.
TSCA regulates the manufacture, distribution, and sale of chemical
substances, and requires testing of new chemicals and new uses of known
chemicals that may present an unreasonable risk of injury to health or the
environment. The EPA, through TSCA, has adopted comprehensive regulations for
PCB's and other halogenated substances, as part of a vast regulatory program
covering thousands of chemicals.
RCRA was enacted in 1976 with the primary objective to protect human
health and the environment and to conserve valuable material and energy
resources. The most important aspect of RCRA is its establishment of
"cradle-to-grave" management and tracking of hazardous waste, from generator to
transporter, to treatment, storage, and disposal.
CERCLA and subsequent amendments under SARA (often referred to
collectively as Superfund) impose strict, retroactive liability upon persons who
generated, transported, or arranged for the transportation of hazardous
substances or owned or operated the vessels or facilities at which such
substances were disposed. CERCLA provides for the investigation and remediation
of hazardous substance sites and mandates that any hazardous substances
remaining on-site must meet certain regulatory requirements, with a preference
for innovative technology. These program regulations may create an incentive to
utilize environmental-friendly technologies such as SET, which destroy targeted
wastes without creating additional residual waste product. Moreover, to the
extent hazardous substances are effectively destroyed, potential liability can
be eliminated or significantly reduced.
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.
13
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, although the permit is
currently expired. The Nationwide Permit contains numerous conditions for
maintaining the Nationwide Permit and there can be no assurance that the Company
will be able to comply with such conditions to maintain and/or secure renewal of
the Nationwide Permit. In addition, if environmental legislation or regulations
are amended, or are interpreted or enforced differently, the Company may be
required to meet stricter standards of operation and/or obtain additional
operating permits or approvals. Failure to obtain such permits or otherwise
comply with such regulatory requirements could have a material adverse effect on
the Company and its operations. Various revisions to the equipment and process
parameters are being made to the existing permit. The Company believes that 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 December 31, 2003, the Company (including all of its direct and
indirect subsidiaries) had a total of 10 full-time and 4 part-time employees, of
which approximately 9 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.
OTHER INFORMATION
See Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K for information regarding revenue from customers, a measure
of profit or loss and total assets for each of the Company' s segments for the
last three fiscal years.
14
ITEM 2. PROPERTIES.
------ -----------
The Company's principal executive offices are located in New York, New
York. The Company leases approximately 2,000 square feet of office space in New
York from an affiliate of Bentley J. Blum, a director and principal stockholder
of Commodore Environmental Services, Inc. ("Environmental") and a director of
the Company, Solution, Commodore Separation Technologies, Inc. ("Separation"),
Advanced Sciences and certain other subsidiaries and affiliates of the Company.
Such space also serves as the principal executive offices of Environmental and
certain of its affiliates. Although the Company's lease for the New York City
space expired in December 1998, the Company has been permitted to use the New
York City office space during 1999, 2000, 2001, 2002, 2003 and 2004 on a
rent-free basis. The Company is charged for direct labor, office supplies and
third party vendor services that the Company generates in its activities in the
New York City offices. Also, the Company provides director and officer insurance
to Environmental and Separation under its policy at no charge to Environmental
and Separation.
In addition to the New York, New York facilities, since April 2000, the
Company has leased approximately 1600 square feet of space from Shelby T.
Brewer, a director and executive officer of the Company, on a month-to-month
basis, for a rental payment in the amount of $2000 per month.
The Company leases approximately 400 square feet of laboratory, office
and storage space at Kirtland Air Force Base in Albuquerque, New Mexico for
rental payments in the amount of $707 per month, pursuant to a month-to-month
lease arrangement.
Advanced Sciences' principal executive and administrative offices are
located in Richland, Washington. Advanced Science leases approximately 3,750
square feet of space for rental payments in the amount of $3,500 per month under
a yearly lease. Advanced Sciences also leases various spaces for field
operations in Oak Ridge, Tennessee, and Wheat Ridge, Colorado.
The Company believes that the foregoing properties will satisfy the
business and operational needs of the Company and its subsidiaries in the
present and in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
------- -----------------
Indemnification Matters
-----------------------
The Company, along with several other entities, in a prior year
guaranteed a performance bond of Separation relating to the Port of Baltimore
contract. The Company was notified on June 28, 2000 that the performance bond is
being called. It is not known, at this time, the amount, if any, the Company's
share of liability will be.
As of April 14, 2004, 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. No amount has been recorded in the financial statements as the Company
is unable to determine a loss amount, if any, on the issue of indemnification.
15
Incidental Matters
------------------
As of April 14, 2004, 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 Company held its 2002 Annual Meeting at The Fitzpatrick Hotel
located at 687 Lexington Avenue, New York, NY 10015 on September 12, 2003 -
11:00 a.m. EST. All shareholders of record as of the announced record date were
notified of the meeting in a timely manner. All shareholders of record received
the appropriate financial and proxy materials prior to the meeting.
The results of the meeting were as follows:
The stockholders owning a majority of the issued and outstanding shares
of the Company's Common Stock have voted:
1. to elect Bentley J. Blum, Shelby T. Brewer, Frank E. Coffman,
James M. DeAngelis, Paul E. Hannesson, Michael P. Kalleres and
William A. Wilson as Directors;
2. to amend the Certificate of Incorporation to increase the number
of authorized shares of common stock from 125,000,000 shares to
300,000,000 shares.
3. to approve the Company's Short Term Incentive Plan.
4. to ratify the Company's 1998 Stock Option Plan, as amended.
5. to approve options issued to the Chief Executive Officer outside
the Company's 1998 Stock Option Plan, as amended.
6. to approve options issued to the Chief Financial Officer outside
the Company's 1998 Stock Option Plan, as amended.
7. to ratify Tanner + Co. as the Company's independent auditors for
the year ended December 31, 2003.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
------- ----------------------------------------------------------------------
MARKET INFORMATION
On June 28, 1996, the Company issued common stock and warrants at
initial public offering prices of $6.00 per share and $0.10 per warrant. The
Company's warrants, previously extended from June 16, 2001, expired on June 16,
2002. On March 6, 2003, the Common Stock ceased to be listed on the American
Stock Exchange ("AMEX") and began trading in the over-the-counter market in the
so-called "pink sheets" of the National Quotation Bureau, Inc. and the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. (the "OTC
Bulletin Board or OTCBB"), where it is currently traded under the symbol CXII.
As of April 14, 2004, there were 275 record holders of the Company's common
stock.
The following table sets forth, for the fiscal periods shown, the high
and low sale prices (rounded to the nearest cent) for the Company's common stock
and warrants as reported on the AMEX (prior to March 6, 2003) and on the OTCBB
(after March 6, 2003).
Common Stock Warrants*
High Low High Low
---- --- ---- ---
Fiscal 2003
First Quarter......... $0.180 $0.020 - -
Second Quarter........ 0.032 0.019 - -
Third Quarter......... 0.035 0.016 - -
Fourth Quarter........ 0.230 0.013 - -
Fiscal 2002
First Quarter......... $0.21 $0.09 $0.03 $0.01
Second Quarter........ 0.12 0.05 0.01 0.01
Third Quarter......... 0.09 0.05 - -
Fourth Quarter........ 0.12 0.04 - -
* Warrants expired on June 16, 2002
ISSUANCE OF COMMON STOCK SUBSEQUENT TO DECEMBER 31, 2003
The Company issued a total of 9,070,937 shares of its common stock
during the period from January 1, 2004 to April 14, 2004, in connection with
various conversion notices from the holders of the Company's Series E
Convertible Preferred Stock, par value ($0.001) per share (the "Series E
Preferred Stock") and the holders of the Company's Series F Convertible
Preferred Stock, par value ($0.001) per share (the "Series F Preferred Stock").
17
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, 2003, the Company had paid an aggregate
since the stock was issued of $134,000 in cash dividends and the Company has
accrued an additional $838,170 in unpaid 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. During 2003 the Company paid $141,929
in common stock in payment of the accrued dividends on all of the converted
Series E Preferred Stock shares to date.
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, 2003, the Company had paid an aggregate since
the stock was issued of $92,000 in cash dividends and the Company has accrued an
additional $531,775 in unpaid dividends. The Company has the option to pay the
dividends accrued in all periods after September 31, 2000 in the Company's
common stock rather than cash. During 2002 the Company paid $39,387 in common
stock in payment of the accrued dividends on all of the converted Series F
shares to date.
Series H Preferred Stock
------------------------
The holders of the Company's Series H Convertible Preferred Stock, par
value ($0.001) per share (the "Series H Preferred Stock"), are entitled to a
dividend rate of 3% over the term of the securities. Through December 31, 2003,
the Company had not paid cash dividends and the Company has accrued $32,745 in
unpaid dividends. The Company has the option to pay the dividends accrued in all
periods in additional shares of Series H Preferred Stock. See "Recent Sales of
Unregistered Securities -- May 2002 Settlement Agreement Issuance of Series H
Preferred Stock."
Common Stock
------------
The Company has never paid cash dividends on its common stock. Any
future determination by the Board of Directors of the Company with respect to
the payment of cash dividends on the common stock of the Company will depend on
the ability of the Company to service its outstanding indebtedness, the
Company's future earnings, capital requirements, the financial condition of the
Company and such other factors as the Company's Board of Directors may consider.
The Company currently intends to retain its earnings, if any, 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.
18
RECENT SALES OF UNREGISTERED SECURITIES
On October 2, 2002, Mr. Bentley Blum, a Director of the Company, had
previously loaned the Company with $125,000 of cash installments over the period
of one year (the "Blum Loan"). The Company elected to convert the Blum Loan to
the Company's common stock using the conversion feature of the 5-day average
closing price of the Company's common stock prior to October 2, 2002. On October
2, 2002, Blum issued a conversion notice for $125,000 of the outstanding
principal of the Blum Loan into 2,500,000 shares. Mr. Blum continued to provide
cash installments in the form of a loan to the Company through February 2004
(the "Blum Demand Note"). The Blum Demand Note bears interest at 9% per annum
and has no due date at this time. The current principal balance of the Blum
Demand Note is $272,032 as of December 31, 2003 and remains unpaid as of April
14, 2004.
On November 19, 2004, the Company issued a warrant to purchase
27,355,800 shares of its common stock at an exercise price of $0.0285 per share
(the closing price of our common stock on the OTCBB on such date) to the Blum
Asset Trust, a company controlled by Bentley Blum, a Director of the Company, in
consideration for the loans made to the Company and the usage of office space
and personnel of the Blum Asset Trust over the last five years. The Company
believes that this transaction is exempt from the registration requirements of
the Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities.
On June 13, 2001, the Company issued and sold to Milford Capital
Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar")
one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan
Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year
warrant for 333,334 shares of the Company's common stock at an exercise price of
$0.22 per share. The Company pledged its equipment and SET related intellectual
property as collateral for the Milford/Shaar Bridge Loan Notes. The Company is
required to 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
December 31, 2005. In connection with the Milford/Shaar Bridge Loan Notes, the
Company issued to Milford/Shaar in February 2004, a five-year warrant for
250,000 shares of the Company's common stock at an exercise price of $0.03 per
share. The Shaar Fund, Ltd., through the Shaar Bridge Loan, continues to provide
cash installments on a periodic basis in the form of additional principal. The
current principal balance of the Milford/Shaar Bridge Loan Notes is $1,350,749
as of December 31, 2003 and remains unpaid as of April 14, 2004. Additionally,
as of April 14, 2003, there is $119,073 in accumulated forbearance fees and
$100,000 due in exit fees on the Milford/Shaar Bridge Loan Notes. See "MD&A -
Liquidity and Capital Resources."
On May 23, 2001, a private investor purchased $250,000 of the Company's
common stock at the market price. The Company issued the private investor
1,973,077 shares of common stock of the Company as a result of the equity
purchase. In connection with the purchase of the shares of the Company's common
stock, the Company issued the private investor a 2-year warrant for 500,000
shares of the Company's common stock at an exercise price of $0.22 per share.
The Company re-priced this warrant in November 2003 to $0.0285 and extended the
19
expiration date of this warrant to November 19, 2005. The Company believes that
this transaction is exempt from the registration requirements of the Securities
Act under Section 4(2) thereof as a transaction not involving any public
offering of securities. See "MD&A - Liquidity and Capital Resources."
In September 2000, the Company completed $500,000 in financing in the
form of a loan (the "Brewer Note") from S. Brewer Enterprises, Inc. ("SB
Enterprises"), which is owned by one of its officers and directors, Shelby T.
Brewer, Chairman of the Board and Chief Executive Officer of the Company. The
Brewer Note bears a 9.75% interest rate, payable monthly, with a balloon
principal payment at the end of the term. In connection with the Brewer Note,
the Company issued SB Enterprises a 2-year warrant for 100,000 shares of the
Company's common stock at an exercise price of $1.0625 per share. This warrant
expired by it terms in September of 2002. The note was due and payable on March
15, 2001. The Brewer Note was convertible into the Company's common stock at the
market price up through March 15, 2001.
On March 15, 2001, SB Enterprises executed an Amended and Restated
Promissory Note (the "Restated Brewer Note"), which extended the maturity date
of the note until December 31, 2001. Additionally, the conversion feature of the
Restated Brewer Note was changed to the 5-day average closing price of the
Company's common stock prior to a conversion notice. On April 9, 2001, SB
Enterprises issued a conversion notice for $250,000 of the outstanding principal
of the Brewer Restated Note. The conversion price was calculated by the previous
5-day average of the closing price of the Company's common stock and was
converted into 1,041,667 shares.
On December 12, 2002, SB Enterprises executed an Amended and Restated
Promissory Note Extension (the "Restated Brewer Note Extension"), which extended
the maturity date of the note until January 1, 2004. In connection with the
Restated Brewer Note Extension, the Company issued SB Enterprises a 2-year
warrant for 1,000,000 shares of the Company's common stock at an exercise price
of $0.05 per share. On March 14, 2003, SB Enterprises issued a conversion notice
for the remaining principal balance of $250,000 plus accrued interest of
$36,563. The conversion price was calculated by the previous 5-day average of
the closing price of the Company's common stock and was converted into
13,189,842 shares. 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% (in November 2000) 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 to
the Company until January 15, 2005 in exchange for warrants for 2,500,000 shares
of the Company's common stock at an exercise price of $0.0285. The current
principal balance of the Weiss Group Note is $253,603 as of December 31, 2003
and remains unpaid as of April 14, 2004. See "MD&A - Liquidity and Capital
Resources."
20
Effective April 16, 2001, the Company issued warrants to purchase
1,000,000 shares of its common stock at an exercise price of $0.22 per share
(the closing price of our common stock on the AMEX on such date) to all holders
of the Weiss Group Note in consideration of the extension of the due date of
such loans by such persons from February 12, 2001 to June 30, 2001. The Company
believes that this transaction is exempt from the registration requirements of
the Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities.
Effective January 24, 2002, the Company issued warrants to purchase
500,000 shares of its common stock at an exercise price of $0.15 per share (the
closing price of our common stock on the AMEX on such date) to all holders of
the Weiss Group Note in consideration of the extension of the due date of such
loans by such persons from June 30, 2001 to May 31, 2002. The Company believes
that this transaction is exempt from the registration requirements of the
Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities. See "MD&A - Liquidity and Capital Resources."
Effective October 29, 2002, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 1,000,000 shares at an
exercise price of $0.22 per share of the Company's common stock in connection
with the Weiss Group Note. Effective October 29, 2002, the members of the Weiss
Group Note voluntarily cancelled all issued warrants to purchase 500,000 shares
at an exercise price of $0.15 per share of the Company's common stock in
connection with the Weiss Group Note.
Effective October 29, 2002, the Company issued warrants to purchase
1,500,000 shares of its common stock at an exercise price of $0.05 per share
(the closing price of our common stock on the AMEX on such date) to all holders
of the Weiss Group Note in consideration of the extension of the due date of
such loans by such persons from May 31, 2002 to January 1, 2004. The Company
believes that this transaction is exempt from the registration requirements of
the Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities.
Effective February 14, 2004, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 1,500,000 shares at an
exercise price of $0.05 per share of the Company's common stock in connection
with the Weiss Group Note.
Effective February 15, 2004, the Company issued warrants to purchase
2,500,000 shares of its common stock at an exercise price of $0.0285 per share
to all holders of the Weiss Group Note in consideration of the extension of the
due date of such loans by such persons from May 31, 2002 to January 15, 2005.
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.
May 2002 Settlement Agreement Issuance of Series H Preferred Stock
On August 30, 2000, Applied completed a stock purchase agreement with
Dispute Resolution Management, Inc. (DRM) and its two shareholders, William J.
Russell ("Russell") and Tamie B. Speciale ("Speciale").
21
On May 16, 2002, a Notice of Default and Right to Pursue Remedies (the
"Notice") was issued to the Company by William J. Russell and Tamie B. Speciale
(the "Pledgees") claiming that the Company is in default under the Stock
Purchase Agreement (the "Agreement"), between the Company and DRM and the
related Stock Pledge Agreement (the "Stock Pledge"). As of May 16, 2002, the
Company no longer owned an 81% interest in DRM.
On August 19, 2002, the Company entered into a settlement agreement
with DRM (the "DRM Settlement Agreement"). Under terms of the DRM Settlement
Agreement, the Company acknowledged that it had previously received back
4,750,000 shares of its common stock from DRM and its shareholders. As part of
the DRM Settlement Agreement, the Company received an additional 1,187,500
shares of its common stock from DRM and its shareholders.
Additionally, the Company issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per share, each such share of
Series H Preferred having a stated value of $1.00 per share, to DRM, Russell and
Speciale as part of the DRM Settlement Agreement as of September 30, 2002 for
satisfaction of the remaining liabilities relating to the purchase and working
capital of DRM. The Series H Preferred shall have the following rights,
privileges, and limitations:
a) The conversion feature shall be exercisable on June 30, 2003.
b) No Series H Preferred may be converted prior to June 30, 2003.
Until July 31, 2005, only 80,000 shares of the Series H Preferred
shall be convertible in any calendar quarter. The balance of any
unconverted Series H Preferred Stock may be converted at any time
on or after August 1, 2005.
c) The conversion price of the Series H Preferred shall be determined
by the average closing price of Company's common stock in the
previous 30 trading days, but in no event shall the conversion
price be less than $0.20 per share.
d) The Series H Preferred shall have a non-cumulative annual dividend
of 3%, payable in cash or Series H Preferred within 30 days of the
end of the Company's fiscal year, at the Company's election.
e) The Series H Preferred shall not be transferable.
As of December 31, 2003, the Series H Preferred Stock has not been
converted and has unpaid accrued dividends of approximately $33,000.
March 2000 Private Placement of Series F Preferred Stock
On March 20, 2000, the Company completed a $2.0 million private
placement financing with The Shaar Fund Ltd. The Company issued to The Shaar
Fund 226,700 shares of a newly authorized Series F Convertible Preferred Stock
(the "Series F Convertible"), convertible into the Company's common stock, at
any time after September 31, 2000, for a conversion price equal to the
arithmetic mean of the closing prices of the Company's common stock as reported
on the AMEX or the OTCBB 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 or the OTCBB. In May 2005, 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.
22
The Series F Convertible has a variable rate dividend averaging 8.15%
over the term of the securities. The Company reserved the right to redeem all of
the Series F Convertible on or before September 30, 2000 by payment to the
holders of the shares of the Series F Convertible of $2.3 million plus any
accrued and unpaid dividends. Depending upon the market price of the Company's
common stock at the time of conversion, the issuance of the Company's common
stock upon conversion of the Series F Convertible may be subject to shareholder
approval. In addition, the Company issued to The Shaar Fund a warrant to
purchase up to 226,500 shares of the Company's common stock (subject to
adjustment) at a purchase price of $1.94 per share. The warrant expires on March
20, 2005. The Company also issued to Avalon Research Group Inc., as finder in
this transaction, a five-year warrant to purchase up to 250,000 shares of the
Company's common stock (subject to adjustment) at a purchase price of $1.94 per
share. The Company also paid Avalon a "finder's fee" in the amount of $200,000
for this transaction.
The recipient of securities in each of the transactions described under
"Recent Sales of Unregistered Securities" 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 securities issued in this transaction. The Company made
available to each recipient 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, each recipient 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 each 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
or the OTCBB 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
or the OTCBB. In May 2005, the Series E Convertible will automatically convert
into the Company's common stock at a conversion price calculated in accordance
with the above conversion formula plus any accrued and unpaid dividends.
The Series E Convertible has a variable rate dividend averaging 8.15%
over the term of the securities. The Company reserved the right to redeem all of
the Series E Convertible on or before April 30, 2000 by payment to the holders
of the shares of the Series E Convertible of $2.8 million plus any accrued and
unpaid dividends. Depending upon the market price of the Company's common stock
at the time of conversion, the issuance of the Company's common stock upon
conversion of the Series E Convertible may be subject to shareholder approval.
In addition, the Company issued to The Shaar Fund a warrant to purchase up to
312,500 shares of our common stock (subject to adjustment) at a purchase price
of $1.1963 per share. The warrant expires on November 4, 2004. The Company also
issued to Avalon Research Group Inc., as finder in this transaction, a five-year
warrant to purchase up to 250,000 shares of our common stock (subject to
adjustment) at a purchase price of $1.1963 per share. The Company also paid
Avalon a "finder's fee" in the amount of $250,000 for this transaction.
23
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.
24
ITEM 6. SELECTED FINANCIAL DATA.
------ ------------------------
The following table presents selected financial data of the Company, as
of December 31, 2003, 2002, 2001, 2000, and 1999 and for the years then ended.
