ITEM 1. BUSINESS - ------- --------
GENERAL
Commodore Applied Technologies, Inc. (the "Company") is an environmental solutions company offering a range of engineering, technical, and financial services to the public and private sectors related to (i) remediating contamination in soils, liquids and other materials and disposing of or reusing certain waste by-products by utilizing our Solvated Electron Technology ("SET(TM)"), (ii) the settlement of complex, long-tail and latent insurance claims by utilizing a series of tools including an internally developed risk modeling program ("FOCUS(TM)"), and (iii) providing services related to, environmental management for on-site and off-site identification, investigation remediation and management of hazardous, mixed and radioactive waste.
We believe that SET is the only patented, non-thermal, portable and scalable process that is currently available for treating and decontaminating soils, liquids and other materials containing PCBs, pesticides, dioxins, chemical weapons and warfare agents and other toxic contaminants. Furthermore, we believe that the proprietary FOCUS program developed by our 81% owned subsidiary Dispute Resolution Management, Inc., ("DRM") is the only automated risk management system that fully incorporates all of the variables that we view as necessary to determine accurately the liability and settlement targeting necessary to negotiate appropriate insurance recoveries.
The Company's corporate mission is to serve the environmental remediation market from two primary operating centers: (a) to profitably provide government and industry with engineering and remediation solutions to legacy waste environmental problems, and (b) to profitably negotiate and settle complex, long-tail environmental claims domestically and internationally. Our strategy will focus the Company on the unique and high profit niches of environmental claims settlement and recovery, hazardous materials conversion and waste remediation.
Demand for our environmental technology and financial services is anticipated to arise principally from the following sources:
o the need for alternative environmental treatment and disposal methods for toxic substances (such as the SET technology), which involve limited safety risks with respect to air pollution and transportation of hazardous materials and do not result in large volumes of residual waste that require further treatment prior to disposal;
o the need to obtain available insurance recoveries in a negotiated manner (utilizing the FOCUS process) to compensate clients for a portion of their past, current and anticipated obligations, while minimizing the costs and time associated with a litigated recovery environment;
o stricter legislation and regulations mandating new or increased levels of air and water pollution control and solid waste management; and
o the need to provide appropriate risk management tools and mechanisms associated with present and future remediation risks on impaired properties and facilities.
Our business strategy is to expand our environmental technology and financial services businesses by:
o implementing the SET technology in selected niche markets within certain strategic environmental market segments, such as government mixed waste remediation and chemical weapons demilitarization, where we believe SET offers the greatest value and meets pressing customer needs;
o focusing DRM's marketing efforts with aggressive joint working alliances and marketing arrangements with established associations and representatives of Fortune 1000 companies worldwide;
o developing strategic insurance brokerage arrangements and collaborations through joint ventures or acquisitions, to further expand the business offerings and services of DRM to their existing and future clientele; and
o establishing additional collaborative joint working and marketing arrangements with established engineering and environmental service organizations to pursue commercial opportunities in the public and private sector.
The Company has identified three operating segments. These three segments are as follows: Commodore Advanced Sciences, Inc., which primarily provides various engineering, legal, sampling, and public relations services to Government agencies on a cost plus basis; Commodore Solutions, Inc., which is commercializing technologies to treat mixed and hazardous waste; and Dispute Resolution Management, Inc., which provides a package of services to help companies recover financial settlements from insurance policies to defray costs associated with environmental liabilities. Additional information regarding the business of each segment is set forth below, and the information in Note 18 to the Company's Consolidated Financial Statements included in this Annual Report on Form 10-K is incorporated into this Part I by reference.
The Company was incorporated in Delaware in March 1996. As used in this Annual Report, and except as the context otherwise requires, the "Company" means Commodore Applied Technologies, Inc. and its subsidiaries, including Commodore Solutions, Inc., Commodore CFC Technologies, Inc., and Commodore Advanced Sciences, Inc. The Company's principal executive offices are located at 2121 Jamieson Avenue, Suite 1406, Alexandria, Virginia 22314, and its telephone number at that address is (703) 567-1284.
SOIL DECONTAMINATION--COMMODORE SOLUTION TECHNOLOGIES, INC.
The Company, through Commodore Solutions, Inc. ("Solutions"), has developed and is in the process of commercializing its patented process known as SET. Based on the results of its extensive testing and commercial processing activities, the Company believes that SET is capable of effectively treating and decontaminating soils and other materials, including sludges, sediments, oils and other hydrocarbon liquids, metals, clothing and porous and non-porous structures and surfaces, by destroying PCBs, pesticides, dioxins, chlorinated substances and other toxic contaminants to an extent sufficient to satisfy current federal environmental guidelines. The Company also believes that, based on the results of additional tests, SET is capable of neutralizing substantially all known chemical weapons materials and warfare agents, explosives and concentrating certain radioactive wastes for more effective disposal.
The SET process was commercialized during the calendar year 2000. In May 2000, the Company mobilized its S-10 system to Harrisburg, Pennsylvania to begin processing PCB contaminated soils at the Pennsylvania Air National Guard's base located at the Harrisburg International Airport (the "Initial Harrisburg Contract"). The Company substantially completed the base contract in 2000, remediating approximately 260 tons of excavated soils to levels deemed unregulated for disposal by the U.S. Environmental Protection Agency (the "EPA"). The contract has since been modified to add another 50 tons of soils. In November 2000, the Company demonstrated the S-10 system to the EPA at the Harrisburg site, and has been advised informally by an EPA representative that the system will be added to our existing nationwide permit for chemical destruction of PCBs. This is the Company's fourth system to be so permitted.
In February 2001, the Company announced a multi-year contract with Waste Control Specialists, LLC (the "WCS Contract") for the establishment of a fixed facility utilizing the SET technology and the S-10 system for the treatment of radioactive mixed waste. SET safely and effectively treats mixed
wastes, a mixture of radioactive materials and hazardous wastes, by destroying the hazardous elements. The Company utilizes SET to remove Resource Conservation and Recovery Act ("RCRA") and Toxic Substances Control Act ("TSCA") regulated compounds from low-level mixed wastes, making the waste acceptable for on-site disposal. Waste Control Specialists, LLC ("WCS") operates a broad-based waste treatment, storage and disposal facility in Andrews County, Texas. As of December 31, 2001, the Company has not generated any revenues relating to this contract and the equipment remains in storage at this facility.
Additionally, the Company performed several treatability studies for third party customers during 2000, as well as continued internal testing and process development. At Envirocare of Utah ("Envirocare"), the SET process successfully treated water treatment sludge from a waste stream provided by the Brookhaven National Laboratory (the "Envirocare Study"). Under current treatment processes at Envirocare, this waste could not be treated to meet land disposal regulation requirements. The waste stream was a laboratory mixed waste (radioactive) sludge, contaminated with lead and high levels of RCRA organic compounds. The Envirocare Study waste contained the hazardous waste codes,, , and D008. The Envirocare Study waste stream also contained high water content, approximately 75%. The Company successfully treated the material such that it was suitable for land disposal. The results of the Envirocare Study were presented to the participants of the Waste Management Conference in Tucson, Arizona in February 2001. In the case of third party treatability studies, customer location processing and new patent data set construction, all tests and processing results were verified by independent laboratories agreed upon by the Company and/or the respective client. In the case of internal Company process development testing, results were verified with Company owned analytical equipment in addition to periodic independent off-site testing.
The SET Technology
The SET technology, which is based upon solvated electron chemistry, mixes anhydrous liquid ammonia and/or other similar solvents with reactive metals and contaminated elements to effect the selective destruction or neutralization of organic compounds (such as PCBs, pesticides and dioxins). The Company has demonstrated that SET can achieve consistently high levels of contaminant destruction when working with PCBs, dioxins and pesticides. SET has treated soils containing up to 10,000 ppm of contaminants, and oils containing up to 250,000 ppm, leaving residual soils and oils with contamination levels of less than one ppm. In addition, SET has been successfully applied to other PCB-contaminated surfaces such as concrete. The SET process can be used in conjunction with selected post-treatment processes such that no hazardous or toxic residues will result from the use of SET, nor will there be any toxic emissions into the air, water, soils or other surfaces. For example, most contaminated soils treated with SET can (subject, in some instances, to re-blending the soil with organic matter) be used subsequently for planting or for any other use for which non-contaminated soils are appropriate.
Equipment utilized in the SET process consists of tanks, pumps and piping to handle anhydrous ammonia and other solvents in liquid and vapor forms, and treatment vessels for holding contaminated materials and for the introduction of solvating solutions. The system can be transported to field sites and configured in numerous sizes.
The SET process requires placing the contaminated materials into a treatment vessel where they are mixed with a solvent and charged with a base metal (e.g. sodium). The chemical reaction produces metal salts such as calcium chloride, calcium hydroxide and non-halogenated inert organics. The ammonia within the treatment vessel is then removed to a discharge tank for later reuse. The materials are removed, sampled for residual traces of PCB or other halogenated organic compounds, and placed in storage for disposal. In many
cases, the decontaminated soil and metals can be replaced in their original location, recycled or reused. The solvents do not enter the chemical reaction, but merely serve as dissolving liquids for the solvated electron solution.
Operational Characteristics. Substantially all existing systems in use for the destruction of PCBs and other halogenated compounds involve incineration or other thermal processes, and either the permanent installation of highly complex and expensive incinerators and waste disposal equipment at the affected site, or the removal of contaminated materials to off-site facilities. The Company believes that SET represents an approach to resolving serious environmental remediation issues that does not create or entail the safety risks of air pollution and transportation of hazardous materials. The Company believes that SET is more effective than incineration and other destruction processes for toxic substances in that:
o SET does not emit toxic fumes into the atmosphere, as is sometimes the case with thermal or incineration methods;
o SET is portable and can be moved directly to the contaminated site, thereby reducing the risk of off-site contamination;
o SET equipment can be customized and configured to address various treatment applications;
o SET's reaction time is substantially less than that of alternative processes, such as thermal destruction and other forms of chemical treatment;
o SET equipment can be installed and operated inside industrial plant facilities to treat hazardous wastes on line as a continuation of the manufacturing process;
o SET, when used to treat soils, yields nitrogen-enriched soils that can be reused on-site, avoiding replacement and the post-treatment costs of off-site disposal; and
o SET has been shown to neutralize or destroy all chemical weapons material and warfare agents in the United States stockpile, and Lewisite (the primary chemical weapons material and warfare agent of the former Soviet Union), in tests conducted by an independent, federally certified surety laboratory.
The Company believes that SET is the only technology currently available that possesses all of these features and is capable of treating a wide variety of contaminants. The above characteristics (non-thermal, no air emissions, mobile) are particularly applicable when dealing with mixed waste. Wastes that contain radioactive material and hazardous waste regulated by RCRA and TSCA are particularly difficult to treat and have extremely limited disposal options. By applying the SET process to remove the RCRA and TSCA components, leaving only radioactive waste material, disposal options expand. SET not only removes the hazardous components but also does so by an efficient, non-thermal process that can control and contain the radioactive material so that it remains in the treated material and does not enter the environment in an uncontrolled fashion. As of December 31, 2001, the SET technology has not generated profitable operations or any significant revenues.
EPA Nationwide Permit. In order to treat PCBs within the United States on all non-Superfund sites, a treating entity must obtain a permit from the EPA. Most EPA permits granted to date for PCB destruction are solely for single-site incineration treatment centers. In August 1995, SET was demonstrated to the EPA in order to obtain the Nationwide Permit, which was issued to the Company in March 1996. The Nationwide Permit allows the Company to use SET on-site to treat PCB-contaminated soil at any location in the United States. In addition to soil treatment, the Nationwide Permit allows the Company to treat PCB contaminated metallic surfaces and waste oils, as well as wastewater (the wastewater is treated by a non-SET process). The Company has also successfully demonstrated SET as a treatment process for organic materials contaminated with PCBs and radionuclides and has received a draft revised EPA permit for these matrices. This permit revision covers the destruction of PCBs in soils, waste oils, organic materials, water, and on metallic surfaces.
The Nationwide Permit expired in September 2001, and may be renewed subject to providing any requested additional information to the EPA at the time of renewal. The Company is in the process of obtaining a permit revision for its commercial SET processing system, the S-10. The S-10 system is capable of processing up to 10 tons of contaminated material daily. Various revisions to the equipment and process parameters are being made to the existing permit. The revised permit will be issued pending the final site selection for the full or part-time operation of any SET system for the treatment of PCB wastes. The revised permit will require the Company to fund closure costs associated with the implementation of any SET system for the treatment of PCB wastes. The closure costs are calculated on a site-by-site basis and are funded accordingly by the Company.
Based on currently published lists of EPA national operating permits, the Company believes that it possesses the only non-thermal PCB treatment technology for multiple applications permitted under the EPA's Alternate Destruction Technology Program. EPA regulations governing permitting have been in effect for more than 15 years, and according to the latest EPA published list of non-thermal destructive processes, only seven companies have met EPA's stringent requirements for commercial operation. Of these, only the Company is permitted for the chemical destruction of such a wide range of PCB contaminated materials. The EPA's Alternative Destruction Technology Program is designed to encourage remediation technologies as an alternative to incineration.
Test Results. In more than 1,500 tests using SET, various high levels of contaminants, including PCBs, were reduced to levels approaching non-detectable with the destruction process occurring in a matter of minutes. The following table lists selected results of these tests.
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.
* Material was low-level radioactive waste ** Commercial quantities treated on site
ENVIRONMENTAL INSURANCE CLAIM RESOLUTION-DISPUTE RESOLUTION MANAGEMENT, INC.
The Company, through DRM, provides guidance to an environmentally impacted Company through the strategic tactical and implementation issues that are inherent to an insurance recovery effort. DRM has identified issues that are important to insurers and it understands the process insurers use to evaluate environmental claims. DRM operates five offices domestically and an international office in London and has five primary business areas/profit centers. The five areas include (1) U.S. and foreign environmental and asbestos claims, including claims to insolvent London Market insurers; (2) environmental and asbestos reinsurance claims; (3) business interruption claims; (4) products liability; and (5) Y2K remediation claims. Currently, DRM generates about 85% of its revenue from environmental claims, 5% from Y2K claims, and 10% from products liability.
DRM was founded as a division of the KPMG Peat Marwick, LLP Environmental Management Group in 1994 and purchased by the principals of DRM in December 1996. The Company purchased 81% of DRM on August 30, 2000. The Company's consolidated financial statements include operations of DRM since August 30, 2000. The principals of DRM retain the remaining 19%. DRM and Dispute Resolution Management UK Limited ("DRM UK") are management consulting firms specializing in business-oriented, non-litigious solutions for the settlement of complex, long-tail and latent insurance and other claims.
DRM represents policyholders, typically large multi-national corporations, in the non-litigated resolution of large insurance claims. DRM facilitates the settlement of claims by utilizing a series of proprietary systems to perform insurance policy archeology, policy coverage analysis and prioritization, claim documentation, coverage trigger allocation, settlement value targeting, risk allocation modeling and settlement structuring and documentation. DRM commits to manage the entire settlement process, typically in exchange for a monthly retainer and/or a percentage success fee payable when the insurers enter into a settlement agreement with its client.
DRM offers a bundle of services to its clients which include: construction of historical coverage flowcharts derived through old and lost policy archaeology, insurance coverage analysis and prioritization, compilation of all necessary claims data and computer assisted risk exposure modeling and quantification. DRM accepts engagements to design and execute non-litigated insurance recovery projects in the context of environmental, products liability, Y2K, business interruption and insolvency claims. DRM commits to manage the entire settlement process in exchange for a lump sum success fee (4% to 22%) when the insurers settle with the client. In most cases, DRM also receives a monthly retainer during the process. DRM avoids the litigation track, although it may work in tandem with litigators. The settlement typically involves less time and resources than litigation with insurers. DRM manages all aspects of developing the settlement proposal and negotiating it with insurers. The client relationship is based upon (1) DRM's knowledge of the insurers' procedures and needs, (2) DRM's history of successfully concluding claims negotiations and (3) DRM's commitment to business solutions in lieu of litigation to conclusion.
DRM has handled many complex insurance claim negotiations with the majority of the major property/casualty carriers, resulting in several hundred million dollars in recoveries for its clients, primarily on a contingent fee basis. DRM enhances its marketing and client service capabilities by employing a multi-disciplinary team of settlement experts drawn from both the policyholder sector and from the claims departments of the major carriers. The DRM team has over 100 years of combined claims settlement experience. DRM has 19 full-time employees comprised of attorneys, MBAs and former insurance claim managers and professionals.
The Company anticipates that it will be able to combine our environmental-related management, engineering and technological services experience with DRM's consulting expertise and pursue opportunities where there exists:
o the need for financial solutions to a company's or quasi-governmental group's environmental and other long-tail liabilities;
o the need for cost-effective and safe solutions to the on-going dangers posed by toxic and radioactive waste;
o environmentally impacted or distressed properties where a "Brownfield" environmental clean-up is warranted; and
o the urgent need to prevent proliferation of weapons of mass destruction by efficiently converting existing, terrorist-vulnerable nuclear and chemical components into energy and benign materials.