The following selected historical data is derived from the Company's
Consolidated Financial Statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report.
Consolidated Statement of Operations Data: (in thousands, except per share data)
1999 2000 2001 2002 2003
---------- ----------- ------------ ----------- ----------
Revenue:
Contract revenue............. $ 18,147 $ 17,057 $ 4,590 $ 3,710 $ 660
Cost of sales:
Cost of sales................ 16,127 14,452 3,369 2,108 811
Research and development..... 1,145 993 423 297 70
General and administrative... 4,037 5,228 2,420 1,792 1,700
Depreciation and amortization 696 865 658 314 267
Impairment of Machinery...... -- -- 776 -- --
Impairment of Patents........ -- -- 627 -- --
Impairment of Goodwill....... -- 6,586 -- -- --
Minority interests........... -- -- -- -- --
---------- ----------- ------------ ----------- ----------
Loss from operations............. (3,858) (11,067) (3,683) (801) (801)
Interest income.............. 39 57 38 -- --
Interest expense............. (166) (586) (226) (104) (769)
Equity in net losses of
subsidiary................. -- -- (295) -- --
---------- ----------- ------------ ----------- ----------
Loss before income taxes ........ (3,985) (11,596) (4,166) (905) (2,957)
Income taxes................. -- -- -- -- --
---------- ----------- ------------ ----------- ----------
Loss on disposal of
discontinued operations........ -- -- -- (4,134) --
(Loss) gain from discontinued
operations..................... -- 155 (2,388) (933) --
---------- ----------- ------------ ----------- ----------
Net loss ........................ $ (3,985) $ (11,441) $ (6,554) $ (5,972) $ (2,957)
========== =========== ============ =========== ==========
Net loss per share - basic and
diluted........................ $ (.16) $ (.34) $ (.13) $ (.11) $ (.04)
========== =========== ============ =========== ==========
Weighted average number of shares 24,819 35,866 53,241 57,775 92,035
========== =========== ============ =========== ==========
Consolidated Balance Sheet Data: (in thousands)
1999 2000 2001 2002 2003
---------- ----------- ------------ ----------- ----------
Cash and cash equivalents........ $ 1,797 $ 579 $ 170 $ 59 $ --
Assets held for sale - DRM....... -- 29,687 29,407 -- --
Total assets..................... 16,047 37,473 31,200 736 246
Long term debt................... 716 221 -- 431 1,575
Liabilities held for sale - DRM.. -- 22,966 22,165 -- --
Total liabilities................ 6,096 29,618 29,629 5,025 6,898
Minority interests............... -- -- -- -- --
Stockholders' (deficit) equity... 9,951 7,855 1,571 (4,289) (6,656)
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------- -----------------------------------------------------------------------
OF OPERATIONS.
--------------
Overview
The Company is engaged in providing a range of engineering and
technical services to the public and private sectors related to (i) remediating
contamination in soils, liquids and other materials and disposing of or reusing
certain waste by-products by utilizing SET; and (ii) providing services related
to, environmental management for on-site and off-site identification,
investigation remediation and management of hazardous, mixed and radioactive
waste.
The Company owns technologies related to the separation and destruction
of mixed waste, polychlorinated biphenyls (PCBs) and chlorofluorocarbons (CFCs).
The Company is currently working on the commercialization of these technologies
through development efforts, licensing arrangements and joint ventures. Through
Advanced Sciences, formerly Advanced Sciences, Inc., a subsidiary acquired on
October 1, 1996, the Company has contracts with various government agencies and
private companies in the U.S. As some government contracts are funded in
one-year increments, there is a possibility for cutbacks as these contracts
constitute a major portion of Advanced Sciences' revenues, and such a reduction
would materially affect the operations. However, management believes Advanced
Sciences' existing client relationships will allow the Company to obtain new
contracts in the future.
Applied discontinued the operations of its previously 81% owned
subsidiary DRM, on May 16, 2002 as a result of Applied's inability to meet the
terms and conditions of the Stock Purchase Agreement with DRM. The loss from the
disposition of DRM is recorded at $4,134,000 to Applied. The Company's loss of
the DRM subsidiary may have a material adverse effect on the financial condition
of the Company and its cash flow problems. The Company currently requires
additional cash to sustain existing operations and to meet current obligations
and ongoing capital requirements. Excluding DRM, the Company's current monthly
operating expenses exceed cash revenues by approximately $100,000.
The Company has identified two reportable segments in which it
operates, based on the guidelines set forth in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131. These two
segments are as follows: Commodore Advanced Sciences, Inc., which primarily
provides various engineering, legal, sampling, and public relations services to
Government agencies on a cost plus basis; and Commodore Solutions, Inc., which
is commercializing technologies to treat mixed and hazardous waste.
The Companys auditor's opinion on our fiscal 2002 and 2003 financial
statements contains a "going concern" qualification in which they express doubt
about the Company's ability to continue in business, absent additional
financing. The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements.
Results of Operations
Year ended December 31, 2003 compared to Year ended December 31, 2002
Revenues were $660,125 for the year ended December 31, 2003, compared
to $3,710,000 for the year ended December 31, 2002. The decrease in revenues is
due to the decreases in revenue contribution by Advanced Sciences as certain
contracts were not renewed and other contracts were completed.
In the case of Advanced Sciences, revenues were $568,000 for the year
ended December 31, 2003, compared to $3,448,000 for the year ended 2002.
Revenues in 2002 were primarily from engineering and scientific services
performed for the United States government under a variety of contracts similar
to those in place in 2002. Advanced Sciences had two major customers in 2003,
26
each of which represents more than 10% of annual revenue. The combined revenue
for these two customers was $568,000 or 100% of the Company's total 2003
revenue. The decline in revenues at Advanced Sciences is primarily the result of
fewer contracts and overall, less subcontract work being performed in 2003. 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 $1,854,000 for 2002 to $721,000 for 2003. A reduction in cost of
sales at Advanced Sciences resulted from fewer contracts and overall, less work
performed resulting in decreased revenues. Anticipated losses on contracts are
provided for by a charge to income during the period such losses are first
identified.
In the case of Solution, revenues were $92,000 for the year ended
December 31, 2003 as compared with $262,000 for the year ended December 31,
2002. The decrease is primarily due to the decrease in feasibility studies and
commercial processing. Revenues in 2003 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 $92,000 or 100% of the Solution's total 2003 revenue. The increase in
revenues at Solution is primarily the result of more subcontract work being
performed in 2003. Cost of sales was $90,000 for the year ended December 31,
2003 as compared to $254,000 for the year ended December 31, 2002. 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, 2003, the Company incurred research and
development costs of $70,000, as compared to $297,000 for the year ended
December 31, 2002. 100% of the research and development costs are attributable
to the operations of Solution. In 2003, the Company invested more money in
capital expenditures and less in laboratory work and consultants than it had in
2002. Advanced Sciences did not incur research and development costs in the
years 2002 and 2003.
General and administrative expenses for the year ended December 31,
2003 were $1,700,000 as compared to $1,792,000 for the year ended December 31,
2002. This decrease reflects the impact of some of the restructuring steps in
the Company throughout 2003.
In the case of Advanced Sciences, general and administrative costs
decreased from $754,000 for the year ended December 31, 2002 to $570,000 for the
year ended December 31, 2003. This decrease reflects the impact of some
restructuring steps in Advanced Sciences (including principally a reduction in
personnel) the Company made throughout 2003 due to the inability to replace
certain completed contracts. Solution incurred general and administrative costs
of $73,000 for the year ended December 31, 2003 as compared with $203,000 for
the year ended December 31, 2002. This decrease was primarily due to a more
narrowly focused sales and marketing effort for Solution's services, which has
resulted in contracts that will produce revenue in 2004.
The increase in interest expense of $665,000 from 2002 to 2003 is
primarily related to higher, amortized non-cash interest costs associated with
the Blum Note, Milford/Shaar Note and the Weiss Group Note and higher balances
on the Company's receivable financing line of credit.
27
The loss from discontinued operations is approximately $0 and $933,000
for the years ended December 31, 2003 and 2002. The Company discontinued DRM in
2002 and there were no operations during 2003.
Year ended December 31, 2002 compared to Year ended December 31, 2001
Revenues were $3,710,000 for the year ended December 31, 2002, compared
to $4,590,000 for the year ended December 31, 2001. The decrease in revenues is
due to the decreases in revenue contribution by Advanced Sciences.
In the case of Advanced Sciences, revenues were $3,448,000 for the year
ended December 31, 2002, compared to $4,409,000 for the year ended 2001.
Revenues in 2002 were primarily from engineering and scientific services
performed for the United States government under a variety of contracts similar
to those in place in 2001. Advanced Sciences had two major customers in 2002,
each of which represents more than 10% of annual revenue. The combined revenue
for these two customers was $3,448,000 or 100% of the Company's total 2002
revenue. The decline in revenues at Advanced Sciences is primarily the result of
fewer contracts and overall, less subcontract work being performed in 2002. The
government decided to deal directly with the subcontractor rather than having
Advanced Sciences subcontract this work on behalf of the government. The
government took this action, as the subcontracts became too large. Cost of sales
decreased from $3,080,000 for 2001 to $1,854,000 for 2002. A reduction in cost
of sales at Advanced Sciences resulted from fewer contracts and overall, less
work performed resulting in decreased revenues. Anticipated losses on contracts
are provided for by a charge to income during the period such losses are first
identified.
In the case of Solution, revenues were $262,000 for the year ended
December 31, 2002 as compared with $181,000 for the year ended December 31,
2001. The increase is primarily due to the increase in feasibility studies and
commercial processing. Revenues in 2002 were primarily from remediation services
performed for engineering and waste treatment companies in the U.S. under a
variety of contracts. Solution has two major customers, each of which represents
more than 10% of annual revenue. The combined revenue for these two customers
was $262,000 or 100% of the Solution's total 2002 revenue. The increase in
revenues at Solution is primarily the result of more subcontract work being
performed in 2002. Cost of sales was $254,000 for the year ended December 31,
2002 as compared to $289,000 for the year ended December 31, 2001. The decrease
in cost of sales is attributable to lower sales and marketing expenses for the
SET technology. Anticipated losses on engagements, if any, will be provided for
by a charge to income during the period such losses are first identified.
For the year ended December 31, 2002, the Company incurred research and
development costs of $297,000, as compared to $423,000 for the year ended
December 31, 2001. 100% of the research and development costs are attributable
to the operations of Solution. In 2002, the Company invested more money in
capital expenditures and less in laboratory work and consultants than it had in
2001. Advanced Sciences did not incur research and development costs in the
years 2001 and 2002.
General and administrative expenses for the year ended December 31,
2002 were $1,792,000 as compared to $2,420,000 for the year ended December 31,
2001. This decrease reflects the impact of some of the restructuring steps in
the Company throughout 2002.
28
In the case of Advanced Sciences, general and administrative costs
decreased from $1,219,000 for the year ended December 31, 2001 to $754,000 for
the year ended December 31, 2002. This decrease reflects the impact of some
restructuring steps in Advanced Sciences (including principally a reduction in
personnel) the Company made throughout 2002 due to the inability to replace
certain completed contracts. Solution incurred general and administrative costs
of $203,000 for the year ended December 31, 2002 as compared with $313,000 for
the year ended December 31, 2001. This decrease was primarily due to a more
narrowly focused sales and marketing effort for Solution's services, which has
resulted in contracts that will produce revenue in 2003.
The decrease in interest expense of $122,000 from 2001 to 2002 is
primarily related to lower, amortized non-cash interest costs associated with
the Brewer Note, Milford/Shaar and the Weiss Group Note and lower balances on
the Company's receivable financing line of credit.
The loss from discontinued operations is approximately $933,000 and
$2,388,000 for the years ended December 31, 2002 and 2001, respectively. The
difference results primarily from the estimated loss on disposal of DRM of
approximately $4,134,000. The remaining difference is the result of the reduced
retainers paid by DRM's current customers and the lack of material settlements
on their existing client agreements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003 and December 31, 2002 Advanced Sciences had a
$64,000 and $0 outstanding balance, respectively, on its revolving lines of
credit.
The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements. The
Company's current monthly operating expenses exceed cash revenues by
approximately $100,000 at December 31, 2002.
The Company's auditor's opinion on our fiscal 2002 and 2003 financial
statements contains a 'going concern" qualification in which they express doubt
about the Company's ability to continue in business, absent additional
financing. The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements.
For the year ended December 31 2003, the Company converted 162,500
shares of Series E Preferred for 40,916,155 shares of the Company's common
stock. For the year ended December 31 2003, the Company converted 17,500 shares
of Series F Preferred for 2,450,514 shares of the Company's common stock.
Additionally, the Company issued 1,566,989 and 551,571, respectively, shares of
the Company's common stock in satisfaction of all accrued dividends pertaining
to the Series E and Series F Preferred conversions through February 20, 2003.
The Company issued no shares of the Company's common stock with respect to
accrued dividends pertaining to the Series E and Series F Preferred conversions
from the period February 21, 2003 through December 31, 2003.
For the year ended December 31 2003, the Company converted no shares of
Series H Preferred and issued no stock with respect to accrued dividends
pertaining to the Series H Preferred.
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. The
Weiss Group Note bears interest at 12% per annum and was due and payable on
February 12, 2001. All holders of the Weiss Group Note have granted payment
extensions to the Company until January 15, 2005 in exchange for warrants for
29
2,500,000 shares of the Company's common stock at an exercise price of $0.0285.
The current principal balance of the Weiss Group Note is $253,603 as of December
31, 2003 and remains unpaid as of April 14, 2004.
Effective February 14, 2004, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 1,500,000 shares at an
exercise price of $0.05 per share of the Company's common stock in connection
with the Weiss Group Note.
Effective February 15, 2004, the Company issued warrants to purchase
2,500,000 shares of its common stock at an exercise price of $0.0285 per share
to all holders of the Weiss Group Note in consideration of the extension of the
due date of such loans by such persons from May 31, 2002 to January 15, 2005.
The Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities.
On May 23, 2001, a private investor purchased $250,000 of the Company's
common stock at the market price. The Company issued the private investor
1,973,077 shares of common stock of the Company as a result of the equity
purchase. In connection with the purchase of the shares of the Company's common
stock, the Company issued the private investor a 2-year warrant for 500,000
shares of the Company's common stock at an exercise price of $0.22 per share.
The Company re-priced this warrant in November 2003 to $0.0285 and extended the
expiration date of this warrant to November 19, 2005. The Company believes that
this transaction is exempt from the registration requirements of the Securities
Act under Section 4(2) thereof as a transaction not involving any public
offering of securities. See "MD&A - Liquidity and Capital Resources."
On June 13, 2001, the Company issued and sold to Milford Capital
Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar")
one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan
Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year
warrant for 333,334 shares of the Company's common stock at an exercise price of
$0.22 per share. The Company pledged its equipment and SET related intellectual
property as collateral for the Milford/Shaar Bridge Loan Notes.
The Company 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
December 31, 2005. In connection with the Milford/Shaar Bridge Loan Notes, the
Company issued to Milford/Shaar in February 2004, a five-year warrant for
250,000 shares of the Company's common stock at an exercise price of $0.03 per
share. The Shaar Fund, Ltd., through the Shaar Bridge Loan, continues to provide
cash installments on a periodic basis in the form of additional principal. The
current principal balance of the Milford/Shaar Bridge Loan Notes is $1,350,749
as of December 31, 2003 and remains unpaid as of April 14, 2004. Additionally,
as of April 14, 2003, there is $119,073 in accumulated forbearance fees and
$100,000 due in exit fees on the Milford/Shaar Bridge Loan Notes.
30
On October 2, 2002, Mr. Bentley Blum, a Director of the Company, had
previously loaned the Company with $125,000 of cash installments over the period
of one year (the "Blum Loan"). The Company elected to convert the Blum Loan to
the Company's common stock using the conversion feature of the 5-day average
closing price of the Company's common stock prior to October 2, 2002. On October
2, 2002, Blum issued a conversion notice for $125,000 of the outstanding
principal of the Blum Loan into 2,500,000 shares. Mr. Blum continued to provide
cash installments in the form of a loan to the Company through February 2004
(the "Blum Demand Note"). The Blum Demand Note bears interest at 9% per annum
and has no due date at this time. The current principal balance of the Blum
Demand Note is $272,032 as of December 31, 2003 and remains unpaid as of April
14, 2004. See "MD&A - Liquidity and Capital Resources."
On November 19, 2004, the Company issued a warrant to purchase
27,355,800 shares of its common stock at an exercise price of $0.0285 per share
(the closing price of our common stock on the OTCBB on such date) to the Blum
Asset Trust, a company controlled by Bentley Blum, a Director of the Company, in
consideration for the loans made to the Company and the usage of office space
and personnel of the Blum Asset Trust over the last five years. 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."
The financial information included in the accompanying form 10K for the
period ending December 31, 2003 reflects the terms of the DRM Settlement
Agreement. For the year ended December 31, 2002 the Company recorded a loss on
the disposal of DRM in the amount of $4,134,000. The Company currently requires
additional cash to sustain existing operations and to meet current obligations
and ongoing capital requirements. The Company's current monthly operating
expenses exceed cash revenues by approximately $100,000. Because of the
dissolution of DRM, its' operations have been reflected as discontinued
operations for the years ended December 31, 2002, and 2001.
For the year ended December 31, 2003, the Company incurred a net loss
of $2,957,000 as compared to a net loss of $5,972,000 for the year ended
December 31, 2002.
As shown in the financial statements for the years ended December 31,
2003, 2002, and 2001, the Company incurred losses of $2,957,000, $5,972,000, and
$6,554,000 respectively. The Company has also experienced net cash inflows
(outflows) from operating activities of ($955,000), ($121,000), and $965,000 for
the years ended December 31, 2003, 2002 and 2001 respectively. At December 31,
2003 and 2002 the Company had working capital (deficit) of ($6,814,000) and
($4,276,000) respectively. The increase in the working capital deficit from
December 31, 2002 to December 31, 2003 is mainly due to the Company's loss from
operations and dividends on preferred stock during the year ended December 31,
2003.
As shown in the financial statements for the years ended December 31,
2003 and 2002 the Company had stockholders' (deficit) equity of ($6,652,000) and
($4,289,000) respectively. The Company's net increase in stockholders' deficit
from December 31, 2002 to December 31, 2003 is primarily due to the loss for the
year ended December 31, 2003.
31
The Company currently is negotiating with a lender to obtain debt
financing, to supplement funds generated from operations, to meet the Company's
cash needs over the next 12 months. The Company intends to meet its long term
capital needs through obtaining additional contracts that will generate funds
from operations and obtaining additional debt or equity financing as necessary
or engaging in merger or sale transactions. There can be no assurance that such
sources of funds will be available to the Company or that it will be able to
meet its short or long term capital requirements.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards (the "NOLs") of
approximately $34,000,000, which expire in the years 2010 through 2023. The
amount of NOLs that can be used in any one year will be limited by the
applicable tax laws that are in effect at the time such NOLs can be utilized.
The unused NOLs balances may be accumulated and used in subsequent years. A full
valuation allowance has been established to offset any benefit from the net
operating loss carryforwards. It cannot be determined when or if the Company
will be able to utilize the NOLs.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to account for certain arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue
No. 00-21 did not have a material impact on operating results or financial
condition of the Company as the Company followed the provisions of Statement of
Position ("SOP") 97-2, Software revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2 with Respect to Certain Transactions, which provide
guidance for revenue recognition of arrangements with multiple deliverables.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS 133,
Accounting for Derivatives and Hedging Activities. SFAS 149 is generally
effective for derivative instruments, including derivative instruments embedded
in certain contracts, entered into or modified after June 30, 2003. The adoption
of SFAS 149 did not have a material impact on the operating results or financial
condition of the Company.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. On November 7, 2003, FASB Staff Position 150-3 was issued, which
indefinitely deferred the effective date of SFAS 150 for certain mandatory
redeemable non-controlling interests. As the Company does not have any of these
financial instruments, the adoption of SFAS 150 did not have any impact on the
Company's consolidated financial statements.
32
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R")
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN
46), which was issued in January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity (VIE). As
of the effective date of FIN 46R, an enterprise must evaluate its involvement
with all entities or legal structures created before February 1, 2003, to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no grandfathering of existing entities. Public companies must apply
either FIN 46 or FIN 46R immediately to entities created after January 31, 2003
and no later than the end of the first reporting period that ends after March
15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated
financial position, results of operations or cash flows.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 revises or
rescinds portions of the interpretive guidance included in Topic 13 of the
codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104 did not have a material
effect on the Company's results of operations or financial condition.
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.
33
Further, the Company's business is subject to a number of risks and
uncertainties that would affect any such forward-looking statements. These risks
and uncertainties include, but are not limited to:
o the Company's critical need for additional cash to sustain
existing operations and meet existing obligations and capital
requirements (the Company's auditor's opinion on our fiscal 2002
and 2003 financial statements contains a "going concern"
qualification in which they express doubt about the Company's
ability to continue in business, absent additional financing);
o the ability to generate profitable operations from a large scale
remediation project;
o the ability of the Company to renew its nationwide permit to treat
PCBs;
o the ability of the Company to implement its waste processing
operations, including obtaining commercial waste processing
contracts and processing waste under such contracts in a timely
and cost effective manner; the timing and award of contracts by
the U.S. Department of Energy for the cleanup of waste sites
administered by it;
o the Company's ability to integrate acquired companies;
o the acceptance and implementation of the Company's waste treatment
technologies in the government and commercial sectors;
o the Company's ability to obtain and perform under other large
technical support services projects; developments in environmental
legislation and regulation;
o the ability of the Company to obtain future financing on favorable
terms; and
o other circumstances affecting anticipated revenues and costs.
These risks and uncertainties could cause actual results of the Company
to differ materially from those projected or implied by such forward-looking
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-------- ----------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
------ -------------------------------------------
The consolidated financial statements of the Company are included on
pages F-1 through F-43 of this Annual Report and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
34
ITEM 9A. CONTROLS AND PROCEDURES.
------- -----------------------
a) Evaluation of disclosure controls and procedures. As required by
Rule 13a-15 under the Exchange Act, as of December 31, 2003, the
Company carried out an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and
procedures. This evaluation was carried out under the supervision
and with the participation of the Company's management, including
the Company's President and Chief Executive Officer, and the
Company's Chief Financial Officer and Chief Accounting Officer.
Based upon that evaluation, the Company's President and Chief
Executive Officer, and Chief Financial Officer and Chief
Accounting Officer have concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to
material information relating to the Company required to be
included in the Company's periodic SEC filings. Disclosure
controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in
Company reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rule
and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed
under the Exchange Act is accumulated and communicated to
management, include the Company's Chief Executive Officer, and
Chief Financial Officer and Chief Accounting Officer as
appropriate, to allow timely decisions regarding required
disclosures.
b) Changes in internal controls. There have been no changes in
internal controls or in other factors during our most recent
fiscal quarter that has significantly affected or is reasonably
likely to significantly affect our internal controls over
financial reporting, including any corrective actions with regard
to significant deficiencies and material weaknesses.
35
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 14, 2004 are as
follows:
Name Age Position
--------------------------------------------------------------------------------
Shelby T. Brewer, Ph.D. 67 Chairman of the Board, President and Chief
Executive Officer
O. Mack Jones 63 President & Chief Operating Officer
James M. DeAngelis 43 Chief Financial and Administrative
Officer, Treasurer
Bentley J. Blum 62 Director
Frank E. Coffman 62 Director
Paul E. Hannesson 63 Director
Michael P. Kalleres 64 Director
William A. Wilson 89 Director
SHELBY T. BREWER, Ph.D. was appointed Chairman, Chief Executive Officer
and President of the Company in January 2001. Since April 2000, Mr. Brewer has
served as Chairman and Chief Executive Officer of Solutions, a wholly owned
subsidiary of the Company, which oversees Advanced Sciences. From 1996 to March
2000, Dr. Brewer was President of S. Brewer Enterprises, a consulting firm he
founded that is engaged in supporting mergers and acquisitions, arranging
private and public financing, forming joint ventures abroad, re-positioning
established companies, and fostering new technology enterprises. Dr. Brewer
served as President and CEO of the nuclear power businesses of ABB Combustion
Engineering from 1985 to 1995. From 1981 to 1984, Dr. Brewer served as Assistant
Secretary of Energy in the Reagan administration, holding the top nuclear post
in the U.S. government. Prior to his appointment by President Reagan, Dr. Brewer
achieved positions of increasing line responsibility in private industry, the
U.S. Navy, and the Atomic Energy Commission. Dr. Brewer holds Ph.D. and M.S.
degrees in nuclear engineering from the Massachusetts Institute of Technology.
He holds a B.S. degree in mechanical engineering and a B.A. in humanities from
Columbia University.
BENTLEY J. BLUM has served as a director of the Company since March
1996 and served as its Chairman of the Board from March to November 1996. Mr.
Blum has served as a director of Environmental since 1984 and served as its
Chairman of the Board from 1984 to November 1996. Mr. Blum also currently serves
as a director of Separation, Solution and CFC Technologies. For more than 15
years, Mr. Blum has been actively engaged in real estate acquisitions and
currently is the sole stockholder and director of a number of corporations that
hold real estate interests, oil drilling interests and other corporate
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.
36
FRANK E. COFFMAN, Ph.D. has served as a director of the Company since
June 2002. Mr. Coffman also currently serves as Senior Vice President, Corporate
Development Officer of Holmes & Narver. (August 1997 - Present). Mr. Coffman
served as Senior Vice President, Government & Commercial Programs, IT
Corporation, from January 1995 to May 1997 and as Vice President, Government &
Commercial Programs, IT Corporation from 1984 to 1995. Mr. Coffman served as
Deputy Assistant Secretary for Waste Management for the Department of Energy
("DOE") from 1981 to 1984, Director of the Office of Advanced Nuclear Systems,
DOE from 1980 to 1981 and as a Director of the Division of Fusion Development
and Technology, DOE from 1978 to 1980. Mr. Coffman served as Chief of the Energy
Research Development Agency, Fusion Systems and Applications Studies Branch from
1970 to 1975. Mr. Coffman serves on the Board of Directors of Holmes and Narver.
Mr. Coffman holds a Ph.D. in nuclear physics and a Master of Arts degree in
plasma physics from Vanderbilt University. Mr. Coffman holds a Bachelor of
Science degree in physics from Western Kentucky University.
JAMES M. DEANGELIS has served as a director of the Company since June
2002. Mr. DeAngelis was appointed Vice President-Finance and Treasurer of the
Company in July 1998 and was promoted to Chief Financial and Administrative
Officer and Secretary in December 1998. Mr. DeAngelis has also served as Senior
Vice President-Sales & Marketing of Separation since July 1996, after having
served as its Vice President-Marketing since November 1995. Mr. DeAngelis has
also served as the President of CFC Technologies since September 1994, and
served as Vice President-Marketing of Environmental from September 1992 to
September 1995. Mr. DeAngelis holds a Masters in Business Administration degree
from the American Graduate School of International Management. Mr. DeAngelis
holds Bachelor of Science degrees in Biology and Physiology from the University
of Connecticut.
PAUL E. HANNESSON has served as a director of the Company since March
1996 and served as Chairman of the Board from November 1996 through January
2001. Mr. Hannesson also served as Chief Executive Officer of the Company from
March to October 1996 and as President from March to September 1996, and was
re-appointed Chief Executive Officer in November 1996 and President in May 1997,
all positions he served until January 2001. Mr. Hannesson has been a director of
Environmental since February 1993 and was appointed its Chairman of the Board
and Chief Executive Officer in November 1996. Mr. Hannesson also served as
President of Environmental from February 1993 to July 1996 and was re-appointed
President in May 1997. In July 1998 Mr. Hannesson resigned as Director and
Officer of Environmental. Mr. Hannesson also currently serves as the Chairman of
the Board and Chief Executive Officer of Separation. Mr. Hannesson was a private
investor and business consultant from 1990 to 1993. Mr. Hannesson is the
brother-in-law of Bentley J. Blum, a director of the Company.
O. MACK JONES has served as a Director of the Company since October
2003. Mr. Jones was appointed President and C.O.O. of the Company in April 2003.
Mr. Jones had 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
37
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.
Vice Admiral MICHAEL P. KALLERES, USN (Ret) has served as a director of
the Company since June 2002. VADM Kalleres currently serves as President of Dare
to Excel Inc. (1998 to present). He also served as President and Chief Executive
Officer of Global Associates, Ltd., Technology Services Group from 1994 to 1998.
VADM Kalleres retired from active duty in September 1994 after 32 years as a
naval officer. His last assignment was as Commander, Military Sealift Command,
an organization of over 8,000 people, from which he successfully operated nearly
150 maritime vessels and 27 offices worldwide. VADM Kalleres was awarded 18
personal/unit military/combat decorations including the Defense Distinguished
Service Medal (2 awards) and the U.S. Navy Distinguished Service Medal. He is
also a recipient of the Congressional, Ellis Island Medal of Honor. He is also a
Distinguished Graduate of the U.S. Naval War College and a graduate of the
National War College. VADM Kalleres is a former member (1994-1998) of the
Defense Science Board, the Naval Studies Board of the National Academy of
Science. He is also a board member of the Dean's Advisory Council at the
Krannert School of Management-Purdue University, and the National Board of the
Salvation Army. Vice Admiral Kalleres was awarded a Bachelor of Science Degree
in Industrial Management and Engineering from the Krannert School of
Management-Purdue University, and a Master of Science Degree in Political and
International Affairs from George Washington University.
WILLIAM A. WILSON (Ambassador) has served as a director of the Company
since June 2002. Mr. Wilson has been active in ranching and farming in
California and Mexico from 1980 to the present. Mr. Wilson was active in real
estate development in California from 1961 through 1980. Mr. Wilson served as
Chief Engineer of Wilson Oil Tools from 1938 through 1955 and as Chairman from
1955 to 1961 when the company was sold to Joy Manufacturing, Co. Mr. Wilson
served as the Presidential Envoy to the Holy See from 1980 to 1984 and as
Ambassador to the Holy See from 1984 to 1986. Mr. Wilson is a Trustee of Saint
John's Hospital and a member of the Knights of Malta. Mr. Wilson served on the
Board of Directors of Jorgensen Steel Co. from 1973 to 1984 and again from 1986
to 1991. Mr. Wilson also served on the Board of Directors of Pennzoil Company
from 1983 to 1987. Mr. Wilson holds a Stanford University BA Mechanical
Engineering from Stanford University and a Doctor of Laws, Honoris Causa from
Assumption College, Barry University, and Pepperdine University.
Each director is elected to serve for a term of one year or until his
or her successor is duly elected and qualified. The Company's officers are
elected by, and serve at the pleasure of, the Board of Directors, subject to the
terms of any employment agreements. Messrs. Hannesson and Blum are
brothers-in-law. No family relationship exists among any other directors or
executive officers of the Company.
KEY EMPLOYEES
None.
38
BOARD COMMITTEES
The Company's Board of Directors has (i) an Audit Committee and (ii) a
Compensation, Stock Option and Benefits Committee. The Company no longer
maintains an Executive and Finance Committee (the "Finance Committee"). On
August 30, 2000, the Board of Directors unanimously voted to abolish the Finance
Committee and determined that the entire Board of Directors would perform its
function.
As of December 31, 2003, the Compensation, Stock Option and Benefits
Committee, was composed of Frank E. Coffman, as Chairman, Michael P. Kalleres,
William A. Wilson and Shelby T. Brewer. The Compensation, Stock Option, and
Benefits Committee has responsibility for establishing and reviewing employee
and consultant/advisor compensation, bonuses and incentive compensation awards,
administering and interpreting the Company's 1998 Stock Option Plan, as amended,
( the "1998 Plan"), and determining the recipients, amounts and other terms
(subject to the requirements of the 1998 Plan) of options which may be granted
under the 1998 Plan and outside the 1998 Plan, from time to time and providing
guidance to management in connection with establishing additional benefit plans.
As of December 31, 2003, the Audit Committee was composed of Michael P.
Kalleres as Chairman, Frank E. Coffman, William A. Wilson and James M.
DeAngelis. The responsibilities of the Audit Committee include recommending to
the Board of Directors the firm of independent accountants to be retained by the
Company, reviewing with the Company's independent accountants the scope and
results of their audits, reviewing with the independent accountants and
management the Company's accounting and reporting principles, policies and
practices, as well as the Company's accounting, financial and operating controls
and staff, supervising the Company's policies relating to business conduct and
dealing with conflicts of interest relating to officers and directors of the
Company.
AUDIT COMMITTEE AND FINANCIAL EXPERT
Michael P. Kalleres currently serves as the Chairman of the Audit
Committee but is not deemed to be an independent financial expert for the
Company. Mr. DeAngelis qualifies as an audit committee financial expert but is
not independent of management. We believe the cost related to retaining a
financial expert at this time is prohibitive. Further, because of our limited
operations, we believe the services of a financial expert are not warranted.
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. 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.
39
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the year ended December 31, 2003, and upon a
review of Forms 5 and amendments thereto furnished to the Company with respect
to the year ended December 31, 2003, 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, 2003.
CODE OF ETHICS
A code of ethics relates to written standards that are reasonably
designed to deter wrongdoing and to promote:
1. Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships.
2. Full, fair, accurate, timely and understandable disclosure in
reports and documents that are filed with, or submitted to the
Securities and Exchange Commission and in other public
communications made by the Company.
3. Compliance with applicable government laws, rules and regulations.
4. The prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and
5. Accountability for adherence to the code.
We have not adopted a corporate code of ethics. Our board of directors
is considering over the next year, establishing such a code of ethics.
40
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 2003, 2002 and 2001 to all persons serving as
the Company's Chief Executive Officer during 2003, 2002, and 2001 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 $100,000
during any such year.
Summary Compensation Table
Annual Compensation Long-Term Compensation
----------------------------------------- -----------------------------------------------------
Other Securities
Annual Restricted Under- All Other
Compen- Stock Lying LTIP Compen-
Name and Principal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($) ($) (#) ($) (4)
(a) (b) (c) (d) (e) (g) (g) (h) (i)
------------------------------------------------------------------------------------------------------------------------------------
Shelby T. Brewer, Ph.D.(1) 2003 -0-(2) -0- -0- -0- 39,450,846(3) -0- 30,000(4)
Chief Executive Officer 2002 69,677(2) -0- -0- -0- 2,865,200(3) -0- 30,000(4)
2001 90,137(2) -0- -0- -0- 200,000(3) -0- -0-
Paul E. Hannesson 2003 -0- -0- -0- -0- 4,818,075(6) -0- -0-
Former Chief Executive Officer 2002 -0- -0- -0- -0- 1,181,925(6) -0- -0-
2001 77,242(5) -0- -0- -0- -0- -0- -0-
James M. DeAngelis(7) 2003 12,480(8) -0- -0- -0- 20,641,812(9) -0- -0-
Senior Vice President & Chief 2002 114,175(8) -0- -0- -0- 1,841,688(9) -0- -0-
Financial Officer 2001 164,368(8) -0- -0- -0- -0- -0- -0-
William E. Ingram 2003 -0- -0- -0- -0- -0- -0- -0-
Former Vice President & 2002 -0- -0- -0- -0- -0- -0- -0-
Controller 2001 20,645(10) -0- -0- -0- -0- -0- -0-
O. Mack Jones(11) 2003 103,938(12) -0- -0- -0- 10,240,625(13) -0- -0-
President & 2002 110,019(12) -0- -0- -0- 1,759,375(13) -0- -0-
Chief Operating Officer 2001 134,805(12) -0- -0- -0- 100,000(13) -0- -0-
Peter E Harrod 2003 -0- -0- -0- -0- -0- -0- -0-
Former President 2002 -0- -0- -0- -0- -0- -0- -0-
Advanced Sciences 2001 49,460(14) -0- -0- -0- 200,000(15) -0- -0-
(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 from January 2001 through October
2003 and continues to serves as Chief Executive Officer and a
director since October 2003 to present.
(2) Represents the amount of Mr. Brewer's base salary paid by the
Company. Mr. Brewer's base salary for 2003 from January through
April was $250,000, and from May through December was $285,000 of
41
which $271,000 was originally deferred until December 31, 2003,
and remains unpaid as of April 14, 2004. Mr. Brewer's base salary
for 2002 was $250,000 of which $184,231 was originally deferred
until December 31, 2002, and remains unpaid as of April 14, 2004.
Mr. Brewer's base salary for 2001was $250,000 of which $160,000
annually originally deferred until December 31, 2001, and remains
unpaid as of April 14, 2004. Mr. Brewer's base salary for 2000 was
$90,000.
(3) Represents shares of common stock underlying stock options granted
to Mr. Brewer by the Company in his capacity as an officer and
director of the Company. Mr. Brewer canceled prior options for
840,000 shares of common stock voluntarily on October 2, 2002.
(4) Represents a $1,000,000 Life Insurance Policy in the name of
Shelby T. Brewer paid on behalf of Mr. Brewer by the Company.
(5) Represents the amount of Mr. Hannesson's base salary paid by the
Company. The Company previously recorded a liability for $344,000
representing amounts owed to Mr. Hannesson under his employment
contract, but deferred per agreement. The deferred salary amount
was used by Mr. Hannesson to offset a portion of the exercise
price and taxes with respect to Mr. Hannesson's stock option
exercise of 830,000 stock options in July 2000. See "Certain
Relationships and Related Transactions--Services Agreement." Mr.
Hannesson was replaced by Shelby T. Brewer effective January 15,
2001. Mr. Hannesson remains a director of the Company.
(6) Represents shares of common stock underlying stock options granted
to Mr. Hannesson by the Company in his capacity as an officer and
director of the Company. Mr. Hannesson canceled prior options for
2,147,500 shares of common stock voluntarily on October 2, 2002.
(7) Mr. DeAngelis served as Vice President and Treasurer of the
Company from July 1998 to December 1999 and as Sr. Vice President,
Chief Financial and Administrative Officer, Treasurer and
Secretary from December 1999 to present. Mr. DeAngelis has served
as a director of the Company since June 2002.
(8) Represents the amount of Mr. DeAngelis' base salary paid by the
Company. Mr. DeAngelis' total base salary for 2003 from January
through April was $165,000, and from May through December was
$225,000 of which $194,520 was originally deferred until December
31, 2003, and remains unpaid as of April 14, 2004. Mr. DeAngelis'
total base salary for 2002 was $165,000 of which $55,985 was
originally deferred until December 31, 2002, and remains unpaid as
of April 14, 2004. Mr. DeAngelis' total base salary for 2001 was
$165,000 of which $33,000 was originally deferred until December
31, 2002, and remains unpaid as of April 14, 2004. Mr. DeAngelis'
base salary for 2000 and 1999 was $165,000 and $145,000
respectively.
(9) Represents shares of common stock underlying stock options granted
to Mr. DeAngelis by the Company in his capacity as an officer of
the Company. Mr. DeAngelis canceled prior options for 681,250
shares of common stock voluntarily on October 2, 2002.
(10) Represents the amount of Mr. Ingram's base salary paid by the
Company. Mr. Ingram's total base salary for 2001, 2000 and 1999
was $150,000. Mr. Ingram resigned his management position
effective January 12, 2001.
(11) 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, and President and
Chief Operating Officer from April 2003 to present. Mr. Jones has
served as a director of the Company since October 2003.
(12) Represents the amount of Mr. Jones' base salary paid by the
Company. Mr. Jones' total base salary for 2003 from January
through April was $165,000, and from May through December was
$250,000 of which $115,485 originally deferred until December 31,
2003, and remains unpaid as of April 14, 2004. Mr. Jones' total
base salary for 2002 was $165,000 of which $60,581 originally
deferred until December 31, 2002, and remains unpaid as of April
14, 2004. 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 April 14, 2004. Mr. Jones' base salary for
2000 and 1999 was $150,000.
(13) Represents shares of common stock underlying stock options granted
to Mr. Jones the Company in his capacity as an officer of the
Company. Mr. Jones canceled prior options for 437,500 shares of
common stock voluntarily on October 2, 2002.
(14) Represents the amount of Mr. Harrod's base salary paid by the
Company, through its wholly owned subsidiary, Advanced Sciences.
Mr. Harrod's total base salary for 1997, 1998 and 1999 was
$150,000, $170,000, and $190,000 respectively. Mr. Harrod resigned
his management position effective February 28, 2001.
(15) Represents shares of common stock underlying stock options granted
to Mr. Harrod by the Company in his capacity as an officer of the
Company. Mr. Harrod resigned his management position effective
February 28, 2001.
42
STOCK OPTIONS
The following table sets forth certain information concerning options
granted during the year ended December 31, 2003 to the individuals listed in the
Summary Compensation Table pursuant to the Company's 1998 Stock Option Plan, as
amended, (the "1998 Plan") and to certain individuals outside of the 1998 Plan.
The Company has no outstanding stock appreciation rights and granted no stock
appreciation rights during the year ended December 31, 2003.
Option Grants in Last Fiscal Year
Individual Grants
------------------------------------------------------------------
Potential Realizable Value
Number of Percent of at Assumed Annual Rates of
Securities Total Options Exercise of Stock Price Appreciation for
Underlying Granted to Base Option Term(6)
Options Employees in Price Expiration ----------------------------
Name Granted (#) Fiscal Year(5) ($/Share) Date 5% ($) 10% ($)
------------------------------------------ -------------------- ------------- --------------- ----------------------------
(a) (b) (c) (d) (e) (f) (g)
Shelby T. Brewer.......... 39,450,846(1) 51.18% 0.0285 12/14/08 -0- -0-
James M. DeAngelis........ 20,641,812(2) 26.78% 0.0285 12/14/08 -0- -0-
O. Mack Jones............. 10,240,625(3) 13.29% 0.0285 12/14/08 -0- -0-
Paul E. Hannesson......... 4,818,075(4) 6.25% 0.0285 12/14/08 -0- -0-
-----------------------------------------------------------------------------
(1) Options to purchase 39,450,846 shares of common stock were issued
on November 19, 2003 outside of the 1998 Plan of which 100% vested
upon issuance.
(2) Options to purchase 20,641,812 shares of common stock were issued
on November 19, 2003 outside of the 1998 Plan of which 100% vested
upon issuance.
(3) Options to purchase 10,240,625 shares of common stock were issued
on November 19, 2003 outside of the 1998 Plan of which 100% vested
upon issuance.
(4) Options to purchase 4,818,075 shares of common stock were issued
on November 19, 2003 outside of the 1998 Plan of which 100% vested
upon issuance.
(5) Percentages based on 77,081,358 stock options granted (under the
1998 Plan and outside the 1998 Plan) during the year ended
December 31, 2003.
(6) The closing price for the Company's common stock on December 31,
2003 was $0.013. The closing price is used for all the subsequent
stock appreciation calculations.