In addressing these opportunities, target markets will include:
o industrial companies in North America and Europe who have maintained comprehensive general liability insurance coverages with potential or demonstrated long-tail liabilities;
o mixed-waste (radioactive with hazardous and/or toxic content) U.S. governmental and international nuclear waste streams;
o governmental entities that are named as additional insureds on historic general liability coverages;
o spent nuclear fuel and the drying and dehydriding of nuclear fuel rods;
o U.S. governmental nuclear utilities;
o companies that require specialty environmental cost capping and finite risk insurance products; and
o U.S. governmental programs for neutralizing nuclear and chemical weapons and explosives.
ENVIRONMENTAL MANAGEMENT--COMMODORE ADVANCED SCIENCES, INC.
The Company, through Commodore Advanced Sciences, Inc. ("Advanced Sciences"), provides specialized technical and project management products and services primarily to government-sector customers, including the DOE and DOD, and also to private-sector domestic and foreign industrial customers. Advanced Sciences engages in all aspects of environmental regulation and compliance, as well as access to leading technologies and innovative skills related to the identification, investigation, remediation and management of hazardous, mixed
and radiological waste sites. Advanced Sciences currently operates a network of six offices located in four states, with its principal executive offices located in Albuquerque, New Mexico.
The Company's strategy in acquiring Advanced Sciences was to incorporate its process technology into the products and services offered to Advanced Sciences' customers, with a view to increasing the quality and scope of services offered and providing the Company with a broader customer base for its technology.
Services
Environmental Services. Advanced Sciences' analytic and scientific abilities enable it to become involved in environmental issues and problems at their outset. Initially, Advanced Sciences provides its customers with a broad outline of the types of environmental problems, health risks and liabilities associated with a particular activity. Advanced Sciences also conducts environmental audits and assessments, underground storage tank site investigations, remedial investigations/feasibility studies, environmental impact assessments, and statements and studies to identify any potential environmental hazards.
Remediation Services. Having already established a market position in the consulting and front-end analysis phase, Advanced Sciences is poised to follow market demand into remediation services. After an environmental problem is identified, Advanced Sciences offers alternative remediation approaches that may involve providing on-site waste containment or management of on-site/off-site remediation and waste removal. Advanced Sciences can also redesign its customers' ongoing production processes and develop engineering plans and technical specifications to minimize or eliminate the generation of hazardous waste. The Company believes that Advanced Sciences' integration of engineering and environmental skills, plus its access to innovative technologies, provide Advanced Sciences with a competitive advantage in redesigning production processes.
Technical Services. New technologies play a critical role in both the remediation of existing waste sites and in the reduction of waste generated by ongoing production processes. Commodore Advanced Sciences has access to the SET technology and all its derivatives. Additionally, Advanced Sciences has access to the Supported Liquid Membrane ("SLiM(TM)") technology held by Commodore Separation Technologies, Inc. ("Separation"). This technology has the ability to selectively extract heavy metals and radioactive nuclides from liquids and gasses. The SLiM technology is held in an 85% owned subsidiary of Commodore Environmental Services, which owns 14.54% of the Company. Advanced Sciences has also retained what it believes are among the most qualified professionals in the environmental consulting business. Advanced Sciences' scientists have participated on national boards for risk assessment and quality assurance, were instrumental in the development of environmental regulations for the Department of Energy ("DOE") and the Department of Defense ("DOD"), and have served as expert witnesses before the U.S. Congress and the Nuclear Regulatory Commission. To maintain its competitive position, Advanced Sciences intends to continue to develop viable remediation technologies and attract and retain qualified personnel.
Contracts
Rocky Flats Environmental Technology Site (RFETS) Contracts: Commodore Advanced Sciences (CAS) has two contract vehicles at RFETS; a subcontract with Kaiser-Hill Company LLC (Kaiser-Hill), prime integrating and management responsible for cleanup of RFETS, and a lower-tier subcontract with Accelerated Systems LLC. Under its fixed unit rate type subcontract with Kaiser Hill, CAS provides 20 personnel who sample surface water or soils, collect SDWA and bioassay samples in radiological controlled areas, and ship the samples to Kaiser-Hill controlled laboratories. CAS' subcontract has recently been extended through September 2002 to enable Kaiser Hill to compete for the subcontract scope and make a new award by October 2002. CAS believes it is on a competitive team for the re-bidding of this subcontract work. CAS also provides engineering design and documentation support services to Kaiser Hill under a time and materials type task order executed via its Basic Ordering Agreement (BOA) with Accelerated Systems. The BOA extends through June 2003.
Denver Regional Water Council of Governments: Commodore Advanced Sciences' is contracted annually to sample surface waters, streams, groundwater wells and watersheds to Chatfield damn located southwest of Denver. The current contract term is complete December 2002.
Tetra Tech Contract: Commodore Advanced Sciences is in the fourth year of its five-year subcontract under Tetra Tech's general engineering support contract with Bechtel Jacobs Co, LLC. Bechtel Jacobs is responsible for environmental oversight of the U.S. DOE's Oak Ridge, TN site. CAS, provides 1 to 3 engineering personnel on a time and material basis to Tetra Tech on a contract basis through September 2002.
General Services Administration Contract: In January 2000, Commodore Advanced Sciences was awarded a 5-year contract for environmental and engineering services by the GSA's Federal Supply Service. Work is performed by task orders not to exceed a $15 million contract ceiling. GSA's needs were diverted to facility security and Anthrax sampling due to the events of September 11 and beyond causing CAS its expected backlog to $2 million through December 2003. The environmental advisory services contract includes providing expertise in the areas of environmental planning services and documentation, environmental compliance services, environmental/occupational training services, and waste management services.
American Technologies Incorporated (ATI) Contract: Commodore Advanced Sciences, LLC, under a fixed price type subcontract with a three-year base period is providing facility maintenance, surveillance and inspection services for American Technologies, Inc. (ATI) in support of Bechtel Jacobs Company at the East Tennessee Technology Park (ETTP) at Oak Ridge, TN. The base period concludes March 31, 2002.
Parsons Infrastructure and Technology Group, Inc.: Commodore Advanced Sciences, Inc. (CAS), provides two to three engineering personnel on a time and material basis to Parsons who supports BWXT, the operating and management contractor at the Y12 facility in Oak Ridge, TN. The time and material contract runs through September 2002. CAS provides general engineering, draftsmen and maintenance of engineering drawings for the Y12 facility management group.
Joint Ventures
Teledyne Environmental Joint Venture. In August 1996, Commodore Government Environmental Technologies, Inc. ("Government Technologies"), a wholly-owned subsidiary of the Company, entered into a joint venture agreement
with Teledyne Environmental, Inc. ("Teledyne Environmental"), a subsidiary of Allegheny Teledyne, Inc., as the exclusive means by which each party (and their affiliates) will pursue the chemical weapons destruction and demilitarization market on a worldwide basis. Teledyne Environmental is a major provider of contract services to the Department of Defense (the "DOD") and the Department of Energy (the "DOE"). The purpose of the joint venture, known as Teledyne-Commodore, LLC (the "LLC"), a Delaware limited liability company, encompasses all phases of chemical weapons demilitarization including design, engineering, field work, ordinance and residue (heel) neutralization and demilitarization, disposal and reclamation through the use, application and commercialization of the SET process. The LLC's SET process and the ammonia jet cutting system was unable to compete successfully in the Army's ACWA program.
Government Technologies and Teledyne Environmental each owned 50% of the equity, profit and losses of the LLC. Teledyne Environmental and the Company agreed to cease the operations of and dissolve their Teledyne-Commodore LLC as of October 22, 2001. In dissolving the LLC, the companies have determined that the application of SET technology to chemical weapons demilitarization under the U.S. Army's ACWA II program is not likely to occur. Last year, the Program Manager of the ACWA II program determined that its chemical weapons destruction plans for stockpiles in Colorado and Kentucky would not include the technologies offered by the LLC. Dissolution of the LLC will enable the companies to realize significant savings in operations expenses. The companies have not ruled out further collaboration in the future with respect to demilitarization of chemical weapons. Under the dissolution agreement, the Company obtained, from the LLC, equipment used by the LLC and the intellectual property rights of the relevant technologies it licensed to the LLC as they applied to chemical weapons destruction. The Company has valued the equipment obtained from the LLC on our current financial statements at a net book value ($30,000) at the time of dissolution.
Nuvotec, Inc., Joint Venture. In April 2002, Commodore Government Environmental Technologies, Inc. ("Government Technologies"), a wholly-owned subsidiary of the Company, entered into a LLC agreement with Technical Resources International, Inc., ("TRI"), a wholly owned subsidiary of Nuvotec, Inc., as a non-exclusive means by which each party (and their affiliates) will pursue the mixed waste treatment on a limited, domestic basis. TRI is a provider of contract services to the Department of Energy (the "DOE") and to the public utilities market. The purpose of the joint venture, known as Nuvoset, LLC (the "LLC"), a Delaware limited liability company, encompasses all aspects of mixed waste characterization, treatment, storage, transportation and disposal through the use, application and commercialization of the technologies of the LLC partners.
MARKETS AND CUSTOMERS
General
The Company markets its services and technologies to governmental and industrial customers throughout the United States. The Company also plans to target customers in markets abroad, particularly in the Far East. A majority of the Company's sales are technical in nature and involve senior technical and management professionals, supported by the Company's marketing groups. During the year ended December 31, 2001, sales of approximately 47% of the Company's environmental management services were to private sector customers and sales of approximately 53% were derived from contracts with federal, state and municipal government agencies. Contracts to private sector customers generally may not be
terminated at the option of the customer. Contracts with governmental customers generally may be terminated at any time at the option of the customer. DRM settlements and retainage accounted for 53% of the Company's revenues in 2001. DRM's final settlement success fees were derived from a series of clients as the result of 18 to 24 months of negotiated settlements with insurers. In 2001, Advanced Sciences' Rocky Flats Contract and Oak Ridge Contract accounted for approximately 72% and 28%, respectively of the Advanced Sciences' sales. The Company benefits substantially from its long-term relationships with many of its customers that result in a significant amount of repeat business.
Soil Decontamination
The Company anticipates that the initial market for commercial applications of SET will be the hazardous and mixed waste and industrial by-products treatment and disposal market. Mixed waste is material that contains both a hazardous and radioactive component. The most common methods of treatment and disposal of hazardous wastes and industrial by-products include landfilling, chemical and biological treatment and incineration. Most of the current treatment and disposal methods entail air pollution and transportation risks. In a mixed waste, both hazardous and nuclear regulations apply, making disposal difficult, if not impossible. Currently, there exist very limited disposal options and these may not provide a permanent solution. Certain of these treatment and disposal methods result in large volumes of residual waste, which may require further treatment prior to disposal. As a result, a number of these methods are encountering increased public resistance and added regulatory oversight.
As with any new technology or process, there has been initial resistance to the use of SET on a large scale, especially in connection with a strong vested interest on the part of the U.S. Military (based on substantial expenditures and commitments previously made) to use incineration for the destruction of weapons. In addition, other prospective projects for the Company have already been committed to other forms of destruction technology, including incineration, plasma arc, vitrification, molten metal, molten salt, chemical neutralization, biological treatment, catalytic electrochemical oxidation and supercritical wet oxidation. The Company, and its collaborative partners, have been attempting to overcome such competition by introducing SET in smaller clean-up projects and through feasibility studies demonstrating its applicability to larger projects, such as the Initial Harrisburg Contract and the WCS Fixed Facility Processing Contract. The SET process provides a significant advantage by allowing the processed material to be disposed of as a non-mixed waste by destroying the hazardous component.
It may also be anticipated that, over an extended period, the market for decontamination of hazardous materials will continue to decline as past environmental degradation is corrected, and as the private and public sectors limit further pollution through prohibitions on production and use of a broad range of hazardous materials and through the modification and improved efficiency of various manufacturing processes. The mixed waste market is one of the few areas that shows growth and has limited competition when compared to the general hazardous waste market. The SET process brings a unique solution to the problem of remediating mixed waste.
Environmental Management
Based on market data compiled by Advanced Sciences, the largest market for environmental services today within the United States is the U.S. Government. Government wide spending levels for environmental services exceed $10 billion per year. The DOD and DOE are expected to account for approximately
66% of such expenditures and together expect to spend in excess of $200 billion for environmental work. Advanced Sciences has a long-term record for providing environmental services to the U.S. Government with the DOD and DOE being its primary customers.
RAW MATERIALS
The Company has historically experienced no difficulty in obtaining components used in the SET process for which it relies on a broad range of suppliers. Nevertheless, business disruptions or financial difficulties of such suppliers, shortages or other causes beyond the Company's control, could adversely affect the Company by increasing the cost of goods sold or reducing the availability of such components. If the Company was unable to obtain a sufficient supply of required components, it could experience significant delays in the furnishing of components used in the SET process, which could result in the loss of orders and customers and could have a material adverse affect on the Company's business, financial condition and results of operations. In addition, if the cost of finished components was to increase, there can be no assurance that the Company would be able to pass such increase on to its customers. The use of outside suppliers also entails risks of quality control and disclosure of proprietary information.
BACKLOG
At December 31, 2001, total possible backlog for the Company was approximately $11,000,000 as compared with approximately $25,000,000 as of December 31, 2000. Approximately $2,000,000 of the total backlog represents work for which the Company has entered into a signed agreement or purchase order with respect thereto or has received an order to proceed with work up to a specified dollar amount. The remaining backlog of approximately $9,000,000 represents the Company's current estimate of work, for which the Company has been notified that it has been chosen for a project but where a contract has not yet been finalized, options that have yet to be formally exercised, proposals in evaluation by our customers or new bids. The Company estimates that approximately $1,600,000 of the total backlog represents work that will be completed in the next 12 months. Backlog amounts have historically resulted in revenues; however, no assurance can be given that all amounts included in backlog will ultimately be realized, even if covered by written contracts or work orders.
RESEARCH AND DEVELOPMENT
Research and development activities are ongoing and utilize internal technical staff, as well as independent consultants retained by the Company and its subsidiaries. All such activities are company-sponsored. Research and development expenditures for the Company and its subsidiaries were $423,000, $993,000, and $1,145,000 for the years ended December 31, 2001, 2000 and 1999 respectively.
INTELLECTUAL PROPERTY
The Company currently has fifty-five (55) issued U.S. and foreign patents. Additionally, the Company has fifty (50) patent applications currently on file and pending in the U.S. and in foreign countries. The average life expectancy for the currently issued patents is 14 years. As patents are issued, the U.S. Patent and Trademark Office assigns the Company a twenty (20) year patent-life for each patent issued.
The Company believes that its patent portfolio provides the Company the necessary "proprietary turf" in which it can market, distribute, and license the full range of the SET technology and all of its derivatives. Additionally, the Company's strength of its patent portfolio may operate as an effective "barrier to entry" in several of the markets in which the Company is presently conducting business.
To protect its trade secrets and the un-patented proprietary information in its development activities, the Company requires its employees, consultants and contractors to enter into agreements providing for the confidentiality and the Company's ownership of such trade secrets and other un-patented proprietary information originated by such persons while in the employ of the Company. The Company also requires potential collaborative partners to enter into confidentiality and non-disclosure agreements.
There can be no assurance that any patents that may hereafter be obtained, or any of the Company's confidentiality and non-disclosure agreements, will provide meaningful protection of the Company's confidential or proprietary information in the case of unauthorized use or disclosure. In addition, there can be no assurance that the Company will not incur significant costs and expenses, including the costs of any future litigation, to defend its rights in respect of any such intellectual property.
COMPETITION
Environmental Insurance Claim Resolution.
DRM has been primarily engaged in providing environmental insurance recovery services to corporations and entities within the United States. Based on market data compiled by DRM, the largest market for environmental insurance recovery services today is the United States industrial and manufacturing sector. DRM estimates that there are insurer's reserves in excess of $30 billion for environmental clean-up insurance claims in the U.S. DRM currently occupies a position in the negotiated insurance recovery services arena by virtue of its long-term record for providing these services to over 100 industrial clients to date.
Insurance companies have long relied on computer based risk modeling and allocation programs to develop desired settlement criteria. DRM's FOCUS replicates the insurer's computer analysis and provides a three-tiered probability structure for potential allocation and settlement. DRM believes that the FOCUS product provides a significant performance advantage over its competition in this industry.
The market for DRM's consulting services is highly competitive, and they face competition from many other providers of consulting services. DRM's competitors range from large organizations, such as national accounting firms and the large management consulting companies that offer a full range of consulting services, to small firms and independent contractors that provide only one specialized service. Some of DRM's competitors have significantly more financial and marketing resources, larger professional staffs or are more widely recognized. There are few barriers to entry into the consulting business. DRM's competitors include such firms as Arthur Anderson Consulting, Risk Management, the Peterson Group (a division of Navigant) and Dickstein Shapiro Morin and Oshinsky, LLP.
Soil Decontamination
The Company anticipates that the initial market for commercial private sector applications of SET will be the hazardous and non-hazardous waste and industrial by-products treatment and disposal market. Several large domestic and international companies and numerous small companies, many of whom have substantially greater financial and other resources than the Company, characterize this market. The Company primarily competes in the hazardous waste treatment market in the U.S., a market valued at over $3.9 billion for 2001. The top ten competitors in this market account for over 70 percent of the revenues for this market sector. The dominant companies in this sector include URS, The IT Group, Inc., Tetra Tech, Inc. and CH2M Hill, Inc. The Company's revenues for 2001 account for less than 1 percent of the dollar volume of the hazardous waste market. Although the Company believes that it possesses the only Nationwide Permit for destroying PCBs, any one or more of the Company's competitors or other enterprises not presently known may develop technologies which are superior to the technologies utilized by the Company. To the extent that the Company's competitors are able to offer comparable services at lower prices or of higher quality, or more cost-effective remediation alternatives, the Company's ability to compete effectively could be adversely affected.
The domestic and international governmental public sector of the market is dominated by many large multinational corporations who are presently engaged in providing incineration and other conventional technologies in decontaminating chemical weapons and warfare agents, concentration of nuclear wastes and the decontamination of military vessels and other hardware. These competitors include Raytheon Corporation (the current general contractor for the Johnston Atoll incinerator), EG&G, Inc. (the general contractor for the Tooele Army Depot), Mason and Hanger (the general contractor for the Newport News Naval Facility), Waste Management Corporation (a bidder for domestic "large burial" stockpile weapons decontamination), and others, including Browning-Ferris Industries, Inc., Jacobs Engineering, Inc., Fluor Daniel Corporation and Lockheed Martin Marietta Corporation. All of these corporations have substantially greater financial, personnel and other resources than the Company. In addition, many prospective users of SET have already committed substantial resources to other forms of environmental remediation technology, including incineration, plasma arc, vitrification, molten metal, molten salt, chemical neutralization, catalytic electrochemical oxidation and supercritical wet oxidation.
The Company believes that its ability to compete in both the commercial private and governmental public sectors is dependent upon SET being accepted in these sectors as a superior, more cost-effective method to achieve decontamination of a variety of materials.
Environmental Management
Advanced Sciences has been primarily engaged in providing environmental engineering and scientific support services to United States government agencies, such as the DOE and DOD. Based on market data compiled by Advanced Sciences, the largest market for environmental services today is the United States government, which is expected to continue its spending level for environmental services at approximately $10 to $11 billion for 2002. The DOE and DOD are expected to account for approximately 66% of such expenditures. Advanced Sciences currently occupies a position in the waste management and environmental services arena by virtue of its long-term record for providing environmental services to the United States government.
External developments and forces affecting Advanced Sciences include competition from its competitors, as well as, demographic and technological trends that influence the composition and needs of its customer base and the usefulness and competitive position of its services. In addition, in order to maintain its position in its market, Advanced Sciences must be able to respond to economic trends and regulatory actions that affect the usefulness and accessibility of its services and control its costs of doing business.
In the hazardous waste management market, Advanced Sciences' competitors include such firms as Roy F. Weston, Jacobs Engineering, Science Applications International Corp., CH2M Hill and CDM. In providing environmental impact assessment services, Advanced Sciences' principal competitors in this market sector include Tetra Tech, The Earth Technology Corp., URS and Woodward-Clyde. Primary factors affecting Advanced Sciences' competitiveness in this market are its ability to continue to attract and retain qualified technical and professional staff with quality project performance records and to control its costs of doing business.
In an effort to maintain its competitive position, Advanced Sciences believes that it has developed a solid infrastructure, acquired a qualified professional staff, and developed aggressive marketing objectives to provide hazardous waste management and environmental sciences to the United States government and private sector industrial customers. The Company believes its competitive position with the United States government is enhanced by the physical proximity of Advanced Sciences' plants to DOE and DOD sites, its skilled professional staff, prior project experience with the United States government, numerous existing multi-year contracts with the United States government, integrated services and high quality performance.
ENVIRONMENTAL REGULATION
The environmental legislation and policies which the Company believes are applicable to SET in the United States primarily include TSCA, RCRA, and the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), and may include, on a case by case basis, the Clean Air Act of 1970, as amended (the "Clean Air Act"). These laws regulate the management and disposal of toxic and hazardous substances, provide for the protection of land and groundwater resources, and control the discharge of pollutants into the air. Many of these laws have international counterparts, particularly in Europe and elsewhere in North America.
TSCA regulates the manufacture, distribution, and sale of chemical substances, and requires testing of new chemicals and new uses of known chemicals that may present an unreasonable risk of injury to health or the environment. The EPA, through TSCA, has adopted comprehensive regulations for
PCB's and other halogenated substances, as part of a vast regulatory program covering thousands of chemicals.
RCRA was enacted in 1976 with the primary objective to protect human health and the environment and to conserve valuable material and energy resources. The most important aspect of RCRA is its establishment of "cradle-to-grave" management and tracking of hazardous waste, from generator to transporter, to treatment, storage, and disposal.
CERCLA and subsequent amendments under SARA (often referred to collectively as Superfund) impose strict, retroactive liability upon persons who generated, transported, or arranged for the transportation of hazardous substances or owned or operated the vessels or facilities at which such substances were disposed. CERCLA provides for the investigation and remediation of hazardous substance sites and mandates that any hazardous substances remaining on-site must meet certain regulatory requirements, with a preference for innovative technology. These program regulations may create an incentive to utilize environmental-friendly technologies such as SET, which destroy targeted wastes without creating additional residual waste product. Moreover, to the extent hazardous substances are effectively destroyed, potential liability can be eliminated or significantly reduced.
The Clean Air Act empowered the EPA to establish and enforce ambient air quality standards and limitations on emissions of air pollutants from specific facilities. In 1987, the EPA began to enforce stricter standards for incineration emissions. With more stringent regulations on waste reduction technologies, the Company believes that SET could obtain a desired market share since, in most cases, it produces little or no air emissions.
CERCLA imposes strict joint and several liability upon owners or operators of facilities when a release or threatened release of a hazardous substance has occurred, upon parties who generated hazardous substances that were released at such facilities and upon parties who arranged for the transportation of hazardous substances to and from such facilities. The Company's plans to own and operate SET at on-site installations expose the Company to potential liability under CERCLA for releases of hazardous substances at those sites. In the event that off-site treatment, storage or disposal facilities utilized by the Company for final disposition of residues from SET are targeted for investigation and clean-up under CERCLA, the Company could incur liability as a generator of such materials or by virtue of having arranged for their transportation and disposal.
In light of such potential liability, the Company has designed the SET technology to minimize the potential for release of hazardous substances into the environment. In addition, the Company has developed plans to manage the risk of CERCLA liability, including training of operators, use of operational controls and structuring of its relationships with the entities responsible for the handling of waste materials and by-products. The Company also maintains insurance with respect to environmental claims, although there can be no assurance that such insurance will be adequate.
The Clean Air Act Amendments of 1990 impose strict requirements upon owners and operators of facilities that discharge pollutants into the environment. These amendments may require that certain air emission control technology be installed on the SET systems in the event that there is any discharge of non-recovered gases into the environment. Such additional air emission controls can be costly and require an air permit to construct and operate.
The Company possesses a Nationwide Permit issued by the EPA under the Alternative Destruction Technology Program that allows it to use SET on-site to treat PCB-contaminated soils and metallic surfaces. The Nationwide Permit
contains numerous conditions for maintaining the Nationwide Permit and there can be no assurance that the Company will be able to comply with such conditions to maintain and/or secure renewal of the Nationwide Permit. In addition, if environmental legislation or regulations are amended, or are interpreted or enforced differently, the Company may be required to meet stricter standards of operation and/or obtain additional operating permits or approvals. Failure to obtain such permits or otherwise comply with such regulatory requirements could have a material adverse effect on the Company and its operations. Various revisions to the equipment and process parameters are being made to the existing permit. The revised permit will be issued pending the final site selection for the full or part-time operation of any SET system for the treatment of PCB wastes. The revised permit will require the Company to fund closure costs associated with the implementation of any SET system for the treatment of PCB wastes. The closure costs are calculated on a site-by-site basis and are funded accordingly by the Company.
EMPLOYEES
As of March 31, 2002, the Company (including all of its direct and indirect subsidiaries) had a total of 52 full-time and 13 part-time employees, of which approximately 35 are engineers, scientists, lawyers and other professionals. None of such employees are covered by collective bargaining agreements and the Company's relations with its employees are believed to be good.
ITEM 2.
ITEM 2. PROPERTIES. - ------- -----------
The Company's principal executive offices are located in Alexandria, Virginia. Since April 2000, the Company has leased approximately 1600 square feet of space from Shelby T. Brewer, a director and executive officer of the Company, on a month-to-month basis, for a rental payment in the amount of $2300 per month.
In addition to the Alexandria, Virginia facilities, the Company leases approximately 2,000 square feet of office space in New York from an affiliate of Bentley J. Blum, a director and principal stockholder of Environmental and a director of the Company, Solution, Separation, Advanced Sciences and certain other subsidiaries and affiliates of the Company. Such space also serves as the principal executive offices of Environmental and certain of its affiliates. Although the Company's lease for the New York City space expired in December 1998, the Company has been permitted to use the New York City office space during 1999, 2000, 2001 and 2002 on a rent-free basis. The Company is charged for direct labor, office supplies and third party vendor services that the Company generates in its activities in the New York City offices. Also, the Company provides director and officer insurance to Environmental and Separation under its policy at no charge to Environmental and Separation.
The Company leases approximately 10,800 square feet of laboratory, office and storage space at Kirtland Air Force Base in Albuquerque, New Mexico for rental payments in the amount of $3,800 per month, pursuant to a month-to-month lease arrangement.
Advanced Sciences' principal executive and administrative offices are located in Albuquerque, New Mexico. Advanced Science leases approximately 3,750 square feet of space for rental payments in the amount of $4,305 per month under a month-to-month lease. Advanced Sciences also leases various spaces for field operations in Carlsbad and Los Alamos, New Mexico, Oak Ridge, Tennessee, and Lakewood, Colorado.
DRM's principal executive and administrative offices are located in Salt Lake City, Utah. DRM leases approximately 4,700 square feet of space for rental payments in the amount of $5,300 per month under a lease that will expire in March 2005.
DRM's principal sales and marketing offices are located in Denver, Colorado. DRM leases approximately 2,581 square feet of space for rental payments in the amount of $3,925 per month under a lease that will expire in December 2004. DRM also leases various spaces for field operations in Cherry Hill, New Jersey; Houston, Texas; Portland, Oregon; and Annapolis, Maryland.
The Company believes that the foregoing properties will satisfy the business and operational needs of the Company and its subsidiaries in the present and in the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ------- -----------------
Indemnification Matters - -----------------------
The Company, along with several other entities, in a prior year guaranteed a performance bond of Separation relating to the Port of Baltimore contract. The Company was notified on June 28, 2000 that the performance bond is being called. It is not known, at this time, the amount, if any, the Company's share of liability will be.
As of March 31, 2002, no litigation has been filed against the Company, or any of the Company's subsidiaries with respect to this indemnification issue. The Company is currently investigating all of the relevant facts and circumstances in connection with the Surety's potential claim or cause of action. In the event that the Company is obligated to indemnify the Surety, the Company estimates that its liability will not exceed approximately $390,000.
Incidental Matters - ------------------
As of April 15, 2002, the Company and its subsidiaries are involved in ordinary, routine litigation incidental to the conduct of their business. Management believes that none of this litigation, individually or in the aggregate, is material to the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- ----------------------------------------------------
The annual meeting for the year 2001 and 2002 will be held during the year 2002. All shareholders of record as of the announced record date will be notified of the meeting in a timely manner. All shareholders of record will receive the appropriate financial and proxy materials prior to the meeting.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------- ----------------------------------------------------------------------
MARKET INFORMATION
On June 28, 1996, the Company issued common stock and warrants at initial public offering prices of $6.00 per share and $0.10 per warrant. The Company's common stock and warrants are traded on the American Stock Exchange ("AMEX") under the symbols CXI and CXI.WS, respectively. As of March 15, 2002, there were 215 record holders of the Company's common stock and 45 record holders of the Company's warrants.
The following table sets forth, for the fiscal periods shown, the high and low sale prices (rounded to the nearest cent) for the Company's common stock and warrants as reported on the AMEX.
DIVIDEND INFORMATION
Series E Preferred Stock ------------------------
The holders of the Company's Series E Convertible Preferred Stock, par value ($0.001) per share (the "Series E Preferred Stock"), are entitled to a variable rate dividends beginning at 12% and averaging 8.15% over the term of the securities. Through December 31, 2001, the Company had paid $134,000 in cash dividends and the Company has accrued an additional $428,000 in dividends. The Company has the option to pay the dividends accrued in all periods after April 30, 2000 in the Company's common stock rather than cash. On January 9, 2002 the Company paid $36,657 in common stock dividends representing the accrued dividends on all of the converted Series E shares to date. See "Recent Sales of Unregistered Securities -- November 1999 Private Placement of Series E Preferred Stock."
Series F Preferred Stock ------------------------
The holders of the Company's Series F Convertible Preferred Stock, par value ($0.001) per share (the "Series F Preferred Stock"), are entitled to a variable rate dividend beginning at 12% and averaging 8.15% over the term of the securities. Through December 31, 2001, the Company had paid $92,000 in cash dividends and the Company has accrued an additional $388,000 in dividends. The Company has the option to pay the dividends accrued in all periods after September 31, 2000 in the Company's common stock rather than cash. On January 9, 2002 the Company paid $83,248.93 in common stock dividends representing the accrued dividends on all of the converted Series F shares to date. See "Recent Sales of Unregistered Securities -- March 2000 Private Placement of Series F Preferred Stock."
Common Stock ------------
The Company has never paid cash dividends on its common stock. Any future determination by the Board of Directors of the Company with respect to the payment of cash dividends on the common stock of the Company will depend on the ability of the Company to service its outstanding indebtedness, the Company's future earnings, capital requirements, the financial condition of the Company and such other factors as the Company's Board of Directors may consider. The Company currently intends to retain its earnings to finance the growth and development of its business, to repay outstanding indebtedness and does not anticipate paying cash dividends on its common stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On June 13, 2001, the Company issued and sold to Milford Capital Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar") one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan Notes") in the aggregate principal amount of $1,000,000. In connection with the Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year warrant for 333,333 shares of the Company's common stock at an exercise price of $0.22 per share. The Company pledged its equipment and SET related intellectual property as collateral for the Milford/Shaar Bridge Loan Notes. The Company shall pay Milford/Shaar principal and interest on a monthly basis in arrears. The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty. The Company believes that this transaction is exempt from the registration requirements of the Securities Act under Section 4(2) thereof as a transaction not involving any public offering of securities.
The Company made all payments on the Milford/Shaar Bridge Loan Notes until November 13, 2001. The Company asked for and received a forbearance of payments on the Milford/Shaar Bridge Loan Notes from November 13, 2001 until May 13, 2002.
On May 23, 2001, a private investor purchased $250,000 of the Company's common stock at the market price. The Company issued the private investor 1,923,077 shares of common stock of the Company as a result of the equity purchase. In connection with the purchase of the shares of the Company's common stock, the Company issued the private investor a 2-year warrant for 500,000 shares of the Company's common stock at an exercise price of $0.22 per share. The Company believes that this transaction is exempt from the registration requirements of the Securities Act under Section 4(2) thereof as a transaction not involving any public offering of securities.
In September 2000, the Company completed $500,000 in financing in the form of a loan (the "Brewer Note") from S. Brewer Enterprises, Inc. ("SB Enterprises"), which is owned by one of its officers and directors, Shelby T. Brewer, Chairman of the Board and Chief Executive Officer of the Company. The Brewer Note bears a 9.75% interest rate, payable monthly, with a balloon principal payment at the end of the term. The note was due and payable on March 15, 2001 and was extended under the same terms and conditions until December 31, 2001. The Brewer Note is convertible into the Company's common stock at the market price up through December 31, 2001.
On March 15, 2001, SB Enterprises executed an Amended and Restated Promissory Note (the "Restated Brewer Note"), which extended the maturity date of the note until December 31, 2001. Additionally, the conversion feature of the Restated Brewer Note was changed to the 5-day average closing price of the Company's common stock prior to a conversion notice. On April 9, 2001, SB Enterprises issued a conversion notice for $250,000 of the outstanding principal of the Brewer Restated Note. The conversion price was calculated by the previous 5-day average of the closing price of the Company's common stock and was converted into 1,041,667 shares. The remaining principal balance of $250,000 is outstanding as of April 15, 2002. The Company has not been notifed of a default of the Brewer Note as of April 15, 2002. The Company believes that this issuance of convertible debt is exempt from the registration requirements of the Securities Act under Section 4(2) thereof as a transaction not involving any public offering of securities. See "MD&A - Liquidity and Capital Resources."
In November 2000, the Company completed $500,000 in financing in the form of a loan (the "Weiss Group Note") from a group of four investors; $75,000 of which was borrowed from the son of Paul E. Hannesson, our former President and Chief Executive Officer, and $25,000 of which was borrowed from Stephen A. Weiss, a shareholder of Greenberg Traurig, LLP, our former corporate and securities counsel. The Weiss Group Note bears interest at 12% per annum, was due and payable on February 12, 2001, and is secured by the first $500,000 of loans or dividends that the Company may receive from DRM. As consideration for such loan, Environmental, one of the Company's principal stockholders owning approximately 16.58% of the Company's common stock, transferred to the investors a total of 1,000,000 shares of the Company's common stock. All holders of the Weiss Group Note have granted payment extensions until May 31, 2002.