43
The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the
1998 Plan and outside of the 1998 Plan at December 31, 2003 by the
individuals listed in the Summary Compensation Table.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares Value at Fiscal Year-End(#) at Fiscal Year-End($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($)(1) Un-exercisable Un-exercisable(2)
---------------------------- ------------------ --------------- ------------------------------ ----------------------------
(a) (b) (c) (d) (e)
Shelby T. Brewer............ -0- -0- 40,316,046 / 40,316,046 -0- /-0-
Paul E. Hannesson........... -0- -0- 6,000,000 / 6,000,000 -0- /-0-
James M. DeAngelis.......... -0- -0- 21,483,500 / 21,483,500 -0- / -0-
O. Mack Jones............... -0- -0- 12,000,000 / 12,000,000 -0- / -0-
(1) Represents the difference between the last reported sale price of
the Common Stock on December 31, 2003 ($0.013), and the exercise
prices of the options (ranging from $0.0285 to $0.07) multiplied
by the applicable number of options exercised.
(2) Represents the difference between the exercise price and the
closing price on December 31, 2003, multiplied by the applicable
number of securities.
44
EMPLOYMENT AGREEMENTS
The Company has no 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
December 31, 2003 were Frank E. Coffman (Chairman), Michael P. Kalleres, William
A. Wilson and Shelby T. Brewer.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee was established in November 1996 and is
responsible for, among other things, establishing the compensation policies
applicable to executive officers of the Company. The Compensation Committee was
composed of Frank E. Coffman (Chairman), Michael P. Kalleres, William A. Wilson
and Shelby T. Brewer at December 31, 2003, all of whom, with the exception of
Shelby T. Brewer, were non-employee Directors of the Company. All decisions of
the Compensation Committee relating to the compensation of the Company's
executive officers are reviewed by, and are subject to the final approval of,
the full Board of Directors of the Company. Set forth below is a report prepared
by Mr. Coffman, Mr. Kalleres and Mr. Wilson in their capacities as members of
the Compensation Committee at December 31, 2003, addressing the Company's
compensation policies for 2003 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;
45
o encourage behavior that exemplifies the Company's values relating
to customers, quality of performance, employees, integrity,
teamwork and good citizenship;
o assess performance based on results and pre-set goals that link
the business activities of each individual to the goals of the
Company; and
o increase stock ownership to promote a proprietary interest in the
success of the Company.
Executive Officer Compensation
Each year the Compensation Committee conducts a full review of the
Company's executive compensation program. This review includes a comprehensive
evaluation of the competitiveness of the Company's compensation program and a
comparison of the Company's executive compensation to certain other public
companies, which in the view of the Compensation Committee represent the
Company's most direct competitors for executive talent. It is the Compensation
Committee's policy to target overall compensation for executive officers of the
Company taking into account the levels of compensation paid for such positions
by such other public companies. A variety of other factors, however, including
position and time in position, experience, and both Company performance and
individual performance, will have an impact on individual compensation amounts.
The key elements of the Company's executive compensation program in
2003 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 2003, 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, 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 from January through April 2003 and then received
a base salary at an annual rate of $285,000 from May through December 2003, of
which $271,000 annually was deferred until December 31, 2003, and remains unpaid
as of April 14, 2004, for services rendered to the Company. Mr. Brewer received
a base salary at an annual rate of $250,000 in 2001 and 2002, of which $160,000
annually was deferred until December 31, 2002, and remains unpaid as of April
14, 2004, 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 2003,
the Compensation Committee took into account the salaries of chief executive
46
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 2002
goals and his individual contributions to the Company and its affiliates. The
Compensation Committee concluded that he had achieved his 2002 goals and had
provided a leadership role in achieving the Company's and its affiliates'
strategic priorities for 2002. The Compensation Committee also considered Mr.
Brewer's decisive management of operational and strategic issues, his drive to
reinforce a culture of innovation and his ability and dedication to enhance the
long-term value of the Company and its affiliates for their respective
stockholders. In making its salary decisions with respect to Mr. Brewer, the
Compensation Committee exercised its discretion and judgment based on the above
factors, and no specific formula was applied to determine the weight of each
factor.
Mr. Brewer's base salary was increased from $250,000 for 2002 to
$285,000 in April 2003, representing an increase of approximately 14%. On
January 1, 2003, Mr. Brewer agreed to defer $271,000 of his base salary until
December 31, 2002, which remains unpaid as of April 14, 2004.
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 2003, no annual incentive
bonuses were paid to the individuals named in the Summary Compensation Table.
Stock Options. The Compensation Committee has the power to grant stock
options under the 1998 Plan and outside of the 1998 Plan. With respect to
executive officers, it has been the Compensation Committee's practice to grant,
on an annual basis, stock options that vest at the rate of 20% upon grant and
20% in each calendar year thereafter for four years, and that are exercisable
over a ten-year period at exercise prices per share set at the fair market value
per share on the date of grant. Generally, the executives must be employed by
the Company at the time the options vest in order to exercise the options and,
upon announcement of a Change in Control (pursuant to and as defined in the 1998
Plan), such options become immediately exercisable. The Compensation Committee
believes that stock option grants provide an incentive that focuses the
executives' attention on managing the Company from the perspective of an owner
with an equity stake in the business. The Company's stock options are tied to
the future performance of the Company's stock and will provide value to the
recipient only when the price of the Company's stock increases above the option
grant price.
A total of 77,081,358, 9,847,218, and 920,000 stock options were
granted pursuant to the 1998 Plan and outside the 1998 Plan in 2003, 2002 and
2001 respectively. 39,450,846, 2,865,000, and 200,000 of such options were
granted to Mr. Brewer in 2003, 2002 and 2001 respectively, and 35,700,512,
4,634,238, and 400,000 of such options were granted (in the aggregate) to other
individuals named in the Summary Compensation Table in 2003, 2002 and 2001
respectively. The number of stock options granted in 2003, 2002 and 2001 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.
47
Impact of Section 162(m) of the Internal Revenue Code
The Compensation Committee's policy is to structure compensation awards
for executive officers that will be consistent with the requirements of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Section
162(m) limits the Company's tax deduction to $1.0 million per year for certain
compensation paid in a given year to the Chief Executive Officer and the four
highest compensated executives other than the Chief Executive Officer named in
the Summary Compensation Table. According to the Code and corresponding
regulations, compensation that is based on attainment of pre-established,
objective performance goals and complies with certain other requirements will be
excluded from the $1.0 million deduction limitation. The Company's policy is to
structure compensation awards for covered executives that will be fully
deductible where doing so will further the purposes of the Company's executive
compensation program. However, the Compensation Committee also considers it
important to retain flexibility to design compensation programs that recognize a
full range of performance criteria important to the Company's success, even
where compensation payable under such programs may not be fully deductible. The
Company expects that all compensation payments in 2003 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 2003, the Compensation Committee believes that the
Company's current executive compensation program meets such standards and has
contributed, and will continue to contribute, to the Company's and its
stockholders' long-term success.
COMPENSATION, STOCK OPTION AND BENEFITS COMMITTEE
William A. Wilson (Chairman)
Frank E. Coffman
Paul E. Hannesson
Michael P. Kalleres
The Report of the Compensation Committee on Executive Compensation
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Annual Report into any filing under the
Securities Act, or under the Exchange Act, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
48
EQUITY COMPENSATION PLAN INFORMATION
The following table reflects the number of shares of our common stock
that, as of April 14, 2004, were outstanding and available for issuance under
compensation plans that have previously been approved by our stockholders as
well as compensation plans that have not previously been approved by our
stockholders.
Number of Securities
Remaining Available for
Number of Securities to be Weighted-Average Future Issuance Under
Issued Upon Exercise of Exercise Price of Equity Compensation
Outstanding Options, Outstanding Options, Plans (Excluding
Warrants and Rights Warrants and Rights ($) Securities Reflected in Column (a))
Plan Category (a) (b) (c)
Equity Compensation Plans
Approved by Security
Holders (1) 13,461,458 0.06 4,538,542
Equity Compensation Plans not
Approved by Security
Holders (2) 75,151,358 0.03 -0-
Total 88,612,816 0.05 4,538,542
___________________________
Consists of options issuable under the 1998 Stock Option Plan, as
amended.
Includes options to purchase a total of 75,151,358 shares issued to Mr.
Brewer, Mr. DeAngelis, Mr. Jones, and Mr. Hannesson in November 2003 outside of
the 1998 Stock Option Plan, as amended.
The following is a brief description of the material features of the
equity compensation plans not approved by our stockholders that are reflected in
the chart above.
On December 14, 1998, our Board of Directors approved the adoption of
the 1998 Stock Option Plan, as amended. The purpose of this plan is to advance
the interests of our stockholders by enhancing our ability to attract, retain
and motivate persons who make important contributions to the Company by
providing them with equity ownership opportunities and performance-based
incentives that better align their interests with those of our stockholders. A
total of 15,000,000 shares of our common stock, subject to adjustment in the
event of a stock split or similar event, is issuable to our consultants,
advisors and employees, officers and directors. A total of 10,000,000 shares of
our common stock have been duly registered under the Company's S-8 filings under
the Plan. The remaining 5,000,000 shares have been approved by the directors for
issuance under the Plan but have yet to be registered under an S-8 filing. The
plan provides for the granting of non-qualified options. Ten Year Option
Repricings
49
The following table sets forth information regarding options held by
the Commodore Named Executive Officers and Directors that were voluntarily
surrendered by such persons, after which the Company issued new options to such
persons at current fair market value. The Compensation Committee approved these
transactions in order to restore the incentive value of such options.
Number of Length of
Securities Exercise Price Original
Underlying of Option at Option Term
Options Market Price of Stock Time of New At Date of
Repriced or at Time of Repricing Repricing or Exercise Repricing
Date Amended (#) or Amendment ($)(1) Amendment ($) Price ($) or Amendment
Shelby T. Brewer 10/02/02 200,000 $0.07 $0.288 (2) 12/14/08
10/02/02 500,000 $0.07 $1.00 (2) 12/14/08
10/02/02 140,000 $0.07 $1.06 (2) 12/14/08
James M. DeAngelis 10/02/02 181,250 $0.07 $0.4375 (3) 12/14/08
10/02/02 300,000 $0.07 $0.288 (3) 12/14/08
10/02/02 200,000 $0.07 $0.688 (3) 12/14/08
O. Mack Jones 10/02/02 187,500 $0.07 $0.4375 (4) 12/14/08
10/02/02 100,000 $0.07 $0.288 (4) 12/14/08
10/02/02 150,000 $0.07 $0.688 (4) 12/14/08
Paul E. Hannesson 10/02/02 147,500 $0.07 $0.4375 (5) 12/14/08
10/02/02 1,000,000 $0.07 $0.50 (5) 12/14/08
Bentley J. Blum 10/02/02 70,000 $0.07 $0.4375 (6) 12/14/08
10/02/02 70,000 $0.07 $1.00 (6) 12/14/08
_________________________
Represents the closing price of our common stock on October 2, 2002 as
reported by the AMEX Stock Market.
In October 2002, Mr. Brewer, the Company's Chairman of the Board and
Chief Executive Officer, voluntarily surrendered options to purchase 840,000
shares of our common stock, after which the Company issued to him options to
purchase 840,200 shares of our common stock so long as Mr. Brewer continues to
be an eligible participant under the 1998 Stock Option Plan, as amended. The
exercise price of the new options is equal to 100% of the fair market value of
our common stock on the date of grant of the new options, as determined by the
last reported sales price of our common stock as reported by the AMEX Stock
Market on the date we granted the new options.
50
In October 2002, Mr. DeAngelis, the Company's Chief Financial and
Administrative Officer, Treasurer and Secretary, voluntarily surrendered options
to purchase 681,250 shares of our common stock, after which the Company issued
to him options to purchase 681,250 shares of our common stock so long as Mr.
DeAngelis continues to be an eligible participant under the 1998 Stock Option
Plan, as amended. The exercise price of the new options is equal to 100% of the
fair market value of our common stock on the date of grant of the new options,
as determined by the last reported sales price of our common stock as reported
by the AMEX Stock Market on the date we granted the new options.
In October 2002, Mr. Jones, the Company's President and Chief Operating
Officer, voluntarily surrendered options to purchase 437,500 shares of our
common stock, after which the Company issued to him options to purchase 437,500
shares of our common stock so long as Mr. Jones continues to be an eligible
participant under the 1998 Stock Option Plan, as amended. The exercise price of
the new options is equal to 100% of the fair market value of our common stock on
the date of grant of the new options, as determined by the last reported sales
price of our common stock as reported by the AMEX Stock Market on the date we
granted the new options.
In October 2002, Mr. Hannesson, the Company's former Chairman of the
Board and Chief Executive Officer, voluntarily surrendered options to purchase
1,147,500 shares of our common stock, after which the Company issued to him
options to purchase 1,147,500 shares of our common stock so long as Mr.
Hannesson continues to be an eligible participant under the 1998 Stock Option
Plan, as amended. The exercise price of the new options is equal to 100% of the
fair market value of our common stock on the date of grant of the new options,
as determined by the last reported sales price of our common stock as reported
by the AMEX Stock Market on the date we granted the new options.
In October 2002, Mr. Blum voluntarily surrendered options to purchase
140,000 shares of our common stock, after which the Company issued to him
options to purchase 144,200 shares of our common stock so long as Mr. Blum
continues to be an eligible participant under the 1998 Stock Option Plan, as
amended. The exercise price of the new options is equal to 100% of the fair
market value of our common stock on the date of grant of the new options, as
determined by the last reported sales price of our common stock as reported by
the AMEX Stock Market on the date we granted the new options.
51
SHAREHOLDER RETURN PERFORMANCE
This graph compares our total stockholder returns, the Standard and
Poor's 500 Composite Stock Index, the Standard and Poor's Small Cap Composite
Environmental Services Stock Index, the Standard and Poor's 500 Composite
Environmental Services Stock Index, and the Standard and Poor's 500 Super
Composite Environmental Services Stock Index. The graph assumes $100 invested at
the per share closing price of the common stock of Commodore Applied
Technologies, Inc. on the American Stock Exchange, from June 28, 1996 through
March 6, 2003, and then on the Over the Counter Bulletin Board from that point
forward.
06/28/1996 12/26/1997 12/25/1998 12/31/1999 12/29/2000 12/28/2001 12/27/2002 12/31/2003
CXII 100.00 53.93 5.62 14.61 4.49 2.34 1.26 0.27
S&P 500 100.00 139.64 182.85 219.09 196.87 173.12 130.53 163.51
S&P Small Cap
Environmental 100.00 87.25 64.24 62.00 102.29 87.92 70.85 79.51
Services
S&P 500 Environmental
Services 100.00 100.82 107.49 49.05 79.42 90.87 63.69 83.03
S&P Super
Composite
Environmental 100.00 102.84 106.11 52.62 85.52 95.02 70.92 90.25
Services
Comparison of initial $100 investment in various indices versus the
common stock of the Company.
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------- --------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information, as of December 31,
2003, 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
--------------------------------------------------------------------------------
Shelby T. Brewer, PhD (1)..... 62,366,468(5) 37.54%
Bentley J. Blum(2)............ 35,155,692(6) 22.90%
James M. DeAngelis (2)........ 22,583,584(7) 15.53%
O. Mack Jones (3)............. 12,000,000(8) 8.90%
Commodore Environmental
Services, Inc. (2)............ 8,382,302(9) 6.82%
Paul E. Hannesson (2)......... 7,509,981(10) 5.80%
(1) The address of Shelby T. Brewer is 2151 Jamieson Street, Carlyle
Towers, Suite 308, Alexandria, Virginia 22314.
(2) The address of Commodore Environmental Services, Inc., Bentley J.
Blum, Paul E. Hannesson, and James M. DeAngelis is 150 East 58th
Street, Suite 3238, New York, New York 10155.
(3) The address of O. Mack Jones is 507 Knight Street, Richland,
Washington 99352.
(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) Consists of: (i) 3,428 shares of common stock (ii) 490,695 shares
of our common stock representing the balance held of the common
stock issued pursuant to the Restated Brewer Note, dated as of
March 15, 2001, between the Company and SB Enterprises and a
subsequent conversion notice for 50% of the outstanding principal
dated as of April 9, 2001; (iii) 865,200 shares of the Company
common stock underlying currently exercisable options granted to
Mr. Brewer by the Company under the 1998 Plan; (iv) 2,000,000
shares of the Company common stock underlying currently
exercisable options granted to Mr. Brewer by the Company outside
of the Company's 1998 Plan; (v) 1,000,000 shares of our common
stock underlying a currently exercisable two year warrant at an
exercise price of $0.05 per share granted to S.B. Enterprises in
connection with the extension of the Brewer Note until January 1,
2004; and (vi) 39,450,846 shares of our common stock underlying a
currently exercisable five year warrant at an exercise price of
$0.0285 per share granted to Mr. Brewer outside of the Company's
1998 Plan.
53
(6) Consists of: (i) 2,500,000 shares of our common stock issued to
Bentley J. Blum in exchange for $125,000 of debt owed to Mr. Blum
from the Company; (ii) 144,200 shares of the Company common stock
underlying currently exercisable options granted to Mr. Blum by
the Company under the Company's 1998 Plan; (iii) 27,355,800 shares
of our common stock underlying a currently exercisable five year
warrant at an exercise price of $0.0285 per share granted to the
Blum Asset Trust by the Company in connection with the Blum Loan
and services provided by the Blum Asset Trust over the last five
years; and (iv) Mr. Blum's indirect beneficial ownership of common
stock based upon his beneficial ownership of 28,479,737 shares and
his spouse's ownership of 2,000,000 shares of Environmental common
stock, representing together 37.74% of the outstanding shares of
Environmental common stock at April 14, 2004, 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.
(7) Consists of (i) 16,500 shares of common stock; (ii) 841,688 shares
of common stock underlying currently exercisable stock options
granted to Mr. James M. DeAngelis by the Company under the
Company's 1998 Plan; (iii) 1,000,000 shares of common stock
underlying currently exercisable stock options granted to Mr.
DeAngelis by the Company outside of the Company's 1998 Plan; (iv)
Mr. DeAngelis' indirect beneficial ownership of common stock based
upon his ownership of 580,000 shares of Environmental; and (vi)
20,641,812 shares of our common stock underlying a currently
exercisable five year warrant at an exercise price of $0.0285 per
share granted to Mr. DeAngelis outside of the 1998 Plan.
(8) Consists of (i) 1,759,375 shares of common stock underlying
currently exercisable stock options granted to Mr. O. Mack Jones
by the Company under the Company's 1998 Plan; and (ii) 10,240,625
shares of our common stock underlying a currently exercisable five
year warrant at an exercise price of $0.0285 per share granted to
Mr. Jones outside of the 1998 Plan.
(9) Excludes warrants to purchase an aggregate of 2,104,248 shares of
common stock at an exercise price of $1.60 per share. See "Market
for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities" and "Certain
Relationships and Related Transactions."
(10) Consists of: (i) 1,181,925 shares of common stock underlying
currently exercisable stock options granted to Mr. Paul E.
Hannesson by the Company under the 1998 Plan; (ii) 4,818,075
shares of our common stock underlying a currently exercisable five
year warrant at an exercise price of $0.0285 per share granted to
Mr. Jones outside of the Company's 1998 Plan; and (iii) Mr.
Hannesson's indirect beneficial ownership of common stock based
upon his ownership of an aggregate of (a) 2,650,000 shares of
Environmental common stock owned by Suzanne Hannesson, the spouse
of Mr. Hannesson, (b) 2,650,000 shares of 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 April 14, 2004, and (d) currently exercisable options
to purchase 525,705 shares of Environmental common stock,
representing together 7.78% of the outstanding shares of
Environmental common stock. Does not include (i) 40,000 shares of
the Company's common stock owned by each of Jon Paul and Krista
Hannesson, the adult children of Mr. Hannesson; and (ii) 1,000,000
shares of Environmental common stock owned by each of Jon Paul and
Krista Hannesson. Mr. Hannesson disclaims any beneficial interest
in the shares of Environmental common stock owned by or for the
benefit of his spouse and children. It also does not include
1,000,000 shares of common stock underlying stock options granted
to Mr. Hannesson by the Company that are not currently
exercisable.
54
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of common stock as of April 14, 2004 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
------------------------------------- ----------------------- ------------------
Shelby T. Brewer, PhD (1)...... 62,366,468(5) 37.54%
Bentley J. Blum................ 35,155,692(6) 22.90%
James M. DeAngelis............. 22,583,584(7) 15.53%
O. Mack Jones (3).............. 12,000,000(8) 8.90%
Commodore Environmental
Services, Inc.................. 8,382,302(9) 6.82%
Paul E. Hannesson.............. 7,509,981(10) 5.80%
Frank E. Coffman, PhD.......... 450,000(11) *
Michael P. Kalleres, VADM...... 450,000(12) *
William A. Wilson.............. 450,000(13) *
All executive officers and
Directors as a
group (8 persons).............. 140,965,724 59.01%
* Percentage ownership is less than 1%.
(1) The address of Shelby T. Brewer is 2151 Jamieson Street, Carlyle
Towers, Suite 308, Alexandria, Virginia 22314.
(2) 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.
(3) The address of O. Mack Jones is 507 Knight Street, Richland,
Washington 99352.