Effective April 5, 2001, the Company issued warrants to purchase 500,000 shares of its common stock at an exercise price of $0.22 per share (the closing price of our common stock on the AMEX on such date) to all holders of the Weiss Group Note in consideration of the extension of the due date of such loans by such persons from February 12, 2001 to June 30, 2001. The Company believes that this transaction is exempt from the registration requirements of the Securities Act under Section 4(2) thereof as a transaction not involving any public offering of securities.
Effective January 24, 2002, the Company issued warrants to purchase 500,000 shares of its common stock at an exercise price of $0.15 per share (the closing price of our common stock on the AMEX on such date) to all holders of the Weiss Group Note in consideration of the extension of the due date of such loans by such persons from June 30, 2001 to May 31, 2002. The Company believes that this transaction is exempt from the registration requirements of the Securities Act under Section 4(2) thereof as a transaction not involving any public offering of securities. See "MD&A - Liquidity and Capital Resources."
March 2000 Private Placement of Series F Preferred Stock
On March 20, 2000, the Company completed a $2.0 million private placement financing with The Shaar Fund Ltd. The Company issued to The Shaar Fund 226,000 shares of a newly authorized Series F Convertible Preferred Stock (the "Series F Convertible"), convertible into the Company's common stock, at any time after September 31, 2000, for a conversion price equal to the arithmetic mean of the closing prices of the Company's common stock as reported on the AMEX for the ten trading days immediately preceding the date of conversion so long as the Company's common stock continues to trade on the AMEX. In May 2003, the Series F Convertible will automatically convert into the Company's common stock at a conversion price calculated in accordance with the above conversion formula plus any accrued and unpaid dividends.
The Series F Convertible has a variable rate dividend averaging 8.15% over the term of the securities. The Company reserved the right to redeem all of the Series F Convertible on or before September 30, 2000 by payment to the holders of the shares of the Series F Convertible of $2.3 million plus any accrued and unpaid dividends. Depending upon the market price of the Company's common stock at the time of conversion, the issuance of the Company's common stock upon conversion of the Series F Convertible may be subject to shareholder approval. In addition, the Company issued to The Shaar Fund a warrant to purchase up to 226,500 shares of the Company's common stock (subject to adjustment) at a purchase price of $1.1963 per share. The warrant expires on November 4, 2004. The Company also issued to Avalon Research Group Inc., as finder in this transaction, a five-year warrant to purchase up to 250,000 shares of the Company's common stock (subject to adjustment) at a purchase price of $1.1963 per share. The Company also paid Avalon a "finder's fee" in the amount of $200,000 for this transaction.
The recipient of securities in this transaction represented its intention to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof, and appropriate restrictive legends were affixed to the warrants and the certificates representing the shares issued in this transaction. The Company made available to The Shaar Fund Ltd., written information about the Company in accordance with Rule 502 of the Securities Act and advised such recipient of the limitations on resale of such securities. In addition, The Shaar Fund Ltd. was offered the opportunity, prior to purchasing any securities, to ask questions of, and receive answers from, the Company concerning the terms and conditions of the transaction and to obtain additional relevant information about the Company. Based upon the facts above, the Company believed this transaction to be exempt from the registration requirements of the Securities Act in reliance on Section 4 (2) thereof as a transaction not involving any public offering of securities.
November 1999 Private Placement of Series E Preferred Stock
On November 4, 1999, the Company completed a $2.5 million private placement financing with The Shaar Fund Ltd. The Company issued to The Shaar Fund 335,000 shares of a newly authorized Series E Convertible Preferred Stock (the "Series E Convertible"), convertible into the Company's common stock, at any time after April 30, 2000, for a conversion price equal to the arithmetic mean of the closing prices of the Company's common stock as reported on the AMEX for the ten trading days immediately preceding the date of conversion so long as the Company's common stock continues to trade on the AMEX. In May 2003, the Series E Convertible will automatically convert into the Company's common stock at a conversion price calculated in accordance with the above conversion formula plus any accrued and unpaid dividends.
The Series E Convertible has a variable rate dividend averaging 8.15% over the term of the securities. The Company reserved the right to redeem all of the Series E Convertible on or before April 30, 2000 by payment to the holders of the shares of the Series E Convertible of $2.8 million plus any accrued and unpaid dividends. Depending upon the market price of the Company's common stock at the time of conversion, the issuance of the Company's common stock upon conversion of the Series E Convertible may be subject to shareholder approval. In addition, the Company issued to The Shaar Fund a warrant to purchase up to 312,500 shares of our common stock (subject to adjustment) at a purchase price of $1.1963 per share. The warrant expires on November 4, 2004. The Company also issued to Avalon Research Group Inc., as finder in this transaction, a five-year warrant to purchase up to 250,000 shares of our common stock (subject to adjustment) at a purchase price of $1.1963 per share. The Company also paid Avalon a "finder's fee" in the amount of $250,000 for this transaction.
The recipient of securities in this transaction represented its intention to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof, and appropriate restrictive legends were affixed to the warrants and the certificates representing the shares issued in this transaction. The Company made available to The Shaar Fund Ltd., written information about the Company in accordance with Rule 502 of the Securities Act and advised such recipient of the limitations on resale of such securities. In addition, The Shaar Fund Ltd. was offered the opportunity, prior to purchasing any securities, to ask questions of, and receive answers from, the Company concerning the terms and conditions of the transaction and to obtain additional relevant information about the Company. Based upon the facts above, the Company believed this transaction to be exempt from the registration requirements of the Securities Act in reliance on Section 4 (2) thereof as a transaction not involving any public offering of securities.
September 1998 Exchange of Debt for Series B, C, D, Preferred Stock and Separation Stock
On December 25, 1998, the Company consummated the transferto Environmental, effective as of September 28, 1998, of all 10,000,000 of its shares of common stock, par value $.001 per share (the "Separation Stock"), of Separation, representing approximately 87% of the issued and outstanding shares of capital stock of Separation, as part of a debt repayment plan between the Company and Environmental. As of September 28, 1998, Environmental owned approximately 35% of the issued and outstanding shares of common stock of the Company. As of April 30, 2001, Environmental owns approximately 16.58% of the issued and outstanding shares of common stock of the Company.
As a result of the repayment, the Company has repaid all of its debt in the amount of $6,756,000 (the "Debt") to Environmental by exchanging the Debt for (i) the Separation Stock (as repayment of $1,250,000 of the Debt); (ii) 20,909 shares of newly authorized 6% Series B Convertible Preferred Stock of the Company (as repayment of $2,090,870 of the Debt); (iii) 10,189 shares of newly authorized 6% Series C Convertible Preferred Stock of the Company (as repayment of $1,018,864 of the Debt); (iv) 20,391 shares of newly authorized 6% Series D Convertible Preferred Stock of the Company (as repayment of $2,039,100 of the Debt); (v) the assignment to Environmental of an account receivable due to the Company from Separation in the amount of $357,000 (as repayment of $357,000 of the Debt); and (vi) the amendment of an existing warrant owned by Environmental to purchase 1,500,000 shares of the Company's common stock to reduce the exercise price of such warrant from $10.00 per share to $1.50 per share. Representatives of both the Company and Environmental determined the terms of the debt restructuring as a result of arm's-length negotiations, and such determinations were supported by fairness opinions by an independent, third party appraiser. Since the Company and Environmental are deemed to be related
parties, the Company and Environmental recorded gains in the total amount of $7,818,000 from these transactions as direct contributions to equity.
The recipient of securities in this transaction represented its intention to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof, and appropriate restrictive legends were affixed to the warrants and the certificates representing the shares issued in this transaction. The Company made available to Environmental written information about the Company in accordance with Rule 502 of the Securities Act and advised Environmental of the limitations on resale of such securities. In addition, Environmental was offered the opportunity, prior to purchasing any securities, to ask questions of, and receive answers from, the Company concerning the terms and conditions of the transaction and to obtain additional relevant information about the Company. Based upon the facts above, the Company believed this transaction to be exempt from the registration requirements of the Securities Act in reliance on Section 4 (2) thereof as a transaction not involving any public offering of securities. On November 24, 1999, Environmental converted all its shares Series B, C, and D Preferred Stock into 7,258,533 shares of common stock, and there are no issued and outstanding shares of the Company's Series B, Series C or Series D Preferred Stock.
February 1998 Intercompany Note
In February 1998, Environmental provided an unsecured loan in the amount of $5,450,000 to the Company, evidenced by the non-convertible note issued by the Company (the "Intercompany Note"). Pursuant to the Intercompany Note, interest on the unpaid principal balance of the Intercompany Note is payable at the rate of 8% per annum, semiannually in cash. The unpaid principal amount of the Intercompany Note was due and payable, together with accrued and unpaid interest, on the earlier to occur of (a) December 31, 1999 or (b) the consummation of any public offering or private placement of securities of the Company with net proceeds aggregating in excess of $6.0 million, other than with respect to working capital financing or secured financing of assets received by the Company in the ordinary course of business from any bank or other lending institution, subject to certain conditions. The Company used the net proceeds of the loan solely for working capital and general corporate purposes and not for the satisfaction of any portion of Company debt or to redeem any Company equity or equity-equivalent securities. The Company paid the Intercompany Note in full effective as of September 28, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Certain Relationships and Related Transactions--February 1998 Intercompany Note."
In connection with the loan, the Company amended and restated in its entirety a five-year warrant issued to Environmental on December 2, 1996, to purchase 7,500,000 shares of the Company's common stock to, reducing the exercise price of the warrant from $15.00 per share to $10.00 per share and to modify other terms of the warrant. In addition, the Company issued to Environmental an additional five-year warrant to purchase 1,500,000 shares of the Company's common stock at an exercise price of $10.00 per share. See "Certain Relationships and Related Transactions--February 1998 Intercompany Note."
The recipient of securities in this transaction represented its intention to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof, and appropriate restrictive legends were affixed to the warrants and the certificates representing the shares issued in this transaction. The Company made available to Environmental, written information about the Company in accordance with Rule 502 of the Securities Act and advised Environmental of the limitations on resale of such securities. In addition, Environmental was offered the opportunity,
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA. - ------- ------------------------
The following table presents selected financial data of the Company, as of December 31, 2001, and for the years ended December 31, 1997, 1998, 1999, 2000 and 2001. The following selected historical data is derived from the Company's Consolidated Financial Statements and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report.
(in thousands, except per share data)
Consolidated Statement of Operations Data:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS. --------------------------
Overview
The Company is engaged in providing a range of engineering, technical, and financial services to the public and private sectors related to (i) remediating contamination in soils, liquids and other materials and disposing of or reusing certain waste by-products by utilizing SET, (ii) the settlement of complex, long-tail and latent insurance claims by utilizing a series of tools including an internally developed risk modeling program, FOCUS, and (iii) providing services related to, environmental management for on-site and off-site identification, investigation remediation and management of hazardous, mixed and radioactive waste.
The Company owns technologies related to the separation and destruction of mixed waste, polychlorinated biphenyls (PCBs) and chlorofluorocarbons (CFCs). Until September 1998, the Company was engaged in the separation of hazardous waste through its 87% owned subsidiary, Separation. Effective September 28, 1998, the Company sold its investment in Separation, which has caused significant variations in results for the periods presented.
The Company is currently working on the commercialization of these technologies through development efforts, licensing arrangements and joint ventures. Through Advanced Sciences, formerly Advanced Sciences, Inc., a subsidiary acquired on October 1, 1996, the Company has contracts with various government agencies and private companies in the U.S. As some government contracts are funded in one-year increments, there is a possibility for cutbacks as these contracts constitute a major portion of Advanced Sciences' revenues, and such a reduction would materially affect the operations. However, management believes Advanced Sciences' existing client relationships will allow the Company to obtain new contracts in the future. Through DRM, an 81% owned subsidiary, the Company has several engagements with various industrial, manufacturing and mining companies in the U.S. and in Europe for the recovery of insurance claims.
The Company has identified three reportable segments in which it operates, based on the guidelines set forth in the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131. These three segments are as follows: Commodore Advanced Sciences, Inc., which primarily provides various engineering, legal, sampling, and public relations services to Government agencies on a cost plus basis; Commodore Solutions, Inc., which is commercializing technologies to treat mixed and hazardous waste; and Dispute Resolution Management, Inc., which provides a package of services to help companies recover financial settlements from insurance policies to defray costs associated with environmental liabilities.
Results of Operations
Year ended December 31, 2001 compared to Year ended December 31, 2000
Revenues were $10,551,000 for the year ended December 31, 2001, compared to $20,631,000 for the year ended December 31, 2000. The decrease in revenues is due to the decreases in revenue contribution by CAS and of the Company's 81% interest in DRM, acquired August 30, 2000.
In the case of Advanced Sciences, revenues were $4,409,000 for the year ended December 31, 2001, compared to $16,786,000 for the year ended 2000. Revenues in 2001 were primarily from engineering and scientific services performed for the United States government under a variety of contracts similar
to those in place in 2000. Advanced Sciences had two major customers in 2001, each of which represents more than 10% of annual revenue. The combined revenue for these two customers was $4,409,000 or 100% of the Company's total 2001 revenue. The decline in revenues at Advanced Sciences is primarily the result of fewer contracts and overall, less subcontract work being performed in 2001. The government decided to deal directly with the subcontractor rather than having Advanced Sciences subcontract this work on behalf of the government. The government took this action, as the subcontracts became too large. Cost of sales decreased from $13,962,000 for 2000 to $3,080,000 for 2001. A reduction in cost of sales at Advanced Sciences resulted from fewer contracts and overall, less work performed resulting in decreased revenues. Anticipated losses on contracts are provided for by a charge to income during the period such losses are first identified.
In the case of DRM, revenues were $5,961,000 for the year ended December 31, 2001, compared to $7,609,316 on a full year basis, $3,574,000 for the four month Company ownership basis, for the year ended December 31, 2000. The Company purchased its 81% interest in DRM on August 30, 2000 and was able to consolidate DRM's revenues and earnings as of that date. The decrease in total year earnings was the result. The decrease in revenues is primarily due to the interruption of business activities concerning insurance settlements and recoveries in the fourth quarter of 2001 as a result of acts of terrorism. The various insurers, in which DRM negotiates and receives their settlements, halted or delayed their settlements until the insurers could operationally absorb the impact of the terrorist acts in the United States. The insurers have resumed traditionally settlement practices starting the first quarter of 2002.
Revenues in 2001 were primarily from completed settlement agreements between their clients and major insurers. DRM has several client engagements, of which two represented more than 10% of DRM's annual revenue. The combined revenue for these two customers was $3,376,000 or 57% of the Company's total 2001 revenue. Settlements are the result of 18 to 24 months of effort by various employees of DRM, of which the expenses are captured in the general and administrative costs section. Selling, general and administrative costs increased from $3,954,000 (on a full year basis) for 2000 to $4,223,000 for 2001. This increase reflects DRM's increased investment in the expanding the office locations, staffing and marketing efforts, which have resulted in an increase in new business, and contracts that will produce revenues in the following 18-32 month periods. Anticipated losses on contracts are provided for by a charge to income during the period such losses are first identified.
In the case of Solution, revenues were $181,000 for the year ended December 31, 2001 as compared with $271,000 for the year ended December 31, 2000. The decrease is primarily due to the decrease in feasibility studies and commercial processing. Revenues in 2001 were primarily from remediation services performed for engineering and waste treatment companies in the U.S. under a variety of contracts. Solution has two major customers, each of which represents more than 10% of annual revenue. The combined revenue for these two customers was $181,000 or 100% of the Solution's total 2001 revenue. The decrease in revenues at Solution is primarily the result of less subcontract work being performed in 2001. Cost of sales was $289,000 for the year ended December 31, 2001 as compared to $490,000 for the year ended December 31, 2000. The decrease in cost of sales is attributable to lower sales and marketing expenses for the SET technology. Anticipated losses on engagements, if any, will be provided for by a charge to income during the period such losses are first identified.
For the year ended December 31, 2001, the Company incurred research and development costs of $423,000, as compared to $993,000 for the year ended December 31, 2000. 100% of the research and development costs are attributable to the operations of Solution. In 2001, the Company invested more money in
capital expenditures and less in laboratory work and consultants than it had in 2000. DRM and Advanced Sciences did not incur research and development costs in the years 2000 and 2001.
General and administrative expenses for the year ended December 31, 2001 were $6,643,000, as compared to $6,989,000 for the year ended December 31, 2000. This decrease reflects the impact of some of the restructuring steps in the Company throughout 2001.
In the case of Advanced Sciences, general and administrative costs decreased from $2,355,000 for the year ended December 31, 2000 to $1,219,000 for the year ended December 31, 2001. This decrease reflects the impact of some restructuring steps in Advanced Sciences (including principally a reduction in personnel) the Company made through-out 2001 due to the inability to replace certain completed contracts. In the case of DRM, general and administrative costs recognized by the Company were $4,223,000 for the year ended December 31, 2001. These costs represent the salaries and bonuses issued to all employees of DRM. Solution incurred general and administrative costs of $700,000 for the year ended December 31, 2001 as compared with $504,000 for the year ended December 31, 2000. This increase was primarily due to a greater sales and marketing effort for Solution's services, which has resulted in contracts that will produce revenue in 2002.