(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) Consists of: (i) 3,428 shares of common stock (ii) 490,695 shares
of our common stock representing the balance held of the common
stock issued pursuant to the Restated Brewer Note, dated as of
March 15, 2001, between the Company and SB Enterprises and a
subsequent conversion notice for 50% of the outstanding principal
dated as of April 9, 2001; (iii) 865,200 shares of the Company
common stock underlying currently exercisable options granted to
Mr. Brewer by the Company under the 1998 Plan; (iv) 2,000,000
shares of the Company common stock underlying currently
exercisable options granted to Mr. Brewer by the Company outside
of the Company's 1998 Plan; (v) 1,000,000 shares of our common
stock underlying a currently exercisable two year warrant at an
exercise price of $0.05 per share granted to S.B. Enterprises in
connection with the extension of the Brewer Note until January 1,
2004; and (vi) 39,450,846 shares of our common stock underlying a
currently exercisable five year warrant at an exercise price of
$0.0285 per share granted to Mr. Brewer outside of the Company's
1998 Plan.
55
(6) Consists of: (i) 2,500,000 shares of our common stock issued to
Bentley J. Blum in exchange for $125,000 of debt owed to Mr. Blum
from the Company; (ii) 144,200 shares of the Company common stock
underlying currently exercisable options granted to Mr. Blum by
the Company under the Plan; (iii) 27,355,800 shares of our common
stock underlying a currently exercisable five year warrant at an
exercise price of $0.0285 per share granted to the Blum Asset
Trust by the Company in connection with the Blum Loan and services
provided by the Blum Asset Trust over the last five years; and
(iv) Mr. Blum's indirect beneficial ownership of common stock
based upon his beneficial ownership of 28,479,737 shares and his
spouse's ownership of 2,000,000 shares of Environmental common
stock, representing together 37.74% of the outstanding shares of
Environmental common stock at April 14, 2004, 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.
(7) Consists of (i) 16,500 shares of common stock; (ii) 841,688 shares
of common stock underlying currently exercisable stock options
granted to Mr. James M. DeAngelis by the Company under the
Company's 1998 Plan; (iii) 1,000,000 shares of common stock
underlying currently exercisable stock options granted to Mr.
DeAngelis by the Company outside of the Company's 1998 Plan; (iv)
Mr. DeAngelis' indirect beneficial ownership of common stock based
upon his ownership of 580,000 shares of Environmental; and (vi)
20,641,812 shares of our common stock underlying a currently
exercisable five year warrant at an exercise price of $0.0285 per
share granted to Mr. DeAngelis outside of the Company's 1998 Plan.
(8) Consists of (i) 1,759,375 shares of common stock underlying
currently exercisable stock options granted to Mr. O. Mack Jones
by the Company under the Company's 1998 Plan; and (ii) 10,240,625
shares of our common stock underlying a currently exercisable five
year warrant at an exercise price of $0.0285 per share granted to
Mr. Jones outside of the Company's 1998 Plan.
(9) Excludes warrants to purchase an aggregate of 2,104,248 shares of
common stock at an exercise price of $1.60 per share. See "Market
for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities" and "Certain
Relationships and Related Transactions."
(10) Consists of: (i) 1,181,925 shares of common stock underlying
currently exercisable stock options granted to Mr. Paul E.
Hannesson by the Company under the 1998 Plan; (ii) 4,818,075
shares of our common stock underlying a currently exercisable five
year warrant at an exercise price of $0.0285 per share granted to
Mr. Hannesson outside of the Company's 1998 Plan; and (iii) Mr.
Hannesson's indirect beneficial ownership of common stock based
upon his ownership of an aggregate of (a) 2,650,000 shares of
Environmental common stock owned by Suzanne Hannesson, the spouse
of Mr. Hannesson, (b) 2,650,000 shares of 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 April 14, 2004, and (d) currently exercisable options
to purchase 525,705 shares of Environmental common stock,
representing together 7.78% of the outstanding shares of
Environmental common stock. Does not include (i) 40,000 shares of
the Company's common stock owned by each of Jon Paul and Krista
Hannesson, the adult children of Mr. Hannesson; and (ii) 1,000,000
shares of Environmental common stock owned by each of Jon Paul and
Krista Hannesson. Mr. Hannesson disclaims any beneficial interest
in the shares of Environmental common stock owned by or for the
benefit of his spouse and children. It also does not include
1,000,000 shares of common stock underlying stock options granted
to Mr. Hannesson by the Company that are not currently
exercisable.
(11) Consists of 450,000 shares of common stock underlying currently
exercisable stock options granted to Mr. Frank E. Coffman by the
Company under the Company's 1998 Plan.
(12) Consists of 450,000 shares of common stock underlying currently
exercisable stock options granted to Mr. Michael P. Kalleres VADM
by the Company under the Company's 1998 Plan.
(13) Consists of 450,000 shares of common stock underlying currently
exercisable stock options granted to Mr. William A. Wilson by the
Company under the Company's 1998 Plan.
Messrs. Blum and Hannesson are brothers-in-law.
56
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.
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%
minority interest in Commodore Laboratories, Inc. which at the time was held by
Albert E. Abel); and (iii) a portion of the Environmental Funding Note in the
amount of $3.0 million.
In October 1996, the Company acquired all of the outstanding shares of
capital stock of Advanced Sciences. Advanced Sciences, together with its
subsidiaries, provides a full range of environmental and technical services,
including identification, investigation, remediation and management of hazardous
and mixed waste sites, to government agencies, including the DOD and DOE, and to
private companies located in the United States and abroad. In consideration for
all of the outstanding shares of capital stock of Advanced Sciences, the former
shareholders of Advanced Sciences received an aggregate of 450,000 shares of
common stock. Simultaneously, the Company also acquired of all of the
outstanding shares of capital stock of ASE. ASE, a newly formed entity with no
history of operations, had an option to purchase all of the outstanding capital
stock of Advanced Sciences and was acquired by the Company for the purpose of
enabling the Company to effect its acquisition of Advanced Sciences. The former
shareholders of ASE received, in consideration for all of the outstanding shares
of capital stock of ASE, an aggregate of 450,000 shares of Company's common
stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
57
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.
On August 30, 2000, Applied completed a stock purchase agreement with
Dispute Resolution Management, Inc. ("DRM") and its two shareholders, William J.
Russell ("Russell") and Tamie B. Speciale ("Speciale").
On May 16, 2002, a Notice of Default and Right to Pursue Remedies (the
"Notice") was issued to the Company by William J. Russell and Tamie B. Speciale
(the "Pledgees") claiming that the Company is in default under the Stock
Purchase Agreement (the "Agreement"), between the Company and DRM and the
related Stock Pledge Agreement (the "Stock Pledge"). As of May 16, 2002, the
Company no longer owns an 81% interest in DRM.
On August 19, 2002, the Company entered into a settlement agreement
with DRM (the "DRM Settlement Agreement"). Under terms of the DRM Settlement
Agreement, the Company acknowledged that it had previously received back
4,750,000 shares of its common stock from DRM and its shareholders. As part of
the DRM Settlement Agreement, the Company received an additional 1,187,500
shares of its common stock from DRM and its shareholders.
Additionally, the Company issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per share, each such share of
Series H Preferred having a stated value of $1.00 per share, to DRM, Russell and
Speciale as part of the DRM Settlement Agreement as of September 30, 2002 for
satisfaction of the remaining liabilities relating to the purchase and working
capital of DRM. The Series H Preferred shall have the following rights,
privileges, and limitations:
a) The conversion feature shall be exercisable on June 30, 2003.
b) No Series H Preferred may be converted prior to June 30, 2003.
Until July 31, 2005, only 80,000 shares of the Series H Preferred
shall be convertible in any calendar quarter. The balance of any
unconverted Series H Preferred Stock may be converted at any time
on or after August 1, 2005.
c) The conversion price of the Series H Preferred shall be determined
by the average closing price of Company's common stock in the
previous 30 trading days, but in no event shall the conversion
price be less than $0.20 per share.
d) The Series H Preferred shall have a non-cumulative annual dividend
of 3%, payable in cash or Series H Preferred within 30 days of the
end of the Company's fiscal year, at the Company's election.
e) The Series H Preferred shall not be transferable.
The financial information included in the accompanying form 10K for the
period ending December 31, 2003 reflects the terms of the DRM Settlement
Agreement. For the year ended December 31, 2002 the Company recorded a loss on
58
the disposal of DRM in the amount of $4,134,000. The Company currently requires
additional cash to sustain existing operations and to meet current obligations
and ongoing capital requirements. The Company's current monthly operating
expenses exceed cash revenues by approximately $100,000. Because of the
dissolution of DRM, it has been reflected as Assets Held for Sale - Component
DRM and Liabilities Held for Sale - Component DRM at December 31, 2000 and 2001
and as discontinued operations for the years ended December 31, 2002 and 2001.
On June 13, 2001, the Company issued and sold to Milford Capital
Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar")
one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan
Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year
warrant for 333,334 shares of the Company's common stock at an exercise price of
$0.22 per share. The Company pledged its equipment and SET related intellectual
property as collateral for the Milford/Shaar Bridge Loan Notes. The Company
shall pay Milford/Shaar principal and interest on a monthly basis in arrears.
The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty.
The Company 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
December 31, 2005. In connection with the Milford/Shaar Bridge Loan Notes, the
Company issued to Milford/Shaar in February 2004, a five-year warrant for
250,000 shares of the Company's common stock at an exercise price of $0.03 per
share. The Shaar Fund, Ltd., through the Shaar Bridge Loan, continues to provide
cash installments on a periodic basis in the form of additional principal. The
current principal balance of the Milford/Shaar Bridge Loan Notes is $1,350,749
as of December 31, 2003 and remains unpaid as of April 14, 2004. Additionally,
as of April 14, 2003, there is $119,073 in accumulated forbearance fees and
$100,000 due in exit fees on the Milford/Shaar Bridge Loan Notes. See "MD&A -
Liquidity and Capital Resources."
On October 2, 2002, Mr. Bentley Blum, a Director of the Company, had
previously loaned the Company with $125,000 of cash installments over the period
of one year (the "Blum Loan"). The Company elected to convert the Blum Loan to
the Company's common stock using the conversion feature of the 5-day average
closing price of the Company's common stock prior to October 2, 2002. On October
2, 2002, Blum issued a conversion notice for $125,000 of the outstanding
principal of the Blum Loan into 2,500,000 shares. Mr. Blum continued to provide
cash installments in the form of a loan to the Company through February 2004
(the "Blum Demand Note"). The Blum Demand Note bears interest at 9% per annum
and has no due date at this time. The current principal balance of the Blum
Demand Note is $272,032 as of December 31, 2003 and remains unpaid as of April
14, 2004. See "MD&A - Liquidity and Capital Resources."
On November 19, 2003, the Company issued a warrant to purchase
27,355,800 shares of its common stock at an exercise price of $0.0285 per share
(the closing price of our common stock on the OTCBB on such date) to the Blum
Asset Trust, a company controlled by Bentley Blum, a Director of the Company, in
consideration for the loans made to the Company and the usage of office space
and personnel of the Blum Asset Trust over the last five years.
59
On December 12, 2002, SB Enterprises executed an Amended and Restated
Promissory Note Extension (the "Restated Brewer Note Extension"), which extended
the maturity date of the Brewer Note until January 1, 2004. In connection with
the Restated Brewer Note Extension, the Company issued SB Enterprises a 2-year
warrant for 1,000,000 shares of the Company's common stock at an exercise price
of $0.05 per share. On March 14, 2003, SB Enterprises issued a conversion notice
for the remaining principal balance of $250,000 plus accrued interest of
$36,563. The conversion price was calculated by the previous 5-day average of
the closing price of the Company's common stock and was converted into
13,189,842 shares. 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% (in November 2000) 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 to
the Company until January 15, 2005 in exchange for warrants for 2,500,000 shares
of the Company's common stock at an exercise price of $0.0285. The current
principal balance of the Weiss Group Note is $253,603 as of December 31, 2003
and remains unpaid as of April 14, 2004. See "MD&A - Liquidity and Capital
Resources."
Effective February 14, 2004, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 1,500,000 shares at an
exercise price of $0.05 per share of the Company's common stock in connection
with the Weiss Group Note.
Effective February 15, 2004, the Company issued warrants to purchase
2,500,000 shares of its common stock at an exercise price of $0.0285 per share
to all holders of the Weiss Group Note in consideration of the extension of the
due date of such loans by such persons from May 31, 2002 to January 15, 2005.
The Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities.
On May 23, 2001, a private investor purchased $250,000 of the Company's
common stock at the market price. The Company issued the private investor
1,973,077 shares of common stock of the Company as a result of the equity
purchase. In connection with the purchase of the shares of the Company's common
stock, the Company issued the private investor a 2-year warrant for 500,000
shares of the Company's common stock at an exercise price of $0.22 per share.
The Company re-priced this warrant in November 2003 to $0.0285 and extended the
expiration date of this warrant to November 19, 2005. 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."
60
On October 2, 2002, Mr. Bentley Blum, a Director of the Company, had
previously loaned the Company with $125,000 of cash installments over the period
of one year (the "Blum Loan"). The Company elected to convert the Blum Loan to
the Company's common stock using the conversion feature of the 5-day average
closing price of the Company's common stock prior to October 2, 2002. On October
2, 2002, Blum issued a conversion notice for $125,000 of the outstanding
principal of the Blum Loan into 2,500,000 shares. Mr. Blum continued to provide
cash installments in the form of a loan to the Company through February 2004
(the "Blum Demand Note"). The Blum Demand Note bears interest at 9% per annum
and has no due date at this time. The current principal balance of the Blum
Demand Note is $272,032 as of December 31, 2003 and remains unpaid as of April
14, 2004. See "MD&A - Liquidity and Capital Resources."
On November 19, 2004, the Company issued a warrant to purchase
27,355,800 shares of its common stock at an exercise price of $0.0285 per share
(the closing price of our common stock on the OTCBB on such date) to the Blum
Asset Trust, a company controlled by Bentley Blum, a Director of the Company, in
consideration for the loans made to the Company and the usage of office space
and personnel of the Blum Asset Trust over the last five years. 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."
SERVICES AGREEMENT
In September 1997, the Company, Environmental, Separation, Advanced
Sciences, and certain other affiliates of the Company (the "Affiliated Parties")
entered into a services agreement, dated as of September 1, 1997 (the "Services
Agreement"), whereby the Company and the Affiliated Parties agreed to cooperate
in sharing, where appropriate, costs related to accounting services, financial
management, human resources and personnel management and administration,
information systems, executive management, sales and marketing, research and
development, engineering, technical assistance, patenting, and other areas of
service as are appropriately and necessarily required in the operations of the
Company and the Affiliated Parties (collectively, the "Services"). Pursuant to
the Services Agreement, services provided by professional employees of the
Company and the Affiliated Parties to one another are charged on the basis of
time actually worked as a percentage of salary (including cost of benefits)
attributable to that professional. In addition, charges for rent, utilities,
office services and other routine charges regularly incurred in the normal
course of business are apportioned to the professionals working in the office on
the basis of salary, and then charged to any party in respect of whom the
professional devoted such time based upon time actually worked. Furthermore,
charges from third parties, including, without limitation, consultants,
attorneys and accountants, are levied against the party actually receiving the
benefit of such services. Pursuant to the Services Agreement, the Company acts
as the coordinator of billings and payments for Services on behalf of itself and
the other Affiliated Parties.
There was no sharing of services in 2001, 2002 and 2003, although,
insurance costs were allocated between Affiliated Parties when it was beneficial
to insure the family of companies under one policy.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-------- --------------------------------------
Audit Fees
For the fiscal years ended December 31, 2003 and 2002, the fees were
$27,530 and $46,653, respectively, for professional services rendered for the
audit of our financial statements.
Audit Related Services
We have also been billed $13,743 and $10,917 for the years ended
December 31, 2003 and 2002, respectively, for the review of financial statements
included in our periodic and other reports filed with the Securities and
Exchange Commission for the year then ended.
Tax Fees
The Company was also billed $11,100 and $11,600 for the years ended
December 31, 2003 and 2002, respectively, for various income tax returns.
All Other Fees
The Company was also billed $8,731 and $12,689 for the years ended
December 31, 2003 and 2002, respectively, in other fees relating primarily to
the audit of the Company's Employee Benefit Plan.
61
PART IV
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ITEM 15. 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 Sheets as of December 31, 2003 and 2002...... F-2
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001.................................. F-3
Consolidated Statements of Stockholders' (Deficit) Equity
for the years ended December 31, 2003, 2002 and 2001.............. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.................................. 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.
62
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)
63
4.22 Warrant to purchase shares of common stock of Commodore
Applied Technologies, Inc. issued to The Shaar Fund Ltd. (20)
4.22 Certificate of Designation of Series F Preferred Stock. (20)
4.23 Warrant to purchase shares of common stock of Commodore
Applied Technologies, Inc. issued to Avalon Research Group,
Inc. (20)
4.24 Certificate of Designation of Series H Preferred Stock. (24)
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)
64
10.19 Voting Agreement, dated June 28, 1996, among Environmental,
Bentley J. Blum, the Company and National Securities
Corporation. (4)
10.20 Agreement and Plan of Merger, dated September 27, 1996, by and
between the Company, CXI-ASI Acquisition Corp. and Advanced
Sciences, Inc. (5)
10.21 Agreement and Plan of Merger, dated September 27, 1996, by and
between the Company CXI-ASE Acquisition Corp. and A.S.
Environmental, Inc. (5)
10.22 Agreement of Transfer, dated as of December 1, 1996 by and
between the Company and Advanced Sciences. (11)
10.23 Bill of Sale, dated as of December 1, 1996, by and between the
Company and Commodore Advanced Sciences, Inc. (11)
10.24 Stock Purchase Agreement, dated as of December 2, 1996,
between the Company and Environmental. (6)
10.25 Employment Agreement, dated as of October 31, 1996, between
Environmental and Edwin L. Harper. (7)
10.26 Employment Agreement, dated as of October 1, 1996, between the
Company and Thomas E. Noel. (5)
10.27 Form of Employment Agreement between Environmental and Paul E.
Hannesson. (8)
10.28 8% convertible note for $4.0 million from the Company to
Environmental. (9)
10.29 8% non-convertible note for $5,450,000 from the Company to
Environmental. (10)
10.30 Teaming Agreement, dated March 18, 1997, by and between ICF
Kaiser Engineers, Inc. and Advanced Sciences. (14)
10.31 Memorandum of Understanding between Lockheed Martin Advanced
Environmental Systems, Inc. and Advanced Sciences. (14)
10.32 Services Agreement, dated as of September 1, 1997, by and
among the Company, Environmental, Separation, Advanced
Sciences and other affiliated companies named therein. (14)
10.33 Amended and Restated 1996 Stock Option Plan. (13)
10.34 Securities Purchase Agreement, dated November 4, 1999, between
Commodore Applied Technologies, Inc. and The Shaar Fund Ltd.
(16)
10.35 Registration Rights Agreement, dated November 4, 1999, between
Commodore Applied Technologies, Inc. and the Shaar Fund Ltd.
(16)
10.36 Finder's Agreement, dated August 17, 1999, between Commodore
Applied Technologies, Inc. and Avalon Research Group, Inc.
(16)
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)
65
10.44 Promissory Note, dated September 15, 2000, issued to Shelby T.
Brewer in the principal amount of $500,000. (20)
10.45 Registration Rights Agreement, dated September 15, 2000 issued
to Shelby T. Brewer. (20)
10.46 Stock Pledge Agreement, dated September 15, 2000 between
Commodore Environmental Technologies, Inc., and Shelby T.
Brewer. (20)
10.47 Warrant to purchase 100,000 shares of common stock of
Commodore Applied Technologies, Inc. issued to Shelby T.
Brewer. (20)
10.48 Amended and Restated Promissory Note, dated September 15,
2000, issued to Shelby T. Brewer in the principal amount of
$500,000. (20)
10.49 Registration Rights Agreement, dated March 15, 2001 issued to
Shelby T. Brewer. (20)
10.50 Secured Promissory Note, dated November 13, 2000, issued to
Klass Partners Ltd. in the principal amount of $250,000. (20)
10.51 Secured Promissory Note, dated November 13, 2000, issued to
Mathers Associates in the principal amount of $150,000. (20)
10.52 Secured Promissory Note, dated November 13, 2000, issued to
Jon Paul Hannesson in the principal amount of $75,000. (20)
10.53 Secured Promissory Note, dated November 13, 2000, issued to
Stephen A. Weiss in the principal amount of $25,000. (20)
10.54 Amended and Restated Stock Purchase Agreement, dated August
30, 2000, by and among Commodore Applied Technologies, Inc.,
Dispute Resolution Management, Inc., William J. Russell and
Tamie P. Speciale. (18)
10.55 Securities Purchase Agreement, dated November 13, 2000, by and
among Commodore Applied Technologies, Inc., Commodore
Environmental Services, Inc., Mathers Associates, Klass
Partners, Ltd., Jon Paul Hannesson and Stephen A. Weiss. (20)
10.56 Security Agreement, dated November 13, 2000 by and among
Mathers Associates, Klass Partners, Ltd., Jon Paul Hannesson,
Stephen A. Weiss and Commodore Applied Technologies, Inc. (20)
10.57 Registration Rights Agreement, dated November 13, 2000, among
Mathers Associates, Klass Partners, Ltd., Jon Paul Hannesson,
Stephen A. Weiss and Commodore Applied Technologies, Inc. (20)
10.58 Dispute Resolution Management, Inc. Undertaking Letter, dated
November 13, 2000. (20)
10.59 Nationwide Permit Extension for PCB Disposal issued by the EPA
to Commodore Remediation Technologies, Inc. (20)
10.60 Contract between Commodore Solutions and Waste Control
Specialists dated February 12, 2000. (20)
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)
66
10.77 Memorandum of Understanding for Amendment of $500,000 CXI
Bridge Loan Documents, dated April 16, 2001, by and among the
Company, Commodore Environmental Services, Inc., Mathers
Associates, Klass Partners, Jon Paul Hannesson and Stephen A.