The increase in interest expense of $1,047,000 from 2000 to 2001 is primarily related to amortization of non-cash interest costs associated with the Company's purchase of 81% of DRM on August 30, 2000 ($1,716,000), Brewer Note ($29,000), Milford/Shaar ($53,000) and the Weiss Group Note ($275,000).
In 2001, the Company took a machinery impairment charge of $776,000 and a patent impairment charge of $627,000 in order to record the machinery and patents at fair market value. In taking this charge, the Company considered the machinery's and the associated patents' operating history and cash flows, its inability to obtain material commercial contracts in 2001 and the future prospects for additional contracts in 2002.
Year ended December 31, 2000 compared to Year ended December 31, 1999
Revenues were $20,631,000 for the year ended December 31, 2000, compared to $18,147,000 for the year ended December 31, 1999. The increase in revenues is primarily due to the revenue contribution of the Company's 81% interest in DRM, acquired August 30, 2000.
In the case of Advanced Sciences, revenues were $16,786,000 for the year ended December 31, 2000, compared to $17,973,000 for the year ended 1999. Revenues in 2000 were primarily from engineering and scientific services performed for the United States government under a variety of contracts similar to those in place in 1999. Advanced Sciences had three major customers in 2000, each of which represents more than 10% of annual revenue. The combined revenue for these three customers was $13,836,000 or 67% of the Company's total 2000 revenue. The decline in revenues at Advanced Sciences is primarily the result of less subcontract work being performed in 2000. The government decided to deal directly with the subcontractor rather than having Advanced Sciences subcontract this work on behalf of the government. The government took this action, as the subcontracts became too large. Cost of sales decreased from $15,865,000 for 1999 to $13,962,000 for 2000. A reduction in cost of sales at Advanced Sciences
resulted from decreased revenues. Anticipated losses on contracts are provided for by a charge to income during the period such losses are first identified.
In the case of DRM, revenues were $3,574,000 for the year ended December 31, 2000. The Company purchased its 81% interest in DRM on August 30, 2000 and was able to consolidate DRM's revenues and earnings as of that date. Revenues in 2000 were primarily from completed settlement agreements between their clients and major insurers. DRM has several client engagements, of which three represented more than 10% of DRM's annual revenue. The combined revenue for these three customers was $2,300,000 or 64% of the DRM's total 2000 revenue contribution to the Company. Settlements are the result of 18 to 24 months of effort by various employees of DRM, of which the expenses are captured in the general and administrative costs section. Anticipated losses on engagements, if any, will be provided for by a charge to income during the period such losses are first identified.
In the case of Solution, revenues were $271,000 for the year ended December 31, 2000 as compared with $174,000 for the year ended December 31, 1999. The increase is primarily due to the increase in feasibility studies and commercial processing. Revenues in 2000 were primarily from remediation services performed for engineering and waste treatment companies in the U.S. under a variety of contracts. Solution has two major customers, each of which represents more than 10% of annual revenue. The combined revenue for these two customers was $271,000 or 100% of the Solution's total 2000 revenue. The increase in revenues at Solution is primarily the result of more subcontract work being performed in 2000. Cost of sales was $490,000 for the year ended December 31, 2000 as compared to $262,000 for the year ended December 31, 1999. The increase in cost of sales is attributable to greater sales and marketing expenses for the SET technology which the Company anticipates greater revenues from Solutions in 2001. Anticipated losses on engagements, if any, will be provided for by a charge to income during the period such losses are first identified.
For the year ended December 31, 2000, the Company incurred research and development costs of $993,000, as compared to $1,145,000 for the year ended December 31, 1999. 100% of the research and development costs are attributable to the operations of Solution. In 2000, the Company invested more money in capital expenditures and less in laboratory work and consultants than it had in 1999. DRM and Advanced Sciences did not incur research and development costs in the years 1999 and 2000.
General and administrative expenses for the year ended December 31, 2000 were $6,989,000, as compared to $4,037,000 for the year ended December 31, 1999. This increase is the result of the addition of the DRM's general and administrative costs as well as and increase in the costs from Solution.
In the case of Advanced Sciences, general and administrative costs increased from $1,428,000 for the year ended December 31, 1999 to $2,355,000 for the year ended December 31, 2000. This increase reflects the impact of some restructuring steps in Advanced Sciences (including principally a reduction in personnel and the associated severance cost) the Company made in the fourth quarter of 2000 due to the inability to replace certain completed contracts. In the case of DRM, general and administrative costs recognized by the Company were $1,761,000 for the year ended December 31, 2000. These costs represent the salaries and bonuses issued to all employees of DRM. Solution incurred general and administrative costs of $504,000 for the year ended December 31, 2000 as compared with $175,000 for the year ended December 31, 1999. This increase was primarily due to a greater sales and marketing effort for Solution's services, which has resulted in contracts that will produce revenue in 2001.
The increase in interest expense of $1,141,000 from 1999 to 2000 is primarily related to amortization of non-cash interest costs associated with the Company's purchase of 81% of DRM on August 30, 2000 ($658,000) and the Weiss Group Note ($333,000).
In 2000, the Company took an asset impairment charge of $6,586,000 as a result of the write off of goodwill associated with the prior acquisition of Advanced Sciences. In taking this charge, the Company considered Advanced Sciences' operating history and cashflows, its inability to obtain replacement contracts for completed contracts in fourth quarter of 2000 and the future prospects for additional contracts to Advanced Sciences in 2001. The Company believes that revenues from existing and potential contracts in 2001 will be insufficient to offset amortization of goodwill associated with Advanced Sciences. The impairment charge reduced the value of the assets of Advanced to their fair market value.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001 and December 31, 2000 ASI had a $108,000 and $1,459,000 outstanding balance, respectively, on its revolving lines of credit.
At December 31, 2000 and 1999, Advanced Sciences had a $1,459,000 and $948,000 outstanding balance, respectively, on various revolving lines of credit. In August 1998, Advanced Sciences refinanced their line of credit with Finova Capital Corporation (the "Finova Credit Line"). The Finova Credit Line was not to exceed 75% of eligible receivable or $2,000,000 and was due in August 2000 with interest payable monthly at prime plus 1 1/2 percent (9 1/4 percent as of December 31, 1999). The Finova Credit Line was extended on a month-to-month basis through October 2000 when the Company secured a new line of credit. The Finova Credit Line was collateralized by the assets of Advanced Sciences and was guaranteed by the Company. The Finova Credit Line contained certain financial covenants and restrictions including minimum ratios that Advanced Sciences had to satisfy. Advanced Sciences was in compliance with the covenants throughout the term of the Finova Credit Line.
In August 1999, Advanced Sciences received $1,000,000 as a "new advance" under a First Amendment to its existing revolving line of credit. This advance is evidenced by a secured promissory note (the "1999 Term Note"). The 1999 Term Note was repayable in monthly installments in the principal amount of $16,667 plus interest accrued and unpaid interest. The first payment was paid August 1999. Interest was set at prime plus 1 1/2 percent. Security for the 1999 Term Note included virtually all property and equipment owned by Advanced Sciences and the Company. This 1999 Term Note was shown as long-term debt in the consolidated balance sheet. The 1999 Term Note and the outstanding balances of the Finova Credit Line were paid in full when Advanced Sciences refinanced their line of credit in October 2000.
In November 1999, the Company completed $2.5 million in financing through private placement. The Company issued 335,000 shares of a new Series E Convertible Preferred Stock, convertible into common stock at the market price, after April 30, 2000 and up through April 30, 2003 at which time it automatically converts to common stock. The Series E Convertible Preferred Stock has a variable rate dividend averaging 8.15% over the term of the security. The Company reserved the right to redeem all the Series E Convertible Preferred Stock on or before April 30, 2000 by payment of $2.8 million plus any accrued dividends.
In March 2000, the Company completed $2.0 million in financing through private placement. The Company issued 226,000 shares of a new Series F Convertible Preferred Stock, convertible into common stock at the market price, after September 30, 2000 and up through April 30, 2003 at which time it automatically converts to common stock. The Series F Convertible Preferred Stock has a variable rate dividend averaging 8.15% over the term of the security. The Company reserved the right to redeem all the Series F Convertible Preferred Stock on or before September 30, 2000 by payment of $2.3 million plus any accrued dividends.
In September 2000, the Company completed $500,000 in financing in the form of a loan (the "Brewer Note") from S. Brewer Enterprises, Inc. ("SB Enterprises"), which is owned by one of its officers and directors, Shelby T. Brewer. The Brewer Note bears a 9.75% interest rate, payable monthly, with a balloon principal payment at the end of the term. The note was due and payable on March 15, 2001 and was extended under the same terms and conditions until December 31, 2001. The Brewer Note is convertible into Common Stock at the market price up through December 31, 2001.
On March 15, 2001, SB Enterprises executed an Amended and Restated Promissory Note (the "Restated Brewer Note"), which extended the maturity date of the note until December 31, 2001. Additionally, the conversion feature of the Restated Brewer Note was changed to the 5-day average closing price of the Company's common stock prior to a conversion notice. On April 9, 2001, SB Enterprises issued a conversion notice for $250,000 of the outstanding principal of the Brewer Restated Note. The conversion price was calculated by the previous 5-day average of the closing price of the Company's common stock and was converted into 1,041,667 shares. The remaining principal balance of $250,000 is outstanding as of April 15, 2002. The Company has not been notified of the holder's intent to declare a default on the Brewer Note.
In October 2001, ASI refinanced their line of credit with Commerce Funding Corporation (the "Commerce Credit Line"). The Commerce Credit Line is not to exceed 85 percent of eligible receivables or $1,000,000 and is due October 2002 with interest payable monthly at prime plus 2 percent (7.0 percent as of November 12, 2001). The Commerce Credit Line is collateralized by the receivables of ASI and is guaranteed by the Company. The Commerce Credit Line contains certain financial covenants and restrictions including minimum ratios that ASI must satisfy. ASI was in compliance with the covenants of the Commerce Credit Line at April 15, 2002.
In addition, the Commerce Credit Line agreement stipulates that no payments shall be made by ASI to the Company other than monthly scheduled payments of principal with respect to the $8,280,000 subordinated indebtedness owed by ASI to the Company (which is eliminated in consolidation) and intercompany indebtedness not to exceed $20,000 in any month. In addition, ASI shall not incur indebtedness in excess of $25,000, other than trade payables, the above subordinated indebtedness and other contractual obligations to suppliers and customers incurred in the ordinary course of business.
In October 2001, ASI repaid their line of credit with KBK Financial, Inc. (the "KBK Credit Line"). The KBK Credit Line was not to exceed 85 percent of eligible receivables or $2,500,000 and was due October 2002 with interest payable monthly at prime plus 2 percent (8.00 percent as of September 30, 2001). The KBK Credit Line was collateralized by the assets of ASI and was guaranteed by the Company. The KBK Credit Line contained certain financial covenants and restrictions including minimum ratios that ASI must satisfy. ASI was in compliance with the covenants of the KBK Credit Line through the repayment in October 2001.
In November 2000, the Company completed $500,000 in financing in the form of a loan (the "Weiss Group Note") from a group of four investors; $75,000 of which was borrowed from the son of Paul E. Hannesson, our former President and Chief Executive Officer, and $25,000 of which was borrowed from Stephen A. Weiss, a shareholder of Greenberg Traurig, LLP, our former corporate and securities counsel. The Weiss Group Note bears interest at 12% per annum, was due and payable on February 12, 2001, and is secured by the first $500,000 of loans or dividends that the Company may receive from DRM. As consideration for such loan, Environmental, one of the Company's principal stockholders owning approximately 16.58% of the Common Stock, transferred to the investors a total of 1,000,000 shares of common stock. All holders of the Weiss Group Note have granted payment extensions until May 31, 2002.
Effective April 5, 2001, the Company issued warrants to purchase 500,000 shares of its common stock at an exercise price of $0.22 per share (the closing price of our common stock on the American Stock Exchange on such date) to all holders of the Weiss Group Note in consideration of such persons extension of the due date of such loans from February 12, 2001 to June 30, 2001.
Effective January 24, 2002, the Company issued warrants to purchase 500,000 shares of its common stock at an exercise price of $0.15 per share (the closing price of our common stock on the American Stock Exchange on such date) to all holders of the Weiss Group Note in consideration of such persons extension of the due date of such loans from June 30, 2001 to May 31, 2002.
On May 23, 2001, a private investor purchased $250,000 of the Company's common stock at the market price. The Company issued the private investor 1,923,077 shares of common stock of the Company as a result of the equity purchase. In connection with the purchase of the shares of the Company's common stock, the Company issued the private investor a 2-year warrant for 500,000 shares of the Company's common stock at an exercise price of $0.22 per share.
On June 13, 2001, the Company issued and sold to Milford Capital Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar") one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan Notes") in the aggregate principal amount of $1,000,000. In connection with the Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year warrant for 333,333 shares of the Company's common stock at an exercise price of $0.22 per share. The Company pledged its equipment and SET related intellectual property as collateral for the Milford/Shaar Bridge Loan Notes. The Company shall pay Milford/Shaar principal and interest on a monthly basis in arrears. The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty.
The Company made all payments on the Milford/Shaar Bridge Loan Notes until November 13, 2001. The Company asked for and received a forbearance of payments on the Milford/Shaar Bridge Loan Notes from November 13, 2001 until May 13, 2002.
The Company has an irrevocable obligation to repurchase from the former shareholders of DRM, by May 16, 2002, that number of 9.5 million shares of the Company's common stock (at a per share price equal to the greater of $1.50 or the closing price of our common stock 30 days prior to purchase) as shall be necessary to provide the holders of such shares with a total of $14.5 million. The original repurchase obligation deadline of August 30, 2001, subsequently extended through May 16, 2002 by a series of extensions (initially extended to September 29, 2001, further extended to October 29, 2001, further extended to January 16, 2002 and subsequently extended until May 16, 2002). As partial security for the payment of such obligation, all of the shares of DRM common stock owned by the Company have been pledged to Messrs. William J. Russell and Tamie P. Speciale, the former sole stockholders of DRM. In the event the Company
is unable to make such $14.5 million payment, when due, the pledgees may foreclose on the DRM stock; in which event the Company would lose its entire equity ownership in the DRM subsidiary.
The Company originally intended to meet its repurchase obligation to the former shareholders of DRM by reacquiring their shares and selling those shares to generate the cash necessary to meet the obligation; however, the Company's ability to effect the repurchase obligation in this manner is heavily dependent on the stock price of the Company's common stock at the time of the repurchase. At April 15, 2002, the closing price of the Company's common stock on the American Stock Exchange, Inc. was $0.09 per share.
The Company currently requires additional cash to sustain existing operations and meet current obligations (including those described above) and the Company's ongoing capital requirements. Excluding the Company's DRM subsidiary, the Company's current monthly operating expenses exceed its cash revenues by approximately $200,000. The continuation of the Company's operations is dependent in the short term upon its ability to obtain additional financing and, in the long term, to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitability.
The Company's auditor's opinion on our fiscal 2001 financial statements contains a "going concern" qualification in which they express doubt about the Company's ability to continue in business, absent additional financing.
For the year ended December 31, 2001, the Company incurred a net loss of $6,554,000, as compared to a net loss of $11,441,000 for the year ended December 31, 2000.
As shown in the financial statements for the years ended December 31, 2001, 2000, and 1999, the Company incurred losses of $6,554,000, $11,441,000 and $3,985,000 respectively. The Company has also experienced net cash inflow (outflows) from operating activities of $1,910,000, ($2,002,000), and ($2,905,000) for the years ended December 31, 2001, 2000 and 1999 respectively. At December 31, 2001, 2000 and 1999 the Company had working capital (deficit) of $(19,571,000), $(16,876,000) and $621,000 respectively. The negative working capital balance for the year ended December 31, 2001 is primarily due to the payment obligations of the Company to the former shareholders of DRM ($14,500,000 of the purchase price obligation and approximately $2,500,000 of the earn-out guarantee) under the Stock Purchase Agreement for the acquisition of 81% of DRM on August 30, 2000.
As shown in the financial statements for the years ended December 31, 2001, 2000 and 1999 the Company had stockholders' equity of $1,571,000, $7,855,000 and $9,951,000 respectively. The Company's net decrease in stockholders' equity from December 31, 2000 to December 31, 2001 is primarily due to the loss for the period ($6,554,000).
The Company currently is negotiating with a lender to obtain debt financing, to supplement funds generated from operations, to meet the Company's cash needs over the next 12 months. The Company intends to meet its long term capital needs through obtaining additional contracts that will generate funds from operations and obtaining additional debt or equity financing as necessary or engaging in merger or sale transactions. There can be no assurance that such sources of funds will be available to the Company or that it will be able to meet its short or long term capital requirements.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards (the "NOLs") of approximately $31,000,000, which expire in the years 2010 through 2021. The amount of NOLs that can be used in any one year will be limited by the applicable tax laws that are in effect at the time such NOLs can be utilized. The Company has determined a maximum of approximately $2.4 million of NOLs is available to be used annually. Unused NOLs balances may be accumulated and used in subsequent years. A full valuation allowance has been established to offset any benefit from the net operating loss carryforwards. It cannot be determined when or if the Company will be able to utilize the NOLs.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report are "forward-looking statements" intended to qualify for the safe harbors from liability established by Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements.