Weiss. (23)
10.78 Warrant to purchase 222,222 shares of common stock of the
Company issued to Klass Partners. (23)
10.79 Warrant to purchase 166,667 shares of common stock of the
Company issued to Mathers Associates. (23)
10.80 Warrant to purchase 41,666 shares of common stock of the
Company issued to Jon Paul Hannesson. (23)
10.81 Warrant to purchase 41,666 shares of common stock of the
Company issued to Krista S. Hannesson. (23)
10.82 Warrant to purchase 27,778 shares of common stock of the
Company issued to Stephen A. Weiss. (23)
10.83 Securities Purchase Agreement dated May 22, 2001, between
Commodore Applied Technologies, Inc., and Dr. Marion Danna.
(23)
10.84 Registration Rights Agreement dated May 22, 2001, between
Commodore Applied Technologies, Inc., and Dr. Marion Danna.
(23)
10.85 Warrant to purchase 500,000 shares of common stock of the
Company issued to Dr. Marion Danna. (23)
10.86 Secured Promissory Note, dated June 13, 2001, issued to
Milford Capital & Management in the principal amount of
$500,000. (23)
10.87 Secured Promissory Note, dated June 13, 2001, issued to the
Shaar Fund, Ltd. in the principal amount of $500,000. (23)
10.88 Registration Rights Agreement dated June 13, 2001, between
Commodore Applied Technologies, Inc., and Milford Capital &
Management. (23)
10.89 Registration Rights Agreement dated June 13, 2001, between
Commodore Applied Technologies, Inc., and the Shaar Fund, Ltd.
(23)
10.90 Warrant to purchase 166,667 shares of common stock of the
Company issued to Milford Capital & Management. (23)
10.91 Warrant to purchase 166,667 shares of common stock of the
Company issued to the Shaar Fund, Ltd. (23)
10.92 Amended and Restated Stock Purchase Agreement, dated September
21, 2001, by and among Commodore Applied Technologies, Inc.,
Dispute Resolution Management, Inc., William J. Russell and
Tamie P. Speciale. (21)
10.93 Amended and Restated Stock Purchase Agreement, dated October
31, 2001, by and among Commodore Applied Technologies, Inc.,
Dispute Resolution Management, Inc., William J. Russell and
Tamie P. Speciale. (22)
10.94 Forbearance Agreement dated January 11, 2002, between
Commodore Applied Technologies, Inc., and Milford Capital &
Management. (23)
10.95 Forbearance Agreement dated January 11, 2002, between
Commodore Applied Technologies, Inc., and the Shaar Fund, Ltd.
(23)
10.96 Forbearance Agreement dated February 13, 2002, between
Commodore Applied Technologies, Inc., and Milford Capital &
Management. (23)
10.97 Forbearance Agreement dated February 13, 2002, between
Commodore Applied Technologies, Inc., and the Shaar Fund, Ltd.
(23)
67
10.98 Forbearance Agreement dated March 13, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management.
(23)
10.99 Forbearance Agreement dated March 13, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd. (23)
10.100 LLC Agreement, dated April 2, 2002, between Technical
Resources, Inc. (a wholly owned subsidiary of Nuvotec, Inc.)
and Commodore Government Environmental Technologies, Inc. (23)
10.101 Forbearance Agreement dated April 1, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd. (24)
10.102 Forbearance Agreement dated April 1, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management.
(24)
10.103 Memorandum of Understanding for Amendment of $500,000 CXI
Bridge Loan Documents, dated April 29, 2002, by and among the
Company, Commodore Environmental Services, Inc., Mathers
Associates, Klass Partners, Jon Paul Hannesson and Stephen A.
Weiss. (24)
10.104 Forbearance Agreement dated May 13, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd. (24)
10.105 Forbearance Agreement dated May 13, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management.
(24)
10.106 Forbearance Agreement dated June 13, 2002, between Commodore
Applied Technologies, Inc., and the Shaar Fund, Ltd. (24)
10.107 Forbearance Agreement dated June 13, 2002, between Commodore
Applied Technologies, Inc., and Milford Capital & Management.
(24)
10.108 Settlement Agreement dated August 19, 2002 by and among
Commodore Applied Technologies, Inc., Dispute Resolution
Management, Inc., William J. Russell and Tamie P. Speciale.
(24)
10.109 Liability Release Agreement dated August 19, 2002 by Dispute
Resolution Management, Inc., William J. Russell and Tamie P.
Speciale to Commodore Applied Technologies, Inc. (24)
10.110 Liability Release Agreement dated August 19, 2002 by Commodore
Applied Technologies, Inc. to Dispute Resolution Management,
Inc., William J. Russell and Tamie P. Speciale. (24)
10.111 Amended and Restated Promissory Note, dated October 2, 2002,
issued to Shelby T. Brewer in the principal amount of
$250,000. (24)
10.112 Warrant to purchase 1,000,000 shares of common stock of
Commodore Applied Technologies, Inc. issued to Shelby T.
Brewer. (24)
10.113 Registration Rights Agreement, dated October 2, 2002 issued to
Shelby T. Brewer. (24)
10.114 Memorandum of Understanding for Amendment of $500,000 CXI
Bridge Loan Documents, dated November 18, 2002, by and among
the Company, Commodore Environmental Services, Inc., Mathers
Associates, Klass Partners, Jon Paul Hannesson and Stephen A.
Weiss. (24)
10.115 Warrant to purchase 222,222 shares of common stock of the
Company issued to Klass Partners. (24)
10.116 Warrant to purchase 166,667 shares of common stock of the
Company issued to Mathers Associates. (24)
10.117 Warrant to purchase 41,667 shares of common stock of the
Company issued to Jon Paul Hannesson. (24)
68
10.118 Warrant to purchase 41,666 shares of common stock of the
Company issued to Krista S. Hannesson. (24)
10.119 Warrant to purchase 27,778 shares of common stock of the
Company issued to Stephen A. Weiss. (24)
10.120 Warrant to purchase 500,000 shares of common stock of the
Company issued to Klass Partners. (24)
10.121 Warrant to purchase 300,000 shares of common stock of the
Company issued to Mathers Associates. (24)
10.122 Warrant to purchase 75,000 shares of common stock of the
Company issued to Jon Paul Hannesson. (24)
10.123 Warrant to purchase 75,000 shares of common stock of the
Company issued to Krista S. Hannesson. (24)
10.124 Warrant to purchase 50,000 shares of common stock of the
Company issued to Stephen A. Weiss. (24)
10.125 Conversion Notice, dated March 14, 2003 between S. Brewer
Enterprises, Inc. and the Company for the conversion of
$250,000 of the Restated Brewer Note. (24)
*10.126 Warrant to purchase 500,000 shares of common stock of the
Company issued to Dr. Marion Danna.
*10.127 Warrant to purchase 27,355,800 shares of common stock issued
to Blum Asset Trust.
*10.128 Forbearance Agreement dated February 1, 2004, between
Commodore Applied Technologies, Inc., and Milford Capital &
Management.
*10.129 Warrant to purchase 250,000 shares of common stock of the
Company issued to Milford Capital & Management.
*10.130 Memorandum of Understanding for Amendment of $500,000 CXI
Bridge Loan Documents, dated February 15, 2004, by and among
the Company, Mathers Associates, Klass Partners, Jon Paul
Hannesson and Stephen A. Weiss.
*10.131 Warrant to purchase 222,222 shares of common stock of the
Company issued to Klass Partners.
*10.132 Warrant to purchase 166,667 shares of common stock of the
Company issued to Mathers Associates.
*10.133 Warrant to purchase 41,667 shares of common stock of the
Company issued to Jon Paul Hannesson.
*10.134 Warrant to purchase 41,667 shares of common stock of the
Company issued to Krista S. Hannesson.
*10.135 Warrant to purchase 27,778 shares of common stock of the
Company issued to Stephen A. Weiss.
*10.136 Warrant to purchase 500,000 shares of common stock of the
Company issued to Klass Partners.
*10.137 Warrant to purchase 300,000 shares of common stock of the
Company issued to Mathers Associates.
*10.138 Warrant to purchase 75,000 shares of common stock of the
Company issued to Jon Paul Hannesson.
*10.139 Warrant to purchase 75,000 shares of common stock of the
Company issued to Krista S. Hannesson.
*10.140 Warrant to purchase 50,000 shares of common stock of the
Company issued to Stephen A. Weiss.
69
*10.141 Warrant to purchase 444,444 shares of common stock of the
Company issued to Klass Partners.
*10.142 Warrant to purchase 333,334 shares of common stock of the
Company issued to Mathers Associates.
*10.143 Warrant to purchase 83,332 shares of common stock of the
Company issued to Jon Paul Hannesson.
*10.144 Warrant to purchase 83,332 shares of common stock of the
Company issued to Krista S. Hannesson.
*10.145 Warrant to purchase 55,556 shares of common stock of the
Company issued to Stephen A. Weiss.
*10.146 Series E Convertible Preferred automatic conversion date
extension dated March 10, 2004, between the Company and The
Shaar Fund, Ltd.
*10.147 Series F Convertible Preferred automatic conversion date
extension dated April 9, 2004, between the Company and The
Shaar Fund, Ltd.
*10.148 Dividend Forgiveness letter dated April 9, 2004, between the
Company and The Shaar Fund, Ltd.
16.1 Letter regarding change in certifying accountant. (12)
16.2 Letter regarding change in certifying accountant. (17)
*21.1 Subsidiaries of the Company.
*31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
*31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
*32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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).
70
(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).
(14) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
filed with the Securities and Exchange Commission on March 31, 1998
(File No. 1-11871).
(15) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 5, 1999 (File No. 1-11871).
(16) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 5, 1999 (File No. 1-11871).
(17) Incorporated by reference and filed as Exhibit to Amendment No. 5 to
Registrant's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on September 12, 1999 (File No.
333-95445).
(18) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 23, 1999 (File No. 1-11871).
(19) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 13, 2000 (File No. 1-11871).
(20) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K/A for the fiscal year ended December 31,
2000 filed with the Securities and Exchange Commission on May 04, 2001
(File No. 1-11871).
(21) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 26, 2001 (File No. 1-11871).
(22) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 31, 2001 (File No. 1-11871).
(23) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001
filed with the Securities and Exchange Commission on April 15, 2002
(File No. 1-11871).
(24) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2002
filed with the Securities and Exchange Commission on April 15, 2003
(File No. 1-11871).
71
Reports on Form 8-K:
--------------------
1. The Company filed a Current Report on Form 10-K, dated April 22, 2003,
regarding a press release issued by the Company announcing its 2002
year end earnings.
2. The Company filed a Current Report on Form 8-K, dated May 19, 2003,
regarding a press release issued by the Company announcing its 2003
1st quarter earnings.
3. The Company filed a Current Report on Form 8-K, dated August 13, 2003,
regarding a press release issued by the Company announcing its 2003
2nd quarter earnings.
4. The Company filed a Current Report on Form 8-K, dated November 17,
2003, regarding a press release issued by the Company announcing its
2003 3rd quarter earnings.
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 14, 2004 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 14, 2004
------------------------ Executive Officer (principal
Shelby T. Brewer executive officer)
/s/ James M. DeAngelis Senior Vice President and Chief April 14, 2004
------------------------ Financial Officer (principal
James M. DeAngelis financial officer)
/s/ Bentley J. Blum Director April 14, 2004
------------------------
Bentley J. Blum
/s/ Frank E. Coffman Director April 14, 2004
------------------------
Frank E. Coffman
/s/ Paul E. Hannesson Director April 14, 2004
------------------------
Paul E. Hannesson
/s/ O. Mack Jones Director April 14, 2004
------------------------
O. Mack Jones
/s/ Michael P. Kalleres Director April 14, 2004
------------------------
Michael P. Kalleres
/s/ William A. Wilson Director April 14, 2004
------------------------
William A. Wilson
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 sent to its security holders an annual report and proxy
material during the 2003 fiscal year.
73
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2003 and 2002
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Index
--------------------------------------------------------------------------------
Page
----
Commodore Applied Technologies, Inc.
Independent Auditors' Report F-1
Consolidated Balance Sheet as of December 31, 2003 and 2002 F-2
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-3
Consolidated Statements of Stockholders' (Deficit) Equity for
the years ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Commodore Applied Technologies, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Commodore Applied
Technologies, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the
related consolidated statements of operations, stockholders' (deficit) equity
and cash flows for the years ended December 31, 2003, 2002, and 2001. 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, 2003 and 2002, and the
results of their operations and their cash flows for the years ended December
31, 2003, 2002, and 2001, 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.
Salt Lake City, Utah
January 29, 2004, except for Notes 9 and 19,
which are dated April 14, 2004
F-1
Commodore Applied Technologies, Inc.and Subsidiaries
Consolidated Balance Sheet
December 31, 2003 and 2002
(Amounts in thousands except shares)
--------------------------------------------------------------------------------
Assets 2003 2002
------ -----------------------------
Current assets:
Cash and cash equivalents $ - $ 59
Accounts receivable, net 71 96
Prepaid assets and other current assets 13 163
-----------------------------
Total current assets 84 318
Property and equipment, net 142 358
Intangible assets:
Patents and completed technology, net of
accumulated amortization of $80 and $40,
respectively 20 60
-----------------------------
Total intangible assets 20 60
-----------------------------
Total assets $ 246 $ 736
-----------------------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Checks written in excess of cash $ 13 $ -
Accounts payable 1,031 1,077
Related party payable 278 80
Line of credit 64 -
Notes payable, net - 714
Other accrued liabilities 3,937 2,723
-----------------------------
Total current liabilities 5,323 4,594
Long-term debt 1,575 431
-----------------------------
Total liabilities 6,898 5,025
-----------------------------
Commitments and contingencies
Stockholders' deficit:
Convertible Preferred Stock, Series E, F
and H, par value $.001 per share,
aggregate liquidation value of $4,142
and $6,716 at December 31, 2003 and 2002,
respectively, 5% to 12% cumulative
dividends for Series E and F, 3%
dividends for Series H, 1,561,700 shares
authorized, 1,033,700 shares and
1,213,700 shares issued and outstanding
at December 31, 2003 and 2002,
respectively 1 1
Common Stock, par value $.001 per share,
300,000,000 shares authorized,
117,702,133 shares and 59,027,062 shares
issued and outstanding, at December 31,
2003 and 2002, respectively 118 59
Additional paid in capital 67,664 67,129
Accumulated deficit (74,172) (71,215)
-----------------------------
(6,389) (4,026)
Treasury stock, 3,437,500 shares (263) (263)
-----------------------------
Total stockholders' deficit (6,652) (4,289)
-----------------------------
$ 246 $ 736
-----------------------------
--------------------------------------------------------------------------------
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, 2003, 2002 and 2001
(Amounts in thousands except per share data)
--------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------------------------
Revenue $ 660 $ 3,710 $ 4,590
Costs and expenses:
Cost of revenues 811 2,108 3,369
Research and development 70 297 423
General and administrative 1,700 1,792 2,420
Depreciation and amortization 267 314 658
Impairment of machinery - - 776
Impairment of patents - - 627
----------------------------------------------
Total operating expenses 2,848 4,511 8,273
----------------------------------------------
Loss from operations (2,188) (801) (3,683)
Other income (expense):
Interest income - - 38
Interest expense (769) (104) (226)
Equity in losses of unconsolidated subsidiary - - (295)
----------------------------------------------
Loss from continuing operations
before provision for income taxes (2,957) (905) (4,166)
Income tax benefit - - -
----------------------------------------------
Loss from continuing operations (2,957) (905) (4,166)
Loss on disposal of discontinued operations - (4,134) -
Loss from discontinued operations - (933) (2,388)
----------------------------------------------
Net loss $ (2,957) $ (5,972) $ (6,554)
----------------------------------------------
Net loss per share from continuing operations -
basic and diluted $ (0.04) $ (0.02) $ (0.08)
Net (loss) gain per share from discontinued operations -
basic and diluted $ - $ (0.09) $ (0.05)
----------------------------------------------
Total net loss per share - basic and diluted $ (0.04) $ (0.11) $ (0.13)
----------------------------------------------
Number of weighted average shares outstanding 92,035 57,775 53,241
----------------------------------------------
--------------------------------------------------------------------------------------------------------
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, 2003 and 2002 and 2001
(Amounts in thousands except shares)
------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
---------------------------------------- Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
--------------------------------------------------------------------------------------
Balance, January 1, 2001 556,700 $ 1 48,330,385 $ 48 $ 66,495 $ (58,689) $ - $ 7,855
Conversion of series E and F
preferred stock into common stock (115,000) (1) 4,072,225 4 (3) - - -
Sale of common stock for cash - - 1,973,077 2 146 - - 148
Sale of warrants for cash - - - - 105 - - 105
Conversion of debt to common stock - - 1,041,667 1 249 - - 250
Issuance of warrants in
financing agreements - - - - 175 - - 175
Preferred stock dividends - - - - (408) - - (408)
Net loss - - - - - (6,554) - (6,554)
--------------------------------------------------------------------------------------
Balance, December 31, 2001 441,700 - 55,417,354 55 66,759 (65,243) - 1,571
Conversion of series E and F
preferred stock into common stock (28,000) - 2,496,423 3 (3) - - -
Issuance of common stock as payment of
preferred stock dividends - - 1,113,285 1 136 - - 137
------------------------------------------------------------------------------------------------------------------------------
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 Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
--------------------------------------------------------------------------------------
Issuance of preferred H Stock pursuant
to disposition of DRM 800,000 1 - - 799 - - 800
Treasury stock, 5,937,500 shares,
received from shareholders of DRM
pursuant to the disposition of DRM - - - - - - (463) (463)
Issuance of 2,500,000 shares of
treasury stock as payment of related
party payable - - - - (75) - 200 125
Preferred stock dividends - - - - (528) - - (528)
Issuance of warrants to officer of the
Company to extend note payable - - - - 41 - - 41
Net loss - - - - - (5,972) - (5,972)
--------------------------------------------------------------------------------------
Balance, December 31, 2002 1,213,700 1 59,027,062 59 67,129 (71,215) (263) (4,289)
Conversion of series E and F
preferred stock into common stock (180,000) - 43,366,669 44 (44) - - -
Issuance of common stock as payment of
preferred stock dividends - - 2,118,560 2 180 - - 182
Conversion of debt to common stock - - 13,189,842 13 271 - - 284
------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements F-5
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' Equity
Continued
------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
---------------------------------------- Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
--------------------------------------------------------------------------------------
Issuance of warrants for:
Payment of accounts payable - - - - 3 - - 3
Services - - - - 198 - - 198
Extension of debt - - - - 301 - - 301
Preferred stock dividends - - - - (374) - - (374)
Net loss - - - - - (2,957) - (2,957)
--------------------------------------------------------------------------------------
Balance, December 31, 2003 1,033,700 $ 1 117,702,133 $ 118 $ 67,664 $ (74,172) $ (263) $(6,652)
--------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements F-6
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Cash Flows
Years Ended December 31, 2003, 2002, and 2001
(Amounts in thousands, except shares and per share data)
--------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------------------------
Cash flows from operating activities:
Net loss $ (2,957) $ (5,972) $ (6,554)
Add: net loss (income) from discontinued operations - 933 2,388
Add: net loss from disposal of discontinued operations - 4,134 -
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 267 314 658
(Gain) loss on disposition of property and equipment - (35) -
Imputed interest expense - - 167
Impairment of machinery - - 776
Impairment of patents - - 627
Loss from unconsolidated subsidiary - - 295
Amortization of debt discount 35 6 187
Issuance of warrants for services 198 - -
Issuance of warrants for extension of debt 301 - -
Changes in assets and liabilities:
Accounts receivable, net 25 503 2,964
Prepaid assets 150 24 97
Net assets of component DRM - (83) (1,559)
Checks written in excess of cash 13 - -
Accounts payable and accrued liabilities 1,013 53 919
----------------------------------------------
Net cash provided by (used in)
operating activities (955) (123) 965
Cash flows from investing activities:
Equipment purchased or constructed (11) - (51)
Advances from (to) related parties, net 198 45 (87)
----------------------------------------------
Net cash provided by (used in)
investing activities 187 45 (138)
--------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants - - 253
(Repayments)/borrowings under line of credit 64 (108) (1,351)
Borrowings on debt and warrants 776 431 1,090
Payments on long-term debt and notes payable (131) (356) (1,228)
----------------------------------------------
Net cash provided by (used in)
financing activities 709 (33) (1,236)
----------------------------------------------
Net change in cash and cash equivalents (59) (111) (409)
Cash and cash equivalents at beginning of year 59 170 579
----------------------------------------------
Cash and cash equivalents at end of year $ - $ 59 $ 170
----------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 10 $ 281 $ 158
----------------------------------------------
Income taxes $ - $ - $ -
----------------------------------------------
--------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-8
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Cash Flows
Continued
--------------------------------------------------------------------------------
Non-Cash Investing and Financing Activities:
2003
----
o The Company recorded $374 of unpaid dividends to holders of
preferred stock, and paid $182 of the unpaid dividends by issuance
of 2,118,560 shares of common stock.
o The Company converted debt of $250 and accrued interest of $34 by
issuance of 13,189,842 shares of common stock.
o The Company issued 50,000 warrants valued at $3 as payment of
accounts payable.
o The Company issued to a member of the board of directors
27,355,800 warrants valued at $470 for forbearance of debt ($272)
and services ($198).
o The Company issued 1,000,000 new warrants and re-priced and
extended 1,500,000 warrants to forbear payments on and extend
notes payable, resulting in a debt discount of $30.
2002
----
o The Company recorded $528 of unpaid dividends to holders of
preferred stock, and paid $137 of the unpaid dividends by issuance
of 1,113,285 shares of common stock.
o The Company financed prepaid assets with notes payable of $140.
o The Company issued warrants valued at $41 with debt extensions.
o Effective May 16, 2002, the Company dissolved the acquisition of
its 81% interest in Dispute Resolution Management, Inc (DRM) (see
Note 6). Consideration given consisted of the issuance of 800,000
shares of Series H Convertible Preferred valued at $800. The
Company received 5,937,500 shares of treasury stock valued at $463
from DRM shareholders. The Company also relieved $29,490 of assets
held for sale - component DRM, $2,595 of accounts payable and
$22,165 of liabilities held for sale - component DRM, and recorded
a loss on disposal of discontinued operations of $4,134 and a loss
on discontinued operations of $933.
o The Company issued 2,500,000 shares of treasury stock valued at
$125 to satisfy a related party payable to an officer of the
Company.
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated
financial statements. F-9
Commodore Applied Technologies, Inc.
and Subsidiaries
Consolidated Statement of Cash Flows
Continued
--------------------------------------------------------------------------------
2001
----
o A debt holder converted $250 of debt to 1,041,667 shares of common
stock
o The Company recorded $408 of unpaid dividends to holders of
preferred stock
o The Company financed prepaid assets with notes payable of $123
o The Company issued warrants valued at $70 with a debt issuance
o The Company received equipment with book value of $30 from an
unconsolidated subsidiary
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated
financial statements. F-10
Commodore Applied Technologies, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(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.
Through Dispute Resolution Management, Inc. (DRM), a
subsidiary acquired August 30, 2000 and disposed of May
16, 2002, Applied provided a package of services to help
companies recover financial settlements from insurance
policies to defray costs associated with environmental
liabilities. As of May 16, 2002, Applied no longer owns
an 81% interest in DRM (see Note 6). Applied's loss of
the DRM subsidiary may have a material adverse effect on
the financial condition of Applied and its cash flow
requirements. Applied currently requires additional cash
to sustain existing operations and to meet current
obligations and ongoing capital requirements.
Principles of Consolidation
The consolidated financial statements include the
accounts of Applied and its majority-owned subsidiaries.
Dispute Resolution Management, Inc. is included as
discontinued operations from August 30, 2000 (date of
acquisition) through May 16, 2002 (date of dissolution)
(see Note 6). During the year ended December 31, 2002,
Applied disposed of DRM, and recorded the related loss
on the disposal of DRM. Applied has presented its
financial statements to reflect the operations of DRM as
discontinued operations.
All significant intercompany balances and transactions
have been eliminated.
--------------------------------------------------------------------------------
F-11
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Principles of Consolidation - Continued
Significant The investment in Teledyne-Commodore, LLC, a 50% owned
Accounting joint venture with Teledyne Environmental, Inc., was
Policies accounted for under the lower of cost or market at
Continued December 31, 2000 as operations had ceased. During the
year ended December 31, 2001, the joint venture was
dissolved, and Applied's share of the related loss was
included in losses of unconsolidated subsidiaries.
Cash and Cash Equivalents
Applied considers cash and highly liquid debt
instruments with original maturities of three months or
less at the date of purchase to be cash equivalents.
Concentration of Credit Risk and Significant Customers
Applied maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits.
Applied has not experienced any losses in such accounts.
With respect to trade receivables, Applied generally
does not require collateral as the majority of Applied's
services are performed for the U.S. Government and prime
contractors that serve the U.S. Government. Applied
believes it is not exposed to any significant credit
risk on cash, cash equivalents and trade receivables.
Sales to major customers which exceeded 10 percent of
revenues are as follows:
Years Ended December 31,
------------- -------------- ---------------
2003 2002 2001
------------- -------------- ---------------
Customer A $ - $ 2,622 $ 3,252
Customer B $ 350 $ 784 $ 1,148
Customer C $ 218 $ - $ -
Customer D $ 75 $ - $ -
--------------------------------------------------------------------------------
F-12
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Risk and Uncertainty
Significant Applied's operations involving the separation and
Accounting destruction of PCBs requires a permit from the EPA.
Policies Applied had a valid nationwide permit related to the
Continued treatment of PCBs in certain substances. The permit
expired September 15, 2001. Applied is currently in the
process of applying for a renewal of the permit. Until
the permit is reviewed and allowed, Applied, or its
client, must post a closure bond specific to the amount
of any contracts that utilize Applied's destruction
technology related to the treatment of PCB's.
Property and Equipment
Property and equipment are recorded at cost.
Improvements which substantially increase the useful
lives of assets are capitalized. Maintenance and repairs
are expensed as incurred. Upon retirement or disposal,
the related cost and accumulated depreciation are
removed from the respective accounts and any gain or
loss is recorded in the Statement of Operations.
Provisions for depreciation are computed on the
straight-line method based on the estimated useful lives
of the assets which range from 3-5 years.
Intangible Assets
Completed technology represents certain technology and
related patents acquired in connection with the purchase
of third-party interests in Commodore Laboratories, Inc.
("Labs"). Completed technology and patents are being
amortized on a straight-line basis over their estimated
.5 year lives remaining at December 31, 2003.
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 Applied recorded
an impairment on its equipment and related patents of
completed technology of $776 and $627, respectively.
--------------------------------------------------------------------------------
F-13
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Revenue Recognition
Significant Substantially all of Applied's revenues from continuing
Accounting operations are generated by its subsidiary, CASI. CASI's
Policies revenues consist of engineering and scientific services
Continued performed for the U.S. Government and prime contractors
that serve the U.S. Government under a variety of
contracts, most of which provide for unit prices.
Revenue under unit price contracts are recorded when the
services are provided.
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's 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. All revenues
associated with DRM have been classified in Applied's
current financial statements in discontinued operations.
Applied disposed of its ownership of DRM on May 16, 2002
(see Note 6).
Research and Development
Research and development expenditures are charged to
operations as incurred.
--------------------------------------------------------------------------------
F-14
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Income Taxes
Significant Income taxes are determined in accordance with Statement
Accounting of Financial Accounting Standards ("SFAS") 109, which
Policies requires recognition of deferred income tax liabilities
Continued and assets for the expected future tax consequences of
events that have been included in the financial
state-ments 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 re-verse. 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.
Stock-Based Compensation
At December 31, 2002, Applied has one stock-based
employee compensation plan, which is described more
fully in Note 12. Applied accounts for its plans under
the recognition and measurement prin-ciples of APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based
employee compensation cost is reflected in net loss, as
all options granted under those plans had an exercise
price that equaled or exceeded the market value of the
underlying common stock on the date of grant. In as much
as Applied rescinded certain options during 2002 and
reissued new options to the option holders, the options
are considered variable op-tions and will be revalued
each quarter to determine the effect on operations, if
any. The following table illustrates the effect on net
loss per share if Applied had applied the fair value
recognition provision of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Years Ended December 31,
--------------------------------
2003 2002 2001
--------------------------------
Net loss, as reported $ (2,597) $ (5,972) $ (6,554)
Deduct: Total stock- based employee
compen-sation expense determined under fair
value based method for all awards, net of
related
tax effects (1,544) (500) (256)
--------------------------------
Pro forma net loss $ (4,141) $ (6,472) $ (6,810)
--------------------------------
Loss per share:
Basic and diluted - as reported $ (.04) $ (.11) $ (.13)
--------------------------------
Basic and diluted - pro forma $ (.04) $ (.12) $ (.14)
--------------------------------
--------------------------------------------------------------------------------
F-15
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Fair Value of Financial Instruments
Significant The fair value of financial instruments is determined by
Accounting reference to various market data and other valuation
Policies techniques as appropriate. Accounts receivable, notes
Continued receivable, cash equivalents, long term debt and the
line of credit are financial instruments that are
subject to possible material market variations from the
recorded book value. Applied has reflected in the
financial statements debt discounts which are being
amortized over the estimated lives of the obligations.
The debt discounts bring the obligations to a market
rate of interest. The fair value of these financial
instruments approximate the recorded book value as of
December 31, 2003 and 2002.
Use of Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted
in the United States of America requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior years have been reclassified to
conform with the current year presentation.
2. Going The accompanying consolidated financial statements have
Concern been prepared under the assumption that Applied will
continue as a going concern. Such assumption
contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business. As shown in the consolidated financial
statements, Applied incurred losses for the years ended
December 31, 2003, 2002 and 2001. Applied also has a
working capital deficit at December 31, 2003. The
consolidated financial statements do not include any
adjustments that might be necessary should Applied be
unable to continue as a going concern.
--------------------------------------------------------------------------------
F-16
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
2. Going Applied's continuation as a going concern is dependent
Concern upon its ability to generate sufficient cash flow to
Continued meet its obligations on a timely basis, to obtain
additional financing as may be required, and ultimately
to attain profitability. Potential sources of cash
include new contracts, external debt, the sale of new
shares of Company stock or alternative methods such as
mergers or sale transactions. No assurances can be
given, however, that Applied will be able to obtain any
of these potential sources of cash. Applied currently
requires additional cash to sustain existing operations
and to meet current obligations and ongoing capital
requirements.
3. Receivables The components of Applied's trade receivables are as
follows as of December 31:
2003 2002
--------------------------------
Contract receivables $ 143 $ 272
Less: Allowance for doubtful accounts
and potential disallowances (72) (176)
--------------------------------
Total receivables, net $ 71 $ 96
--------------------------------
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 2003 2002
--------------------------------------
Machinery and equipment 3 $ 573 $ 615
Furniture and fixtures 5 58 223
Computer equipment 4 213 510
Leasehold improvements 5 - 19
------------------------
844 1,367
Less: accumulated depreciation
and amortization (702) (1,009)
------------------------
Total property and equipment $ 142 $ 358
------------------------
--------------------------------------------------------------------------------
F-17
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
4. Property During the year ended December 31, 2001 an impairment
and loss of $776 was recorded against the machinery
Equipment equipment.
Continued
5. Other Assets Applied had an investment in a joint venture with
Teledyne Environmental, Inc. (LLC). Applied did not
record its equity in the losses of the LLC in 2000 and
1999 as the LLC agreement states that members of the LLC
can only be asked to fund approved capital calls and
Applied had no obligation to fund these 2000 and 1999
losses. During the year ended December 31, 2001, the
joint venture was dissolved, and Applied's share of the
related loss to dissolve the joint venture of $295 was
included in losses of unconsolidated subsidiaries.
6. Acquisition On August 30, 2000, Applied completed a stock purchase
and agreement with Dispute Resolution Management, Inc. (DRM)
Dissolution and its two shareholders. This agreement amended and
of Dispute restated in its entirety the terms of an agreement and
Resolution plan of merger, which Applied had previously entered
Management into with DRM and its shareholders. On May 16, 2002, the
acquisition of DRM was dissolved, and Applied entered
into a settlement agreement with DRM on August 19, 2002.
Under terms of the acquisition agreement, Applied
purchased 81% of the issued and outstanding capital
stock of DRM from the two existing shareholders. The
consideration to these shareholders (and their
designees) consisted of:
a) 10.5 million shares of Applied common
stock. Of these 10.5 million shares, 9.5
million shares are subject to a one-year
option to repurchase any or all shares. The
extended option expired on May 16, 2002.
b) 5 million shares of Applied common stock in
exchange for an option to purchase the
remaining 19% interest in DRM. The option
expires after five years and the option
price was to be based upon the relative
appraised values of DRM and Applied at the
time of purchase.
--------------------------------------------------------------------------------
F-18
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Acquisition c) Five-year warrants to purchase up to an
and aggregate of 1.0 million shares of Applied
Dissolution common stock at an exercise price of $2.00
of Dispute per share.
Resolution
Management d) Quarterly earn-out distributions equal to
Continued 35% of the cash flow of DRM over an earn-
out period commencing as of September 1,
2000 and ending December 31, 2005. Applied
had agreed that if DRM had not distributed
to these shareholders a total of $10
million in cash in earn-out payments by
December 31, 2003, Applied would make up
the difference between $10 million and the
actual cash distributed. This difference
could have been paid in cash or Applied
common shares at Applied's sole discretion.
Applied had an absolute and irrevocable obligation to
repurchase, by the end of the option period, that number
of 9.5 million shares of Applied common stock necessary
to provide the holders of those shares with a total of
$14.5 million. It was 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 had been imputed
on the note payable to record debt at the time of
acquisition of $13,122.
The former owners of DRM entered into five-year
employment agreement with DRM providing for starting
salaries of $262 per year, with annual increases of not
more than 5%. In addition, these individuals entered
into five-year non-competition agreements with DRM.
Applied valued the consideration given as follows:
9.5 million option common shares $ 13,122
5.0 million common shares 5,469
1.0 million common shares 1,094
Warrants to purchase 1.0 million shares 959
Future payment guarantee 10,000
Imputed interest on future payment guarantee (2,588)
-----------------
Total $ 28,056
-----------------
--------------------------------------------------------------------------------
F-19
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Acquisition DRM's equity at the date of acquisition was $414.
and Applied's 81% share of this equity was $336.
Dissolution
of Dispute Applied recorded the difference between the
Resolution consideration given of $28,056 and its ownership in DRM
Management equity of $336 as follows:
Continued
Covenants not to compete $ 2,625
Goodwill 25,095
-----------------
Total $ 27,720
-----------------
Covenants not to compete were being amortized over their
5 year life. Prior to January 1, 2002, goodwill was
being amortized over 20 years.
On May 16, 2002, a Notice of Default and Right to Pursue
Remedies (the "Notice") was issued to Applied by William
J. Russell and Tamie B. Speciale (the "Pledgees")
claiming that Applied was in default under the Stock
Purchase Agreement (the "Agreement"), between Applied
and DRM and the related Stock Pledge Agreement (the
"Stock Pledge"). As of May 16, 2002, Applied no longer
owned an 81% interest in DRM.
On August 19, 2002, Applied entered into a settlement
agreement with DRM (the "DRM Settlement Agreement").
Under terms of the DRM Settlement Agreement, Applied
acknowledged that it had previously received back
4,750,000 shares of its common stock from DRM and its
shareholders, which was recorded as treasury stock at
the fair market value of the common stock. As part of
the DRM Settlement Agreement, Applied received an
additional 1,187,500 shares of its common stock from DRM
and its shareholders, which was also recorded as
treasury stock at the fair market value of the common
stock.
--------------------------------------------------------------------------------
F-20
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Acquisition Additionally, Applied issued 800,000 shares of Series H
and Preferred stock (the "Series H Preferred"), par value
Dissolution $0.001 per share, each such share of Series H Preferred
of Dispute having a stated value of $1 per share, to DRM, Russell
Resolution and Speciale as part of the DRM Settlement Agreement as
Management of September 30, 2002 for satisfaction of the remaining
Continued liabilities relating to the purchase and working capital
of DRM. The Series H Preferred shall have the following
rights, privileges, and limitations:
a) The conversion feature shall be exercisable
on June 30, 2003. No conversion has been
exercised as of December 31, 2003.
b) No Series H Preferred may be converted prior
to June 30, 2003. Until July 31, 2005, only
80,000 shares of the Series H Preferred shall
be convertible in any calendar quarter. The
balance of any unconverted Series H Preferred
Stock may be converted at any time on or
after August 1, 2005.
c) The conversion price of the Series H
Preferred shall be determined by the average
closing price of Company's common stock in
the previous 30 trading days, but in no event
shall the conversion price be less than $0.20
per share.
d) The Series H Preferred shall have a
non-cumulative annual dividend of 3%, payable
in cash or Series H Preferred within 30 days
of the end of Applied's fiscal year, at
Applied's election.
e) The Series H Preferred shall not be
transferable.
For the year ended December 31, 2002 Applied recorded a
loss on the disposal of DRM in the amount of $4,134.
Applied's loss of the DRM subsidiary may have a material
adverse effect on the financial condition of Applied and
its cash flow problems. Applied currently requires
additional cash to sustain existing operations and to
meet current obligations and ongoing capital
requirements.
--------------------------------------------------------------------------------
F-21
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
7. Other Other accrued liabilities consist of the following:
Accrued
Liabilities
2003 2002
------------------------------
Dividend payable $ 1,405 $ 1,210
Compensation and employee benefits 1,373 842
Accrued interest 351 155
Loss reserve 313 238
Forbearance and exit fees 219 -
Related parties 185 185
Other 91 93
------------------------------
$ 3,937 $ 2,723
------------------------------
8. Line At December 31, 2003 and 2002, CASI had a $64 and $0
of outstanding balance, respectively, on a revolving line
Credit of credit. The line of credit is not to exceed 85% of
eligible receivables or $2,500 and is due November 2004
with interest payable monthly at prime plus 2.0 percent
(6% at December 31, 2003). The credit line is
collateralized by the assets of CASI and is guaranteed
by Applied. The line of credit contains certain
financial covenants and restrictions including minimum
ratios that CASI must satisfy.
9. Notes Notes payable and long-term debt consist of the
Payable and following at December 31:
Long-Term
Debt 2003 2002
------------------------------
Notes payable to individuals with interest at
15%, due in aggregate monthly installments,
beginning in July 2001, of $83,33 plus
interest, maturing through August 2002. In
connection with the notes, Applied in 2001
issued warrants to purchase 333,334 shares of
stock which were valued at $70,000 and
recorded as a discount on the notes, which was
fully amortized at 2003 and 2002. 250,000
warrants valued at $4 were issued in February
2004 to extend these notes through December
31, 2005. $ 1,351 $ 583
--------------------------------------------------------------------------------
F-22
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Notes
Payable and
Long-Term
Debt
Continued
Notes payable to individuals with interest at
12%, originally due February 13, 2001 and
extended until May 31, 2002, and then until
January 1, 2004 during 2002, and then until
January 15, 2005 upon the re-pricing and
extension of 1,500,000 related warrants and an
additional 1,000,000 warrants. A discount of
$30 was recorded as of December 31, 2003 for
the value of re-priced and additional
warrants. The note is secured by accounts
receivable. 254 216
Note payable to an officer of Applied with
interest at 9.75%. The note is unsecured and
is convertible into common stock of Applied at
the market rate of the common stock. During
2001 the officer converted $250,000 of the note
for 1,041,667 shares of common stock. During
2003 the officer converted the remaining
$250,000 of the note for 13,189,842 shares of
common stock. - 250
Notes payable to an insurance company with
interest at 8.18%, secured by an insurance
contract and due November 2003 - 131
Unamortized discount for warrants (30) (35)
------------------------------
1,575 1,145
Less current maturities - 714
------------------------------
$ 1,575 $ 431
------------------------------
--------------------------------------------------------------------------------
F-23
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
10. Income Applied provides for deferred income taxes on temporary
Taxes differences which represent tax effects of transactions
reported for tax purposes in periods different than for
book purposes.
The provision for income taxes for the years ended
December 31 results in an effective tax rate which
differs from federal income tax rates as follows:
2003 2002 2001
-----------------------------------------
Expected tax benefit at federal
statutory rate $ (1,005) $ (2,030) $ (2,228)
State income tax benefit, net of
federal income tax benefit (177) (358) (393)
Interest accretion - 24 753
Other 180 604 226
Disposition of discontinued
operations - 1,654 -
Change in valuation allowance 1,002 106 1,642
-----------------------------------------
Income tax benefit $ - $ - $ -
-----------------------------------------
The components of the net deferred tax as of December
31, are as follows:
2003 2002
---------------------------
Reserve for uncollectable
receivables and potential
disallowances $ 160 $ 153
Net operating loss carryforward 12,437 11,320
Impairment charges 1,933 2,225
Other - (170)
---------------------------
14,530 13,528
Valuation allowance (14,530) (13,528)
---------------------------
Net deferred taxes $ - $ -
---------------------------
--------------------------------------------------------------------------------
F-24
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
10. Income Applied conducts a periodic examination of its valuation
Taxes allowance. Factors considered in the evaluation include
Continued recent and expected future earnings and Applied's
liquidity and equity positions. As of December 31, 2003
and 2002, Applied has established a valuation allowance
for the entire amount of net deferred tax assets.
Applied has net operating loss ("NOL") carryforwards at
December 31, 2003 of approximately $34,000 which expire
in years 2010 through 2023. The NOL carryforwards are
limited to use against future taxable income due to
changes in ownership and control.
11. Stockholders' Series E Convertible Preferred Stock
Equity Effective November 4, 1999, Applied issued 335,000
shares of Series E Convertible Preferred Stock with a
stated value of $10 per share.
This stock has a dividend rate of 12% per annum through
April 30, 2000 and thereafter 5% per annum paid
quarterly. In addition the stock has a special dividend
at the rate of 7.5% per annum which began to accrue on
May 1, 2000 and continues to accrue until paid, payable
on May 1, 2001. The Company accrued $207, $341 and $178
of dividends in 2003, 2002 and 2001, respectively, and
issued 1,566,989 shares common stock to pay $142 of
accrued dividends in 2003, respectively.
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, Applied issued warrants to purchase 572,500
shares of common stock at a purchase price equal to 110%
of the market price on the date of closing ($1.20).
These warrants were valued at $60 and expire on November
4, 2004.
The Series E Convertible Preferred Stock is convertible
into common stock at any time on or after April 30, 2000
at a conversion price equal to the arithmetic mean of
the closing prices of common stock as reported in the
respective stock exchange for the ten trading days
immediately preceding the date of conversion.
--------------------------------------------------------------------------------
F-25
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stockholders' Series E Convertible Preferred Stock - Continued
Equity During the years ended December 31, 2003 and 2002 and
Continued 2001, 162,500 and 0 and 22,000 shares of Series E
Convertible Preferred Stock were converted into
40,916,155 and 0 and 1,256,713 shares of common stock,
respectively. As of December 31, 2003 there are 115,500
shares of Series E Convertible Preferred Stock
outstanding.