Such statements may address future events and conditions concerning, among other things, the Company's results of operations and financial condition; the consummation of acquisition and financing transactions and the effect thereof on the Company's business; capital expenditures; litigation; regulatory matters; and the Company's plans and objectives for future operations and expansion. Any such forward-looking statements would be subject to the risks and uncertainties that could cause actual results of operations, financial condition, acquisitions, financing transactions, operations, expenditures, expansion and other events to differ materially from those expressed or implied in such forward-looking statements. Any such forward-looking statements would be subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally. Such assumptions would be based on facts and conditions as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond the Company's control.
Further, the Company's business is subject to a number of risks and uncertainities that would affect any such forward-looking statements. These risks and uncertainties include, but are not limited to: the Company's critical need for additional cash to sustain existing operations and meet existing obligations and capital requirements; the Company's dependence on its subsidiary, Dispute Resolution Management, Inc., to meet its cash needs; the Company's need to raise additional capital to meet obligations relating to the purchase of DRM or to renegotiate such obligations; the ability of the Company to implement its waste processing operations, including obtaining commercial waste processing contracts and processing waste under such contracts in a timely and cost effective manner; the timing and award of contracts by the U.S. Department of Energy for the cleanup of waste sites administered by it; the Company's ability to integrate acquired companies; the acceptance and implementation of the Company's waste treatment technologies in the government and commercial sectors; the Company's ability to obtain and perform under other large technical support services projects; developments in environmental legislation and regulation; the ability of the Company to obtain future financing on favorable terms; and other circumstances affecting anticipated
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------- -----------------------------------------------------------
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------- --------------------------------------------
The consolidated financial statements of the Company are included on pages through of this Annual Report and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ------- ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE. ------------------------------------
None.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the executive officers and directors of the Company, and their positions with the Company as of April 15, 2002 are as follows:
Name Age Position - -------------------------- ---------------- ----------------------------------- Shelby T. Brewer, Ph.D. 63 Chairman of the Board, President and Chief Executive Officer - -------------------------- ---------------- ----------------------------------- James M. DeAngelis 41 Chief Financial and Administrative Officer, Treasurer - -------------------------- ---------------- ----------------------------------- Bentley J. Blum 60 Director - -------------------------- ---------------- ----------------------------------- Herbert A. Cohen 68 Director - -------------------------- ---------------- ----------------------------------- Paul E. Hannesson 61 Director - -------------------------- ---------------- ----------------------------------- David L. Mitchell 71 Director - -------------------------- ---------------- ----------------------------------- Edward L. Palmer 84 Director - -------------------------- ---------------- ----------------------------------- William R. Toller 70 Director - -------------------------- ---------------- -----------------------------------
SHELBY T. BREWER, Ph.D. was appointed Chairman, Chief Executive Officer and President of the Company since January 2001. Since April 2000, Mr. Brewer has served as Chairman and Chief Executive Officer of Solutions, a wholly owned subsidiary of the Company, which oversees Advanced Sciences. From 1996 to March 2000, Dr. Brewer was President of S. Brewer Enterprises, a consulting firm he founded that is engaged in supporting mergers and acquisitions, arranging private and public financing, forming joint ventures abroad, re-positioning established companies, and fostering new technology enterprises. Dr. Brewer served as President and CEO of the nuclear power businesses of ABB Combustion Engineering from 1985 to 1995. From 1981 to 1984, Dr. Brewer served as Assistant Secretary of Energy in the Reagan administration, holding the top nuclear post in the U.S. government. Prior to his appointment by President Reagan, Dr. Brewer achieved positions of increasing line responsibility in private industry, the U.S. Navy, and the Atomic Energy Commission. Dr. Brewer holds Ph.D. and M.S. degrees in nuclear engineering from the Massachusetts Institute of Technology. He holds a B.S. degree in mechanical engineering and a B.A. in humanities from Columbia University.
James M. dEAngelis was appointed Vice President-Finance and Treasurer of the Company in July 1998 and was promoted to Chief Financial and Administrative Officer and Secretary in December 1998. Mr. DeAngelis has also served as Senior Vice President-Sales & Marketing of Separation since July 1996, after having served as its Vice President-Marketing since November 1995. Mr. DeAngelis has also served as the President of CFC Technologies since September 1994, and served as Vice President-Marketing of Environmental from September 1992 to September 1995. Mr. DeAngelis holds a Masters in International
Management degree from the American Graduate School of International Management. Mr. DeAngelis holds B.S. degrees in Biology and Physiology from the University of Connecticut.
Bentley J. Blum has served as a director of the Company since March 1996 and served as its Chairman of the Board from March to November 1996. Mr. Blum has served as a director of Environmental since 1984 and served as its Chairman of the Board from 1984 to November 1996. Mr. Blum also currently serves as a director of Separation, Solution and CFC Technologies. For more than 15 years, Mr. Blum has been actively engaged in real estate acquisitions and currently is the sole stockholder and director of a number of corporations that hold real estate interests, oil drilling interests and other corporate interests. Mr. Blum is a principal stockholder of Environmental. Mr. Blum is the brother-in-law of Paul E. Hannesson, a director of the Company.
Herbert A. Cohen has served as a director of the Company and Environmental since July 1996 and served as a director of Separation from March 1998 to March 2000. Mr. Cohen has been a practicing negotiator for the past three decades acting in an advisory capacity in hostage negotiations and crisis management. He has been an advisor to Presidents Carter and Reagan in the Iranian hostage crisis, the government's response to the skyjacking of TWA Flight 847 and the seizure of the Achille Lauro. Mr. Cohen's clients have included large corporations and government agencies such as the Department of State, the Federal Bureau of Investigation, the Conference of Mayors, the Bureau of Land Management, Lands and Natural Resources Division in conjunction with the EPA, and the United States Department of Justice. In addition, Mr. Cohen was an advisor and consultant to the Strategic Arms Reduction Talks negotiating team. Mr. Cohen holds a law degree from New York University School of Law and has lectured at numerous academic institutions.
Paul E. Hannesson has served as a director of the Company since March 1996 and served as Chairman of the Board from November 1996 through January 2001. Mr. Hannesson also served as Chief Executive Officer of the Company from March to October 1996 and as President from March to September 1996, and was re-appointed Chief Executive Officer in November 1996 and President in May 1997, all positions he served until January 2001. Mr. Hannesson has been a director of Environmental since February 1993 and was appointed its Chairman of the Board and Chief Executive Officer in November 1996. Mr. Hannesson also served as President of Environmental from February 1993 to July 1996 and was re-appointed President in May 1997. In July 1998 Mr. Hannesson resigned as Director and Officer of Environmental. Mr. Hannesson also currently serves as the Chairman of the Board and Chief Executive Officer of Separation. Mr. Hannesson was a private investor and business consultant from 1990 to 1993. Mr. Hannesson is the brother-in-law of Bentley J. Blum, a director of the Company.
David L. Mitchell has served as a director of the Company and Environmental since July 1996 and as a director of Separation from April 1997 to March 2000. Mr. Mitchell has also served as a consultant to the Company from July 1997 to July 1998. For the past sixteen years, Mr. Mitchell has been President and co-founder of Mitchell & Associates, Inc., a banking firm providing financial advisory services in connection with corporate mergers, acquisitions and divestitures. Prior to forming Mitchell & Associates in 1982, Mr. Mitchell was a Managing Director of Shearson/American Express Inc. from 1979 to 1982, a Managing Director of First Boston Corporation from 1976 to 1978, and a Managing Director of the investment-banking firm of S.G. Warburg & Company from 1965 to 1976. Mr. Mitchell holds a bachelor's degree from Yale University.
Edward L. Palmer has served as a director of the Company since August 1998. Mr. Palmer currently serves as President of the Mill Neck Consulting
Group, founded in 1983. Mr. Palmer retired in September 1982 as Chairman of the Executive Committee and Director of CitiCorp and Citibank, N.A. after 23 years of service. Mr. Palmer served as Vice President of the New York Trust, serving in several executive positions since 1940. Mr. Palmer is Trustee Emeritus of Brown University, New York Philharmonic and The Metropolitan Museum of Art. Mr. Palmer served as Director of Borg-Warner Corp., CitiCorp, Corning Incorp., Del Monte Corp., First Boston Corp., Grindlays Banks, plc Kissinger Associates, Monsanto Co., Mutual Life Ins., Phelps Dodge Corp., Union Pacific Corp., and Washington National Bank Corp.
William R. Toller has served as a director of the Company since March 1998. Mr. Toller has also served as a member of the Board of Directors of Separation from April 1997 to March 2000 and has served as a consultant to Environmental since July 1997. Mr. Toller served as the Vice Chairman of Lanxide from July 1997 to February 1998. Mr. Toller also currently serves as Chairman and Chief Executive Officer of Titan Consultants, Inc. (August 1996 - Present). Mr. Toller had been the Chairman and Chief Executive Officer of Witco Corporation since October 1990 and retired in July 1996. Mr. Toller joined Witco in 1984 as an executive officer when it acquired the Continental Carbon Company of Conoco, Inc., of which he had been the President and an officer since 1955. Mr. Toller is a graduate of the University of Arkansas with a Bachelor's degree in Economics, and the Stanford University Graduate School Executive Program. Mr. Toller serves on the Board of Directors of Chase Industries, Inc., Fuseplus, Inc., of which he is also Chairman of the Organization and Compensation Committee, and the United States Chamber of Commerce, of which he is also a member of the Labor Relations and International Policy Committees. Mr. Toller is also a member of the Board of Trustees and the Executive and Finance Committees of the International Center for the Disabled, a member of the Board of Associates of the Whitehead Institute for Biomedical Research, a member of the National Advisory Board of First Commercial Bank in Arkansas, a member of the Dean's Executive Advisory Board and the International Business Committee at the University of Arkansas, College of Business Administration, and a member of the Board of Presidents of the Stamford Symphony Orchestra.
Each director is elected to serve for a term of one year or until his or her successor is duly elected and qualified. The Company's officers are elected by, and serve at the pleasure of, the Board of Directors, subject to the terms of any employment agreements. Messrs. Hannesson and Blum are brothers-in-law. No family relationship exists among any other directors or executive officers of the Company.
KEY EMPLOYEES
The names and ages of the key employees of the Company not listed above, and their positions with the Company as of April 15, 2002, are as follows:
Name Age Position - ---- William J. Russell 51 Chairman and Chief Executive Officer, DRM Tamie P. Speciale 39 President and Chief Operating Officer, DRM O. Mack Jones 61 President of Advanced Sciences
WILLIAM J. RUSSELL has served as Chairman and Chief Executive Officer of DRM since December 1996. Mr. Russell served as Managing Director of KPMG Peat Marwick, LLP's Environment Management Alternative Dispute Resolution Group from March 1995 to December 1996. Mr. Russell served as Vice President of Atlantic Environmental Management from March 1994 to March 1995. Mr. Russell served as General Counsel of Pintlar Corporation (formerly the Bunker Hill Company). Mr. Russell served as Vice President to Gulf Resources & Chemical a NYSE resource company located in Washington, D.C., from February 1992 to March 1994 and was responsible for the company's environmental matters with regard to its status as the owner and primary potentially responsible person of one of the nation's largest Superfund sites. Mr. Russell was engaged in the private practice of law at Elam Burke & Boyd from August 1977 to October 1991, and maintained a practice with an emphasis on environmental law and insurance defense representation. Mr. Russell holds a law degree from the University of Denver. Mr. Russell holds a B.A. degree from the University of Kansas.
TAMIE P. SPECIALE has served as President and Chief Operating Officer of DRM since December 1996. Ms. Speciale served as a manager of KPMG Peat Marwick, LLP's Environment Management Alternative Dispute Resolution Group from January 1996 to December 1996. Ms. Speciale was engaged in the private practice of law at Watkiss Dunning & Watkiss, P.C., from January 1995 to December 1995, and maintained a practice with a concentration in environmental law and commercial business law. Ms. Speciale is certified as an arbitrator with the National Association of Security Dealers (NASD). Ms. Speciale holds an MBA, a law degree and a B.S. degree from the University of Utah.
O. Mack Jones has been serving as Acting President of Advanced Sciences since February 2001. Mr. Jones also has served as Vice President of Field Operations since April 1998, managing its field treatability studies and commercial projects. On February 28, 2001, Mr. Jones was appointed President of Advanced Sciences. Mr. Jones served as a consultant to the Company from June 1996 to April 1998, assisting in the commercialization of the solvated electron technology. From September 1994 to May 1996, he served as a consultant to Environmental assisting in the development of the solvated electron technology. From 1991 to May 1996, Mr. Jones served as the founder and principal executive officer of an environmental consulting company, Florida Vector Services, which provided both consulting and hands-on remediation services primarily in TSCA-related areas. From 1986 to 1991, Mr. Jones was Vice President-Operations with Quadrex Environmental Company, managing the company's field remediation businesses. Mr. Jones is a professional mechanical engineer who held several managerial operating positions in power generation and distribution arenas during his twenty-six years of service to General Electric Company. His experience includes commercial nuclear, fossil, and hydro power construction and maintenance, industrial power delivery systems, and industrial drives and controls.
BOARD COMMITTEES
The Company's Board of Directors has (i) an Audit Committee and (ii) a Compensation, Stock Option and Benefits Committee. The Company no longer maintains an Executive and Finance Committee (the "Finance Committee"). On August 30, 2000, the Board of Directors unanimously voted to abolish the Finance Committee and determined that its function would be performed by the entire Board of Directors.
As of December 31, 2001, the Audit Committee was composed of David L. Mitchell, as Chairman, Herbert A. Cohen, Edward L. Palmer and William R. Toller. The responsibilities of the Audit Committee include recommending to the Board of Directors the firm of independent accountants to be retained by the Company, reviewing with the Company's independent accountants the scope and results of their audits, reviewing with the independent accountants and management the Company's accounting and reporting principles, policies and practices, as well as the Company's accounting, financial and operating controls and staff, supervising the Company's policies relating to business conduct and dealing with conflicts of interest relating to officers and directors of the Company.
As of December 31, 2001, the Compensation, Stock Option and Benefits Committee, was composed of Herbert A. Cohen, as Chairman, David L. Mitchell, Edward L. Palmer and William R. Toller. The Compensation, Stock Option, and Benefits Committee has responsibility for establishing and reviewing employee and consultant/advisor compensation, bonuses and incentive compensation awards, administering and interpreting the Company's 1998 Stock Option Plan, and determining the recipients, amounts and other terms (subject to the requirements of the 1998 Stock Option Plan) of options which may be granted under the 1998 Stock Option Plan from time to time and providing guidance to management in connection with establishing additional benefit plans.
COMPENSATION OF DIRECTORS
The Company pays non-management directors a director's fee in the amount of $375 per meeting for attendance at the meetings of the Board of Directors, and the Company reimburses the directors for actual expenses incurred in respect of such attendance. The Company does not separately compensate employees for serving as directors.
COMPLIANCE WITH SECTION 16(a) of the exchange act
Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10% of the outstanding shares of the Company's common stock, to file initial reports of beneficial ownership and reports of changes in beneficial ownership of shares of common stock with the Commission and the AMEX. Such persons are required by regulations promulgated under the Exchange Act to furnish the Company with copies of all Section 16(a) forms filed with the Commission.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the year ended December 31, 2001, and upon a review of Forms 5 and amendments thereto furnished to the Company with respect to the year ended December 31, 2001, or upon written representations received by the Company from certain reporting persons that such persons were not required to file Forms 5, the Company believes that no director, executive officer or holder of more than 10% of the outstanding shares of common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during, or with respect to, the year ended December 31, 2001.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. - -------- -----------------------
SUMMARY COMPENSATION
The following table sets forth the amount of all compensation paid by the Company and/or its affiliates and allocated to the Company's operations for services rendered during each of 2001, 2000 and 1999 to all persons serving as the Company's Chief Executive Officer during 2000, to each of the Company's four most highly compensated executive officers other than the Chief Executive Officer whose total salary and bonus compensation exceeded $100,000 during any such year.
(1) Mr. Brewer served as Chief Executive Officer and President of Solutions and a director of the Company since April 2000. Mr. Brewer assumed the positions of Chairman, Chief Executive Officer and President of the Company as of January 15, 2001.
(2) Represents the amount of Mr. Brewer's base salary allocated to the Company. Mr. Brewer's base salary for 2001 was $250,000 of which $160,000 originally deferred until December 31, 2001, and remains unpaid as of March 25, 2002. Mr. Brewer's base salary for 2000 was $90,000.
(3) Represents shares of common stock underlying stock options granted to Mr. Brewer by the Company in his capacity as an officer and director of the Company.