Series F Convertible Preferred Stock
In March 2000, Applied issued 266,700 shares of Series F
Convertible Preferred Stock with a stated value of $10
per share. Transaction costs on the issuance totaled
$230 resulting in net proceeds to Applied of $1,771.
The stock has a dividend rate of 12% per annum through
September 30, 2000 and thereafter 5% per annum paid
quarterly. In addition the stock has a special dividend
at the rate of 7.5% per annum which began to accrue
October 1, 2000 and continues to accrue until paid,
payable on October 1, 2001. The Company accrued $143,
$178 and $230 of dividends in 2003, 2002 and 2001,
respectively, and issued 551,571 shares and 1,113,285
shares of common stock to pay $40 and $137 of accrued
dividends in 2003 and 2002, respectively.
The Series F Convertible Preferred Stock has a
liquidation preference of $10 per share. In connection
with the issuance of Series F Convertible Preferred
Stock, Applied issued warrants to purchase 363,475
shares of common stock at $1.93875 per share. These
warrants expire on March 16, 2005.
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.
--------------------------------------------------------------------------------
F-26
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stockholders' Series F Convertible Preferred Stock - Continued
Equity During the years ended December 31, 2003 and 2002 and
Continued 2001, 17,500 shares and 28,000 shares and 93,000 shares
of Series F Convertible Preferred Stock were converted
to 2,450,514 shares and 2,496,423 shares and 2,815,512
shares of common stock, respectively. Applied has
118,200 shares of Series F convertible stock outstanding
at December 31, 2003.
Series H Convertible Preferred Stock
Applied issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per
share, each such share of Series H Preferred having a
stated value of $1 per share, to DRM, Russell and
Speciale as part of the DRM Settlement Agreement as of
September 30, 2002 for satisfaction of the remaining
liabilities relating to the purchase and working capital
of DRM. The Series H Preferred shall have the following
rights, privileges, and limitations:
a) The conversion feature shall be exercisable
on June 30, 2003.
b) No Series H Preferred may be converted prior
to June 30, 2003. Until July 31, 2005, only
80,000 shares of the Series H Preferred shall
be convertible in any calendar quarter. The
balance of any unconverted Series H Preferred
Stock may be converted at any time on or
after August 1, 2005.
c) The conversion price of the Series H
Preferred shall be determined by the average
closing price of Company's common stock in
the previous 30 trading days, but in no event
shall the conversion price be less than $0.20
per share.
d) The conversion price of the Series H
Preferred shall be determined by the average
closing price of Company's common stock in
the previous 30 trading days, but in no event
shall the conversion price be less than $0.20
per share.
e) The Series H Preferred shall have a
non-cumulative annual dividend of 3%, payable
in cash or Series H Preferred within 30 days
of the end of Applied's fiscal year, at
Applied's election. Dividends of $24 and $9
were accrued during 2003 and 2002,
respectively.
--------------------------------------------------------------------------------
F-27
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stockholders' Series H Convertible Preferred Stock - Continued
Equity
Continued f) The Series H Preferred shall not be
transferable.
The holders of all series of convertible preferred stock
have the right, voting as a class, to approve or
disapprove of the issuance of any class or series of
stock ranking senior to or on a parity with the
convertible preferred stock with respect to declaration
and payment of dividends or the distribution of assets
on liquidation, dissolution or winding-up. Upon
liquidation, dissolution or winding up of Applied,
holders of Series E and Series F Convertible Preferred
Stock are entitled to receive liquidation distributions
equivalent to $10.00 per share before any distribution
to holders of the Common Stock or any capital stock
ranking junior to the Series E Convertible Preferred
Stock. There has been no shares of Series H Preferred
stock converted into common shares as of December 31,
2003.
Cumulative unpaid dividends on Preferred Stock is $1,405
and $1,210 at December 31, 2003 and 2002.
12. Stock Options Applied has adopted the intrinsic value method of
and Stock accounting for stock options and warrants under APB 25
Warrants with footnote disclosures of the pro forma effects as if
the FAS 123 fair value method had been adopted. See Note
1 for the pro forma effect on net loss per share if
Applied had applied the fair value recognition provision
of FAS 123.
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 218%, the
expected risk-free rate of return is 3.2 percent,
calculated as the rate offered on U.S. Government
securities with the same term as the expected life of
the options, and the expected term is the maximum
possible term under the option.
Stock options issued during the years ended December 31,
2003, 2002 and 2001 had an average value of $.02, $.07
and $.28, respectively.
--------------------------------------------------------------------------------
F-28
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
12. Stock Options Stock Options
and Stock In December 1998, Applied adopted its 1998 Stock Option
Warrants Plan pursuant to which officers, directors, key
Continued employees and/or consultants of Applied can receive
non-qualified stock options to purchase up to an
aggregate 5,000,000 shares of Applied's Common Stock.
During 1999 and 2000 Applied increased the number of
shares authorized by 5,000,000 shares each year
resulting in 15,000,000 shares currently available under
the 1998 stock option plan. Exercise prices applicable
to stock options issued under this Plan represent no
less than 100% of the fair value of the underlying
common stock as of the date of grant. Stock options
granted under the plan may vest immediately or for any
period up to five years.
In as much as Applied rescinded certain options during
2002 and reissued new options to the option holders, the
options are considered variable options and will be
revalued each quarter to determine the effect on
operations, if any. There is no variable option expense
recognized during 2003 as the variable options' exercise
price exceeded the fair market value of the Company's
stock.
A summary of the status of options granted under and
outside of the Plan as of December 31, 2003, 2002 and
2001 and changes during the periods then ended is
presented below:
2003 2002 2001
-----------------------------------------------------------------
Shares Weighted Shares Weighted Shares Weighted
Average verage verage
Exercise Axercise Axercise
Price E Price E Price
-----------------------------------------------------------------
Options
outstanding
- beginning
of year 10,204,593 $ 0.24 7,266,908 $ 0.84 7,529,056 $ 0.86
Granted 77,081,358 0.03 9,847,218 0.07 920,000 0.28
Exercised - - - - - -
Rescinded - - (3,744,373) 0.74 - -
Forfeited - - (3,165,160) 0.55 (1,182,148) 0.49
-----------------------------------------------------------------
Options
outstanding
- end of year 87,285,951 $ 0.05 10,204,593 $ 0.24 7,266,908 $ 0.84
-----------------------------------------------------------------
--------------------------------------------------------------------------------
F-29
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
12. Stock The following table summarizes information about
Options employee stock options and all other stock options
and Stock outstanding at December 31, 2003:
Warrants
Continued Options Options
Outstanding Exercisable
---------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------------------------------------------------------------------------
$ 0.03 - 0.03 77,081,358 4.96 years $ 0.03 77,081,358 $ 0.03
0.07 - 0.07 9,847,218 4.96 years 0.07 9,847,218 0.07
2.00 - 6.00 357,375 2.98 years 4.86 357,375 4.86
---------------------------------------------------------------
87,285,951 4.95 years $ 0.05 87,285,951 $ 0.05
---------------------------------------------------------------
Stock Warrants
A summary of the warrants granted as of December 31,
2003, 2002 and 2001 and changes during the periods then
ended is presented below:
2003 2002 2001
------------------------------------------------------------------
Shares Weighted Shares Weighted Shares Weighted
Average verage verage
Exercise Axercise Axercise
Price E Price E Price
------------------------------------------------------------------
Warrants
outstanding
- beginning
of year 24,070,312 $ 3.50 21,365,705 $ 4.16 31,332,178 $ 4.42
Granted 30,655,800 0.03 5,537,716 2.19 1,333,334 0.22
Exercised - - - - - -
Repriced (1,500,000) 0.05 - - - -
Rescinded (113,025) 1.94 (1,000,000) 4.16 - -
Expired (17,318,730) 3.50 (1,833,109) 4.16 (11,299,807) 4.42
------------------------------------------------------------------
Warrants
outstanding
- end of
year 35,794,357 $ 0.18 24,070,312 $ 3.50 21,365,705 $ 4.16
------------------------------------------------------------------
--------------------------------------------------------------------------------
F-30
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
12. Stock Outstanding warrants at December 31, 2003 are as follows:
Options
and Stock
Warrants
Continued
Granted Number of Current
2000 and Granted Granted Granted Warrants Exercise Expiration
Prior 2001 2002 2003 2003 Price Date
-------------------------------------------------------------------------------
1,815,881 26,679 261,688 - 2,104,248 $ 1.24 February 2004
312,500 - - - 312,500 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
1,000,000 - - - 1,000,000 2.00 August 2005
- 333,334 - - 333,334 0.22 June 2006
- - 1,000,000 - 1,000,000 0.05 October 2004
- - - 250,000 250,000 0.03 February 2009
- - - 500,000 500,000 0.03 October 2006
- - - 1,000,000 1,000,000 0.03 February 2007
- - - 1,000,000 1,000,000 0.03 April 2006
- - - 27,355,800 27,355,800 0.03 November 2008
- - - 550,000 550,000 0.03 November 2008
---------------------------------------------------------
3,516,856 360,013 1,261,688 30,655,800 35,794,357
---------------------------------------------------------
In 2003, 1,500,000 warrants originally issued with debt
were repriced and extended, and 1,000,000 warrants were
newly issued, both to extend the related debt. The
Company recorded a debt discount of $30 at December 31,
2003. As of December 31, 2003 all warrants are
exercisable.
13. Earnings All earnings per share amounts reflect the
Per implementation of SFAS 128 "Earnings per Share". Basic
Share earnings per share are computed by dividing net income
(loss) 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-31
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
13. Earnings Per
Share
Continued Years Ended December 31,
--------------------------------------------
2003 2002 2001
--------------------------------------------
Net loss $ (2,957) $ (5,972) $ (6,554)
Preferred stock dividends (304) (528) (408)
--------------------------------------------
Net loss available to
common shareholders $ (3,261) $ (6,500) $ (6,962)
--------------------------------------------
Weighted average common
shares outstanding (basic) 92,035,000 57,775,000 53,241,000
Series E Convertible
Preferred Stock (*) (*) (*)
Series F Convertible
Preferred Stock (*) (*) -
Series H Convertible
Preferred Stock (*) (*) (*)
Employee Stock Options (*) (*) (*)
Warrants issued in connection
with various transactions (*) (*) (*)
--------------------------------------------
Weighted average common
shares outstanding (diluted) 92,035,000 57,775,000 53,241,000
--------------------------------------------
Net loss per share - basic
and diluted $ (.04) $ (.11) $ (.13)
--------------------------------------------
(*) Due to Applied's loss from continuing operations in
2003, 2002 and 2001, the incremental shares issuable in
connection with these instruments are anti-dilutive and
accordingly not considered in the calculation.
14. Related Party Applied had the following material related party
Transactions transactions:
Applied at December 31, 2001 had obligations relating to
the purchase of 81% of DRM (see Note 6).
During the year ended December 31, 2000 a shareholder of
Applied sold, at a discount, 1,000,000 common shares
that it owned of Applied to individuals who loaned $500
to Applied. The discount amount of $500 was used to
offset receivables from related parties and result in a
net related party payable of $6 and $42 as of December
31, 2003 and 2002, respectively.
--------------------------------------------------------------------------------
F-32
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
14. Related Party In addition, Applied has payables to related parties of
Transactions $185 and $185 at December 31, 2003 and 2002 recorded in
Continued accrued liabilities.
27,355,800 warrants valued at $470 were issued to a
member of the board of directors for services of rent
and facilities, and forbearance on payment of note that
is due on demand.
Applied has a note payable to a member of the board of
directors that is due on demand and carries interest at
9%. The balance due at December 31, 2003 and 2002 is
$272 and $38, respectively, and is included in the
related party payable.
Applied has long-term debt to shareholders of Applied.
See Note 9.
15. 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:
2004 $ 116
2005 11
---------------
$ 127
---------------
Rent expense approximated $325, $204, and $429 in 2003,
2002 and 2001, respectively. Rent expense in 2003
includes $198 from the issuance of warrants to a member
of the board of directors for office rent expense.
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, 2003 and 2002.
Litigation
Applied has matters of litigation arising in the
ordinary course of business which in the opinion of
management will not have a material adverse effect on
its financial condition or results of operations.
--------------------------------------------------------------------------------
F-33
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments Guarantee
and Applied, along with several other entities, in a prior
Contingencies year guaranteed a performance bond of Commodore
Continued Separation Technologies, Inc. relating to a contract
with the Port of Baltimore. Applied was notified on June
28, 2000 that the performance bond is being called. It
is not known, at this time, the amount, if any,
Applied's share will be. No amount has been reflected in
these financial statements as the amount is not
determinable.
16. 401(K) Applied has adopted a 401(K) savings plan for all
Savings Plan employees who qualify as to age and service.
Contributions by Applied are discretionary. Applied made
annual contributions to the plan of approximately $0, $0
and $35 during the years ended December 31, 2003, 2002
and 2001, respectively.
17. Discontinued Condensed financial information for DRM, which was
Operations discontinued, is as follows for the years ended December
31, 2002 and 2001, which includes DRM operations from
August 30, 2000 (date of acquisition) through May 16,
2002 (date of dissolution):
2002 2001
-----------------------------
Revenues $ 718 $ 5,961
Costs and expenses (1,515) (6,056)
Interest expense (186) (2,090)
Minority interest 50 (203)
-----------------------------
Net (loss) gain before income
tax expense (933) (2,388)
Income tax expense - -
-----------------------------
Net (loss) gain from discontinued
operations $ (933) $ (2,388)
-----------------------------
--------------------------------------------------------------------------------
F-34
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 two reportable
segments as follows:
1. CASI, which primarily provides various
engineering, legal, sampling and public relations
services to government agencies on a cost plus
basis.
2. Solution, which, through CASI, has equipment to
treat mixed and hazardous waste through a
patented process using sodium and anhydrous
ammonia.
DRM, from August 30, 2000 (date of acquisition) to May
16, 2002 (date of dissolution), provided a package of
services to help companies recover financial settlements
from insurance policies to defray costs associated with
environmental liabilities. Income (loss) from DRM is
recorded in the discontinued operations section of the
segment information.
--------------------------------------------------------------------------------
F-35
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
18. Segment Common overhead costs are allocated between segments
Information based on a record of time spent by executives.
Continued
Applied evaluates segment performance based on the
segment's net income (loss). The accounting policies of
the segments are the same as those described in the
summary of significant accounting policies. Applied's
foreign and export sales and assets located outside of
the United States are not significant. Summarized
financial information concerning Applied's reportable
segments is shown in the following tables.
2003
----
Corporate
Overhead
Total CASI Solution & Other
----------------------------------------------------
Revenue $ 660 $ 568 $ 92 $ -
Costs and expenses:
Cost of sales 811 721 90 -
Research and development 70 - 70 -
General and administrative 1,700 570 73 1,057
Depreciation and amortization 267 - - 267
----------------------------------------------------
Total costs and expenses 2,848 1,291 233 1,324
----------------------------------------------------
Income (loss) from operations (2,188) (723) (141) (1,324)
Interest income - - - -
Interest expense (769) (1) - (768)
Income taxes - - - -
----------------------------------------------------
Income (loss) from continuing operations (2,957) (724) (141) (2,092)
Income (loss) from discontinued operations - - - -
----------------------------------------------------
Net income (loss) $ (2,957) $ (724) $ (141) $ (2,092)
----------------------------------------------------
Total assets $ 246 $ 84 $ - $ 162
----------------------------------------------------
Expenditures for long-lived assets $ 11 $ - $ - $ 11
----------------------------------------------------
--------------------------------------------------------------------------------
F-36
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
18. Segment
Information
Continued
2002
----
Corporate
Overhead
Total CASI Solution & Other
----------------------------------------------------
Revenue $ 3,710 $ 3,448 $ 262 $ -
Costs and expenses:
Cost of sales 2,108 1,854 254 -
Research and development 297 - 297 -
General and administrative 1,792 754 203 835
Depreciation and amortization 314 30 247 37
------------------------------------------------------
Total costs and expenses 4,511 2,638 1,001 872
------------------------------------------------------
Income (loss) from operations (801) 810 (739) (872)
Interest income - - - -
Interest expense (104) - - (104)
Income taxes - - - -
------------------------------------------------------
Income (loss) from continuing operations (905) 810 (739) (976)
Loss from discontinued operations (5,067) - - (5,067)
------------------------------------------------------
Net (loss) income $ (5,972) $ 810 $ (739) $ (6,043)
------------------------------------------------------
Total assets $ 736 $ 292 $ 353 $ 91
------------------------------------------------------
Expenditures for long-lived assets $ 2 $ 2 $ - $ -
------------------------------------------------------
--------------------------------------------------------------------------------
F-37
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
18. Segment
Information
Continued
2001
----
Corporate
Overhead
Total CASI Solution & Other
----------------------------------------------------
Revenue $ 4,590 $ 4,409 $ 181 $ -
Costs and expenses:
Cost of sales 3,369 3,080 289 -
Research and development 423 - 423 -
General and administrative 2,420 1,219 313 888
Depreciation and amortization 658 - 515 143
Impairment of machinery 776 - - 776
Impairment of patents 627 - - 627
--------------------------------------------------
Total costs and expenses 8,273 4,299 1,540 2,434
--------------------------------------------------
Income (loss) from operations (3,683) 110 (1,359) (2,434)
Interest income 38 38 - -
Interest expense (226) - (86) (140)
Equity in losses of unconsolidated
subsidiary (295) - - (295)
--------------------------------------------------
Income (loss) from continuing operations (4,166) 148 (1,445) (2,869)
Loss from discontinued operations (2,388) - - (2,388)
--------------------------------------------------
Net (loss) income $ (6,554) $ 148 $ (1,445) $ (5,257)
--------------------------------------------------
Total assets $ 31,200 $ 1,277 $ 600 $ 29,323
--------------------------------------------------
Expenditures for long-lived assets $ 51 $ 51 $ - $ -
--------------------------------------------------
--------------------------------------------------------------------------------
F-38
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
19. Subsequent Applied issued a total of 9,070,937 shares of its common
Events stock from the period from January 1, 2004 to April 14,
2004 in connection with various conversion notices from
the holders of Series E and F Convertible Preferred
Stock.
Effective February 15, 2004, the Company re-priced and
extended warrants to purchase 1,500,000 shares of its
common stock from an exercise price of $.05 to $.0285,
and the Company also issued an additional warrants to
purchase 1,000,000 shares of its common stock at an
exercise price of $.0285 per share to all holders of
notes payable aggregating $254 at December 31, 2003 to
obtain an extension on the notes payable through January
15, 2005.
Effective February 15, 2004, the Company issued warrants
to purchase 250,000 shares of its common stock at an
exercise price of $.03 per share to all holders of notes
payable aggregating $1,351 at December 31, 2003 to
obtain an extension on the notes payable through
December 31, 2005.
20. Recent In November 2002, the EITF reached a consensus on Issue
Accounting No. 00-21, Revenue Arrangements with Multiple
Pronounce- Deliverables. EITF Issue No. 00-21 provides guidance on
ments how to account for certain arrangements that involve the
delivery or performance of multiple products, services
and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements
entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF Issue No. 00-21 did not have
a material impact on operating results or financial
condition of the Company.
In April 2003, FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities. SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging
activities under SFAS 133, Accounting for Derivatives
and Hedging Activities. SFAS 149 is generally effective
for derivative instruments, including derivative
instruments embedded in certain contracts, entered into
or modified after June 30, 2003. The adoption of SFAS
149 did not have a material impact on the operating
results or financial condition of the Company.
--------------------------------------------------------------------------------
F-39
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
20. Recent In May 2003, the FASB issued SFAS 150, Accounting for
Accounting Certain Financial Instruments with Characteristics of
Pronounce- Both Liabilities and Equity. SFAS 150 clarifies the
ments accounting for certain financial instruments with
Continued characteristics of both liabilities and equity and
requires that thoseinstruments be classified as
liabilities in statements of financial position.
Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May
31, 2003 and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003.
On November 7, 2003, FASB Staff Position 150-3 was
issued, which indefinitely deferred the effective date
of SFAS 150 for certain mandatory redeemable
non-controlling interests. As the Company does not have
any of these financial instruments, the adoption of SFAS
150 did not have any impact on the Company's
consolidated financial statements.
In December 2003, the FASB issued Interpretation No. 46R
("FIN 46R") (revised December 2003), Consolidation of
Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate
whether it has a controlling interest in an entity
through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46 (FIN 46), which was issued in
January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to
an entity, an enterprise must first determine that the
entity is not a variable interest entity (VIE). As of
the effective date of FIN 46R, an enterprise must
evaluate its involvement with all entities or legal
structures created before February 1, 2003, to determine
whether consolidation requirements of FIN 46R apply to
those entities. There is no grandfathering of existing
entities. Public companies must apply either FIN 46 or
FIN 46R immediately to entities created after January
31, 2003 and no later than the end of the first
reporting period that ends after March 15, 2004.
Management has not determined the effect the adoption of
FIN 46 will have on the Company's consolidated financial
position, results of operations or cash flows.
--------------------------------------------------------------------------------
F-40
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
20. Recent In December 2003, the Securities and Exchange Commission
Accounting (SEC) issued Staff Accounting Bulletin (SAB) No. 104,
Pronounce- Revenue Recognition. SAB 104 revises or rescinds
ments portions of the interpretive guidance included in Topic
Continued 13 of the codification of staff accounting bulletins in
order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104
did not have a material effect on the Company's results
of operations or financial condition.
--------------------------------------------------------------------------------
F-41