(4) Represents the amount of Mr. Hannesson's base salary allocated to the Company. The Company previously recorded a liability for $344,000 representing amounts owed to Mr. Hannesson under his employment contract, but deferred per agreement. The deferred salary amount was used by Mr. Hannesson to offset a portion of the exercise price and taxes with respect to Mr. Hannesson's stock option exercise of 830,000 stock options in July 2000. See "Certain Relationships and Related Transactions--Services Agreement." Mr. Hannesson was replaced by Shelby T. Brewer effective January 15, 2001. Mr. Hannesson remains a director of the Company.
(5) Represents the amount of Mr. Hannesson's automobile allowance allocated to the Company. Mr. Hannesson was replaced by Shelby T. Brewer effective January 15, 2001. Mr. Hannesson remains a director of the Company.
(6) Represents shares of common stock underlying stock options granted to Mr. Hannesson by the Company in his capacity as an officer and director of the Company.
(7) Represents moving allowances paid to Mr. Hannesson in 1999.
(8) Represents amounts paid to Mr. Adelman in 1999 in satisfaction of his employment agreement. Dr. Adelman resigned his management positions effective December 31, 1998. Mr. Adelman concluded his term as a Director of the Company on August 30, 2000.
(9) Mr. DeAngelis served as Vice President and Treasurer of the Company from July 1998 to December 1999 and as Sr. Vice President, Chief Financial and Administrative Officer, Treasurer and Secretary from December 1999 to present.
(10) Represents the amount of Mr. DeAngelis' base salary allocated to the Company. Mr. DeAngelis' total base salary for 2001 was $165,000 of which $33,000 originally deferred until December 31, 2001, and remains unpaid as of March 25, 2002. Mr. DeAngelis' base salary for 2000 and 1999 was $165,000 and $145,000 respectively.
(11) Represents shares of common stock underlying stock options granted to Mr. DeAngelis by the Company in his capacity as an officer of the Company.
(12) Represents moving allowances paid to Mr. DeAngelis in 1999.
(13) Represents the amount of Mr. Ingram's base salary allocated to the Company. Mr. Ingram's total base salary for 2001, 2000 and 1999 was $150,000. Mr. Ingram resigned his management position effective January 12, 2001.
(14) Represents shares of common stock underlying stock options granted to Mr. Ingram by the Company in his capacity as an officer of the Company. Mr. Ingram resigned his management position effective January 12, 2001.
(15) Mr. Jones served as Vice President and Field Operations Manager of Solutions from April 1998 to January 2001 and as President of Advanced Sciences from February 2001 to present.
(16) Represents the amount of Mr. Jones' base salary allocated to the Company. Mr. Jones' total base salary for 2001 was $165,000 of which $33,000 originally deferred until December 31, 2001, and remains unpaid as of March 25, 2002. Mr. Jones' base salary for 2000 and 1999 was $150,000.
(17) Represents shares of common stock underlying stock options granted to Mr. Jones the Company in his capacity as an officer of the Company.
(18) Represents the amount of Mr. Harrod's base salary allocated to the Company, through its wholly owned subsidiary, Advanced Sciences. Mr. Harrod's total base salary for 1997, 1998 and 1999 was $150,000, $170,000, and $190,000 respectively. Mr. Harrod resigned his management position effective February 28, 2001.
(19) Represents shares of common stock underlying stock options granted to Mr. Harrod by the Company in his capacity as an officer of the Company. Mr. Harrod resigned his management position effective February 28, 2001.
STOCK OPTIONS
The following table sets forth certain information concerning options granted during the year ended December 31, 2001 to the individuals listed in the Summary Compensation Table pursuant to the Company's 1998 Stock Option Plan (the "1998 Plan"). The Company has no outstanding stock appreciation rights and granted no stock appreciation rights during the year ended December 31, 2001.
(1) Options to purchase 200,000 shares of common stock were issued on March 9, 2001 of which 100% vested upon issuance.
(2) Options to purchase 300,000 shares of common stock were issued on March 9, 2001 of which 100% vested upon issuance.
(3) Options to purchase 100,000 shares of common stock were issued on March 9, 2001 of which 100% vested upon issuance.
(4) Percentages based on 920,000 stock options granted (the 1998 Plan) during the year ended December 31, 2001.
(5) The closing price for the Company's common stock on December 31, 2001 was $0.13. The closing price is used for all the subsequent stock appreciation calculations.
The following table sets forth certain information concerning the exercise of options and the value of unexercised options held under the 1998 Plan at December 31, 2001 by the individuals listed in the Summary Compensation Table.
(1) Represents the difference between the last reported sale price of the Common Stock on December 31, 2001 ($0.13), and the exercise price of the option ($0.28 to $0.688) multiplied by the applicable number of options exercised.
(2) Represents the difference between the exercise price and the closing price on December 31, 2001, multiplied by the applicable number of securities.
EMPLOYMENT AGREEMENTS
William J. Russell and Tamie P. Speciale, former owners of DRM, entered into employment agreements with DRM for a term expiring on August 31, 2005. Pursuant to such employment agreement, Mr. Russell and Ms. Speciale agreed to devote their business and professional time and efforts to the business of DRM as senior executive officers. The employment agreements provide that Mr. Russell and Ms. Speciale, each shall receive, among other things, a base salary at an annual rate of $262,500 through December 31, 2001, and will receive not less than $275,000 through December 31, 2002 and not less than $290,000 through December 31, 2003, for services rendered to DRM and certain of its affiliates, including the Company.
The Company has no other employment contracts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The individuals who served as members of the Compensation, Stock Option and Benefits Committee (the "Compensation Committee") during the year ended
December 31, 2001 were Herbert A. Cohen (Chairman), David L. Mitchell, Edward L. Palmer and William R. Toller. Mr. Mitchell served as a consultant to the Company from July 15, 1997 to August 14, 1998, and received compensation in the amount of $10,000 per month for services rendered to the Company in such capacity.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee was established in November 1996 and is responsible for, among other things, establishing the compensation policies applicable to executive officers of the Company. The Compensation Committee was composed of Herbert A. Cohen (Chairman), David L. Mitchell, Edward L. Palmer and William R. Toller at December 31, 2001, all of whom were non-employee Directors of the Company. All decisions of the Compensation Committee relating to the compensation of the Company's executive officers are reviewed by, and are subject to the final approval of, the full Board of Directors of the Company. Set forth below is a report prepared by Mr. Cohen, Mr. Mitchell and Mr. Toller in their capacities as members of the Compensation Committee at December 31, 2001, addressing the Company's compensation policies for 2001 as they affected the Company's executive officers.
Overview and Philosophy
The Company's executive compensation program is designed to be linked to corporate performance and returns to stockholders. Of particular importance to the Company is its ability to grow and enhance its competitiveness for the rest of the decade and beyond. Shorter-term performance, although scrutinized by the Compensation Committee, stands behind the issue of furthering the Company's strategic goals. To this end, the Company has developed an overall compensation strategy and specific compensation plans that tie a significant portion of executive compensation to the Company's success in meeting specified performance goals.
The objectives of the Company's executive compensation program are to:
o attract, motivate and retain the highest quality executives;
o motivate them to achieve tactical and strategic objectives in a manner consistent with the Company's corporate values; and
o link executive and stockholder interest through equity-based plans and provide a compensation package that recognizes individual contributions as well as overall business results.
To achieve these objectives, the Company's executive compensation program is designed to:
o focus participants on high priority goals to increase stockholder value;
o encourage behavior that exemplifies the Company's values relating to customers, quality of performance, employees, integrity, teamwork and good citizenship;
o assess performance based on results and pre-set goals that link the business activities of each individual to the goals of the Company; and
o increase stock ownership to promote a proprietary interest in the success of the Company.
Executive Officer Compensation
Each year the Compensation Committee conducts a full review of the Company's executive compensation program. This review includes a comprehensive evaluation of the competitiveness of the Company's compensation program and a comparison of the Company's executive compensation to certain other public companies, which in the view of the Compensation Committee represent the Company's most direct competitors for executive talent. It is the Compensation Committee's policy to target overall compensation for executive officers of the Company taking into account the levels of compensation paid for such positions by such other public companies. A variety of other factors, however, including position and time in position, experience, and both Company performance and individual performance, will have an impact on individual compensation amounts.
The key elements of the Company's executive compensation program in 2001 consisted of base salary, annual incentive compensation and long-term incentive compensation in the form of stock options. The Compensation Committee's policies with respect to each of these elements, including the basis for the compensation awarded to the Company's Chief Executive Officer, are discussed below.
Base Salaries. Base salaries for executive officers are established by evaluating, on an annual basis, the performance of such individuals (which evaluation involves management's consideration of such factors as responsibilities of the positions held, contribution toward achievement of the Company's strategic plans, attainment of specific individual objectives and interpersonal managerial skills), and by reference to the marketplace for executive talent, including a comparison to base salaries for comparable positions at other similar public companies.
In 2001, total compensation was paid to executives primarily based upon individual performance and the extent to which the business plans for their areas of responsibility were achieved or exceeded. On balance, performance goals were substantially met or exceeded and therefore compensation was paid accordingly.
Mr. Brewer, the Chairman of the Board, President and Chief Executive Officer of the Company received annual compensation based upon, among other things, individual performance and the extent to which the business plans for his areas of responsibility were achieved or exceeded. Mr. Brewer received a base salary at an annual rate of $250,000 in 2001, of which $160,000 was deferred until December 31, 2001 and remains unpaid as of April 15, 2001, for services rendered to the Company.
The members of the Compensation Committee establish the amount actually received by Mr. Brewer each year as base salary for services rendered to the Company and its affiliates. In establishing Mr. Brewer's base salary for 2001, the Compensation Committee took into account the salaries of chief executive Officers at other similar public companies, future objectives and challenges, and Mr. Brewer's individual performance, contributions and leadership. The Compensation Committee reviewed in detail Mr. Brewer's achievement of his 2000 goals and his individual contributions to the Company and its affiliates. The Compensation Committee concluded that he had achieved his 2000 goals and had provided a leadership role in achieving the Company's and its affiliates' strategic priorities for 2000. The Compensation Committee also considered Mr. Brewer's decisive management of operational and strategic issues, his drive to reinforce a culture of innovation and his ability and dedication to enhance the long-term value of the Company and its affiliates for their respective stockholders. In making its salary decisions with respect to Mr. Brewer, the
Compensation Committee exercised its discretion and judgment based on the above factors, and no specific formula was applied to determine the weight of each factor.
Mr. Brewer's base salary increased from $90,000 for 2000 to $250,000 for 2001, representing an increase of approximately 277%. On January 15, 2001, Mr. Brewer agreed to defer a portion of his base salary (64%), reducing his base salary to $90,000, of which $160,000 was deferred until December 31, 2001 and remains unpaid as of April 15, 2001.
Annual Incentive Bonus. Annual incentive bonuses for executive officers are intended to reflect the Compensation Committee's belief that a significant portion of the annual compensation of each executive officer should be contingent upon the performance of the Company. During 2001, no annual incentive bonuses were paid to the individuals named in the Summary Compensation Table.
Stock Options. The Compensation Committee has the power to grant stock options under the 1998 Plan. With respect to executive officers, it has been the Compensation Committee's practice to grant, on an annual basis, stock options that vest at the rate of 20% upon grant and 20% in each calendar year thereafter for four years, and that are exercisable over a ten-year period at exercise prices per share set at the fair market value per share on the date of grant. Generally, the executives must be employed by the Company at the time the options vest in order to exercise the options and, upon announcement of a Change in Control (pursuant to and as defined in the 1998 Plan), such options become immediately exercisable. The Compensation Committee believes that stock option grants provide an incentive that focuses the executives' attention on managing the Company from the perspective of an owner with an equity stake in the business. The Company's stock options are tied to the future performance of the Company's stock and will provide value to the recipient only when the price of the Company's stock increases above the option grant price.
A total of 920,000, 2,243,769 and 3,259,323 stock options were granted pursuant to the 1998 Plan in 2001, 2000 and 1999 respectively. 200,000 and 640,000 of such options were granted to Mr. Brewer in 2001 and 2000 respectively, and 400,000, 0, and 3,100,000 of such options were granted (in the aggregate) to other individuals named in the Summary Compensation Table in 2001, 2000 and 1999 respectively. The number of stock options granted in 2001, 2000 and 1999 were determined by reference to the long-term compensation for comparable positions at other similar public companies and based upon an assessment of individual performance.
Impact of Section 162(m) of the Internal Revenue Code
The Compensation Committee's policy is to structure compensation awards for executive officers that will be consistent with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Section 162(m) limits the Company's tax deduction to $1.0 million per year for certain compensation paid in a given year to the Chief Executive Officer and the four highest compensated executives other than the Chief Executive Officer named in the Summary Compensation Table. According to the Code and corresponding regulations, compensation that is based on attainment of pre-established, objective performance goals and complies with certain other requirements will be excluded from the $1.0 million deduction limitation. The Company's policy is to structure compensation awards for covered executives that will be fully deductible where doing so will further the purposes of the Company's executive compensation program. However, the Compensation Committee also considers it important to retain flexibility to design compensation programs that recognize a full range of performance criteria important to the Company's success, even where compensation payable under such programs may not be fully deductible. The
Company expects that all compensation payments in 2001 to the individuals listed in the Summary Compensation Table will be fully deductible by the Company.
Conclusion
The Compensation Committee believes that the quality of executive leadership significantly affects the long-term performance of the Company and that it is in the best interest of the stockholders to compensate fairly executive leadership for achievement meeting or exceeding the high standards set by the Compensation Committee, so long as there is a corresponding risk when performance falls short of such standards. A primary goal of the Compensation Committee is to relate compensation to corporate performance. Based on the Company's performance in 2001, the Compensation Committee believes that the Company's current executive compensation program meets such standards and has contributed, and will continue to contribute, to the Company's and its stockholders' long-term success.
COMPENSATION, STOCK OPTION AND BENEFITS COMMITTEE Herbert A. Cohen (Chairman) David L. Mitchell Edward L. Palmer William R. Toller
The Report of the Compensation Committee on Executive Compensation shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act, or under the Exchange Act, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- --------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information, as of December 31, 2001, with respect to the beneficial ownership of common stock by each person known to the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock of the Company. Unless otherwise indicated, the owners have sole voting and investment power with respect to their respective shares.
(1) The address of Commodore Environmental Services, Inc., Bentley J. Blum and Paul E. Hannesson is 150 East 58th Street, Suite 3238, New York, New York 10155. Messrs. Blum and Hannesson are brothers-in-law.
(2) The address of Credit Agricole Deux Sevres is 4 Boulevard Louis Tardy, 79000 Niort, France.
(3) The address of Tamie P. Speciale and William J. Russell is 132 West Pierpoint Avenue, Suite 400, Salt Lake City, Utah 84101.
(4) As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Exchange Act as consisting of sole or shared voting power (including the power to vote or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights.
(5) Excludes warrants to purchase an aggregate of 17,901,988 shares of common stock at exercise prices ranging from $1.24 per share to $5.49 per share. See "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities" and "Certain Relationships and Related Transactions."
(6) Consists of (i) 6,000,000 shares of common stock pledged to Credit Agricole Deux Sevres from Environmental in connection with Environmental's default on $4.0 million of convertible bonds on February 06, 2001; and (ii) Credit Agricole Deux Sevres' indirect beneficial ownership of common stock based upon their ownership of 16,800,000 shares of Environmental's common stock pledged to Credit Agricole Deux Sevres from Environmental in connection with Environmental's default on $4.0 million of convertible bonds on February 06, 2001.
(7) Consists of (i) 6,960,000 shares of our common stock issued to Mr. William J. Russell and Nancy E. Russell with joint tenancy and rights of survivorship, by the company in connection with our acquisition of 81.0% of DRM; (ii) 300,000 shares of our common stock underlying currently exercisable employee stock options granted to Mr. Russell at an exercise price of $1.125 per share; and (iii) 340,000 shares of our common stock underlying a currently exercisable five year warrant at an exercise price of $2.00 per share granted to Mr. William J. Russell and Nancy E.
Russell with joint tenancy and rights of survivorship, by the Company in connection with our acquisition of 81.0% of DRM.
(8) Consists of (i) 6,960,000 shares of our common stock issued to Tamie P. Speciale and George H. Speciale with joint tenancy and rights of survivorship, by the Company in connection with our acquisition of 81.0% of DRM; (ii) 300,000 shares of our common stock underlying currently exercisable employee stock options granted to Ms. Speciale at an exercise price of $1.125 per share; and (iii) 340,000 shares of our common stock underlying a currently exercisable five year warrant at an exercise price of $2.00 per share granted to Ms. Tamie P. Speciale and George H. Speciale with joint tenancy and rights of survivorship, by the Company in connection with our acquisition of 81.0% of DRM.
(9) Consists of: (i) 105,000 shares of the Company common stock underlying currently exercisable options granted to Mr. Blum by the Company under the Plan; and (ii) Mr. Blum's indirect beneficial ownership of common stock based upon his beneficial ownership of 28,479,737 shares and his spouse's ownership of 2,000,000 shares of Environmental common stock, representing together 37.74% of the outstanding shares of Environmental common stock at March 15, 2001, and 4,500,000 shares of Environmental common stock underlying currently exercisable stock options, representing together 41.02% of the outstanding shares of Environmental. Does not include 450,400 shares of Environmental common stock owned by Simone Blum, the mother of Mr. Blum, and 385,000 shares of Environmental common stock owned by Samuel Blum, the father of Mr. Blum. Mr. Blum disclaims any beneficial interest in the shares of Environmental common stock owned by his spouse, mother and father.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the beneficial ownership of common stock as of April 15, 2002 by (i) each person known to the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock of the Company, (ii) each Director, (iii) each individual listed in the Summary Compensation Table herein, and (iv) all executive officers and Directors of the Company as a group, as reported by such persons. Unless otherwise indicated, the owners have sole voting and investment power with respect to their respective shares.
* Percentage ownership is less than 1%.
(1) Unless otherwise noted the address of each beneficial owner is 150 East 58th Street, Suite 3238, New York, New York 10155. Messrs. Blum and Hannesson are brothers-in-law.
(2) The address of Credit Agricole Deux Sevres is 4 Boulevard Louis Tardy, 79000 Niort, France.
(3) The address of Tamie P. Speciale and William J. Russell is 132 West Pierpoint Avenue, Suite 400, Salt Lake City, Utah 84101.
(4) As used herein, the term "beneficial ownership" with respect to a security is defined by Rule 13d-3 under the Exchange Act as consisting of sole or shared voting power (including the power to vote or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights.
(5) Excludes warrants to purchase an aggregate of 19,185,171 shares of common stock at exercise prices ranging from $1.17 per share to $5.11 per share. See "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities" and "Certain Relationships and Related Transactions."
(6) Consists of (i) 6,000,000 shares of our common stock pledged to Credit Agricole Deux Sevres from Environmental in connection with Environmental's default on $4.0 million of convertible bonds on February 06, 2001; and (ii) Credit Agricole Deux Sevres' indirect beneficial ownership of our common stock based upon its ownership of 16,800,000 shares of Environmental's common stock pledged to Credit Agricole Deux Sevres from Environmental in connection with Environmental's default on $4.0 million of convertible bonds on February 06, 2001. (Verify calculation - See table)
(7) Consists of (i) 6,960,000 shares of our common stock issued to Mr. William J. Russell and Nancy E. Russell with joint tenancy and rights of survivorship, by the Company in connection with our acquisition of 81.0% of DRM; (ii) 300,000 shares of our common stock underlying currently exercisable employee stock options granted to Mr. Russell at an exercise price of $1.125 per share; and (iii) 340,000 shares of our common stock underlying a currently exercisable five year warrant at an exercise price of $2.00 per share granted to Mr. William J. Russell and Nancy E. Russell with joint tenancy and rights of survivorship, by the Company in connection with our acquisition of 81.0% of DRM.
(8) Consists of (i) 6,960,000 shares of our common stock issued to Tamie P. Speciale and George H. Speciale with joint tenancy and rights of survivorship, by the Company in connection with our acquisition of 81.0% of DRM; (ii) 300,000 shares of our common stock underlying currently exercisable employee stock options granted to Ms. Speciale at an exercise price of $1.125 per share; and (iii) 340,000 shares of our common stock underlying a currently exercisable five year warrant at an exercise price of $2.00 per share granted to Ms. Tamie P. Speciale and George H. Speciale with joint tenancy and rights of survivorship, by the Company in connection with our acquisition of 81.0% of DRM.
(9) Consists of: (i) 140,000 shares of the Company's common stock underlying currently exercisable options granted to Mr. Blum by the Company under the Plan; and (ii) Mr. Blum's indirect beneficial ownership of common stock based upon his beneficial ownership of 28,479,737 shares and his spouse's ownership of 2,000,000 shares of Environmental common stock, representing together 37.74% of the outstanding shares of Environmental common stock at March 15, 2002, and 4,500,000 shares of Environmental common stock underlying currently exercisable stock options, representing together 41.02% of the outstanding shares of Environmental. Does not include 450,400 shares of Environmental common stock owned by Simone Blum, the mother of Mr. Blum, and 385,000 shares of Environmental common stock owned by Samuel Blum, the father of Mr. Blum. Mr. Blum disclaims any beneficial interest in the shares of Environmental common stock owned by his spouse, mother and father.
(10) Consists of: (i) 830,000 shares of common stock; (ii) Mr. Hannesson's indirect beneficial ownership of common stock based upon his ownership of an aggregate of (a) 2,650,000 shares of Environmental common stock owned by Suzanne Hannesson, the spouse of Mr. Hannesson, (b) 2,650,000 shares of Environmental common stock owned by the Hannesson Family Trust (Suzanne Hannesson and John D. Hannesson, trustees) for the benefit of Mr. Hannesson's spouse and (c) 500,000 shares of Environmental common stock in exchange for options to purchase 950,000 shares of Environmental common stock, issued to Hannesson Family Trust, representing together 7.18% of the outstanding shares of Environmental common stock as of March 15, 2001, and (d) currently exercisable options to purchase 525,705 shares of Environmental common stock, representing together 7.78% of the outstanding shares of Environmental common stock. Does not include 1,000,000 shares of Environmental common stock owned by each of Jon Paul and Krista Hannesson, the adult children of Mr. Hannesson. Mr. Hannesson disclaims any beneficial interest in the shares of Environmental common stock owned by or for the benefit of his spouse and children. It also does not include 1,000,000 shares of common stock underlying stock options granted to Mr. Hannesson by the Company that are not currently exercisable.
(11) Consists of: (i) 3,500 shares of common stock; (ii) 840,000 shares of common stock underlying currently exercisable stock options granted to Mr. Brewer by the Company under the 1998 Plan; (iii) 100,000 shares of common stock underlying a currently exercisable 2-year warrant at an exercise price of $1.06 per share granted to SB Enterprises by the Company in connection with the Brewer Note; and (iv) 1,041,667 shares of our common stock issued pursuant to the Restated Brewer Note, dated as of March 15, 2001, between the Company and SB Enterprises and a subsequent conversion notice for 50% of the outstanding principal dated as of April 9, 2001.
(12) Consists of (i) 16,500 shares of common stock; (ii) 681,250 shares of common stock underlying currently exercisable stock options granted to Mr. DeAngelis by the Company under the Company's 1998 Plan; and (iii) Mr. DeAngelis' indirect beneficial ownership of common stock based upon his ownership of 580,000 shares of Environmental.
(13) Consists of 353,000 shares of common stock underlying currently exercisable stock options granted to Mr. Harrod by the Company under the Company's 1998 Plan. (Disclose on Table)
(14) Consists of (i) 90,000 shares of common stock; and (ii) 100,000 of common stock underlying currently exercisable stock options granted to Mr. Ingram by the Company under the Company's 1998 Plan. (Disclose on Table)
(15) All stock options granted to Mr. Adelman by the Company under the Company's 1998 Plan have expired by their terms and conditions.
(16) Consists of (i) 1,000 shares of common stock; and (ii) 140,000 shares of common stock underlying currently exercisable stock options granted to Mr. Cohen by the Company under the Company's 1998 Plan.
(17) Consists of 140,000 shares of common stock underlying currently exercisable stock options granted to Mr. Mitchell by the Company under the Company's 1998 Plan.
(18) Consists of 140,000 shares of common stock underlying currently exercisable stock options granted to Mr. Palmer by the Company under the Company's 1998 Plan.
(19) Consists of 140,000 shares of common stock underlying currently exercisable stock options granted to Mr. Toller by the Company under the Company's 1998 Plan.
Messrs. Blum and Hannesson are brothers-in-law.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- -----------------------------------------------
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
Since its acquisition of the capital stock of Commodore Laboratories, Inc. (the Company's predecessor) in 1993, Environmental has advanced an aggregate of $8,925,426 to the Company, which has been used to finance the development of SET, including salaries of personnel, equipment, facilities and patent prosecution. These cash advances by Environmental were evidenced by successive unsecured 8% promissory notes of the Company's predecessor, and, at December 31,1995, by the Environmental Funding Note. Kraft Capital Corporation ("Kraft"), a corporation wholly owned by Bentley J. Blum, a principal stockholder of Environmental and a director of the Company and of Environmental, provided approximately $656,000 of such financing to Environmental. Environmental provided additional advances to the Company of $978,896 for the first fiscal quarter of 1996, which were repaid by the Company subsequent to its obtaining a line of credit from a commercial bank in April 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Liquidity and Capital Resources."
In March 1996, the Company was formed as a wholly owned subsidiary of Environmental. Prior to its IPO, in exchange for the issuance of 15,000,000 shares of common stock, Environmental contributed to the Company (i) all of the assets and properties (including joint working proposals, quotations and bids in respect to projects and contracts awarded for feasibility studies), subject to all of the liabilities, of its operating divisions relating to SET and the exploitation of the SET technology and processes in all commercial and governmental applications; (ii) all of the outstanding shares of the capital stock of each of Commodore Laboratories, Inc., Commodore Remediation Technologies, Inc., Commodore Government Environmental Technologies, Inc., Commodore Technologies, Inc. and Sandpiper Properties, Inc. (except for a 9.95%
minority interest in Commodore Laboratories, Inc. which at the time was held by Albert E. Abel); and (iii) a portion of the Environmental Funding Note in the amount of $3.0 million.
In April 1996, Bentley J. Blum personally guaranteed a $2.0 million line of credit for the Company from a commercial bank. The initial borrowings under the line of credit, in the approximate amount of $1.0 million, were utilized to repay advances made by Environmental to the Company in 1996, and Environmental, in turn, utilized such funds to repay Kraft the funds provided by Kraft to Environmental for purposes of the advances to the Company. The Company applied $2.0 million of the net proceeds of its IPO to repay the line of credit, and Mr. Blum's guarantee was released at such time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
Upon completion of the IPO in June 1996, Environmental acquired from Albert E. Abel the remaining 9.95% of the outstanding shares of common stock of Commodore Laboratories, Inc. and contributed such shares to the Company for no additional consideration. To acquire the remaining shares of Commodore Laboratories, Inc., Environmental paid Mr. Abel the sum of $750,000 in cash, and issued a ten-year, 8% promissory note to Mr. Abel in the principal amount of $2,250,000, payable as to interest only until the maturity of the note on the tenth anniversary of the date of issuance. Simultaneously, the Company settled all outstanding obligations for accrued compensation payable to Mr. Abel and for amounts receivable by the Company from Mr. Abel, and the net payment to Mr. Abel arising therefrom approximated $120,000. The Company paid such amount to Mr. Abel from the proceeds of its IPO.
In October 1996, the Company acquired all of the outstanding shares of capital stock of Advanced Sciences. Advanced Sciences, together with its subsidiaries, provides a full range of environmental and technical services, including identification, investigation, remediation and management of hazardous and mixed waste sites, to government agencies, including the DOD and DOE, and to private companies located in the United States and abroad. In consideration for all of the outstanding shares of capital stock of Advanced Sciences, the former shareholders of Advanced Sciences received an aggregate of 450,000 shares of common stock. Simultaneously, the Company also acquired of all of the outstanding shares of capital stock of ASE. ASE, a newly formed entity with no history of operations, had an option to purchase all of the outstanding capital stock of Advanced Sciences and was acquired by the Company for the purpose of enabling the Company to effect its acquisition of Advanced Sciences. The former shareholders of ASE received, in consideration for all of the outstanding shares of capital stock of ASE, an aggregate of 450,000 shares of Company's common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
In December 1996, the Company transferred certain of its operating assets related to its SET technology to Solution, subject to certain liabilities related to such assets, in exchange for 100 shares of common stock of Solution, representing all of the issued and outstanding shares of capital stock of Solution. Solution agreed to assume all of the net assets of the Company relating to its SET technology at December 1, 1996, which assets had an aggregate value of approximately $4.0 million at such date, and all known or unknown contingent or un-liquidated liabilities of and claims against the Company and its subsidiaries to the extent they relate to or arise out of the transferred assets. The Company retained, among other things, (a) all temporary cash investments of the Company at December 1, 1996, aggregating approximately $14.1 million, and (b) the principal executive offices and related assets of the Company that, at the time, were located in McLean, Virginia. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
In December 1996, as part of a corporate restructuring to consolidate all of its current environmental technology businesses within the Company, Environmental transferred to the Company all of the capital stock of Separation and CFC Technologies. In addition, Environmental assigned to the Company notes aggregating $976,200 at December 2, 1996, representing advances previously made by Environmental to Separation. Such advances have been capitalized by the Company as its capital contribution to Separation. In consideration for such transfers, the Company paid Environmental $3.0 million in cash and issued to Environmental a warrant expiring December 2, 2003 to purchase 7,500,000 shares of the Company's common stock at an exercise price of $15.00 per share, valued at $2.4 million. Such warrant was subsequently amended to, among other things, reduce the exercise price thereof to $10.00 per share. See "--February 1998 Intercompany Note" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
On August 30, 2000, the Company entered into a stock purchase agreement with DRM and its two shareholders, William J. Russell and Tamie P. Speciale.
Under terms of the agreement, the Company purchased 81% of the issued and outstanding capital stock of DRM from the two shareholders. The consideration to these shareholders (and their designees) consisted of:
a) 10,500,000 shares of common stock, of which 9,500,000 subject to a one-year option to repurchase any or all shares, which expired on August 30, 2001.
b) 5 million shares of common stock in exchange for an option to purchase the remaining 19% interest in DRM at the end of five years. The option price will be based upon the relative appraised values of DRM and the Company at the end of the five-year period.
c) Five-year warrants to purchase up to an aggregate of 1,000,000 shares of the Company's common stock at an exercise price of $2.00 per share.
d) Quarterly earn-out distributions equal to 35% of the cash flow of DRM over an earn-out period commencing as of September 1, 2000 and ending December 31, 2005. The Company has agreed that if DRM has not distributed to these shareholders a total of $10.0 million in cash in earn-out payments by December 31, 2003, the Company will pay to the two shareholders the difference between $10.0 million and the actual cash distributed. The Company may, in its sole discretion, pay such difference by issuing shares of its common stock.
The Company has an irrevocable obligation to repurchase from the former shareholders of DRM, by May 16, 2002, that number of 9.5 million shares of the Company's common stock (at a per share price equal to the greater of $1.50 or the closing price of our common stock as of 30 days prior to purchase) as shall be necessary to provide the holders of such shares with a total of $14.5 million. The original repurchase obligation deadline of August 30, 2001, subsequently extended through May 16, 2002 by a series of extensions (initially extended to September 29, 2001, further extended to October 29, 2001, further extended to January 16, 2002 and subsequently extended until May 16, 2002). As partial security for the payment of such obligation, all of the shares of DRM common stock owned by the Company have been pledged to Messrs. William J. Russell and Tamie P. Speciale, the former sole stockholders of DRM. In the event
the Company is unable to make such $14.5 million payment when due, the pledgees may foreclose on the DRM stock, and the Company would lose its entire equity ownership in the DRM subsidiary.
In September 2000, the Company completed $500,000 in financing in the form of a loan (the "Brewer Note") from S. Brewer Enterprises, Inc. ("SB Enterprises"), which is owned by one of its officers and directors, Shelby T. Brewer, Chairman of the Board and Chief Executive Officer of the Company. The Brewer Note bears a 9.75% interest rate, payable monthly, with a balloon principal payment at the end of the term. The note was due and payable on March 15, 2001 and was extended under the same terms and conditions until December 31, 2001. The Brewer Note is convertible into common stock at the market price up through December 31, 2001.
On March 15, 2001, SB Enterprises executed an Amended and Restated Promissory Note (the "Restated Brewer Note"), which extended the maturity date of the note until December 31, 2001. Additionally, the conversion feature of the Restated Brewer Note was changed to the 5-day average closing price of the Company's common stock prior to a conversion notice. On April 9, 2001, SB Enterprises issued a conversion notice for $250,000 of the outstanding principal of the Brewer Restated Note. The conversion price was calculated by the previous 5-day average of the closing price of the Company's common stock and was converted into 1,041,667 shares. The remaining principal balance of $250,000 is outstanding as of April 15, 2002. The Company has not been notified of the holder's intent to declare a default on the Restated Brewer Note.
In November 2000, the Company completed $500,000 in financing in the form of a loan (the "Weiss Group Note") from a group of four investors; $75,000 of which was borrowed from the son of Paul E. Hannesson, our former President and Chief Executive Officer, and $25,000 of which was borrowed from Stephen A. Weiss, a shareholder of Greenberg Traurig, LLP, our former corporate and securities counsel. The Weiss Group Note bears interest at 12% per annum, was due and payable on February 12, 2001, and is secured by the first $500,000 of loans or dividends that the Company may receive from DRM. . As consideration for such loan, Environmental, one of the Company's principal stockholders owning approximately 16.58% of the common stock, transferred to the investors a total of 1,000,000 shares of the Company's common stock. All holders of the Weiss Group Note have granted payment extensions until May 31, 2002.
Effective April 5, 2001, the Company issued warrants to purchase 500,000 shares of its common stock at an exercise price of $0.22 per share (the closing price of our common stock on the AMEX on such date) to all holders of the Weiss Group Note in consideration of the extension of the due date of such loans by such persons from February 12, 2001 to June 30, 2001.
Effective January 24, 2002, the Company issued warrants to purchase 500,000 shares of its common stock at an exercise price of $0.15 per share (the closing price of our common stock on the AMEX on such date) to all holders of the Weiss Group Note in consideration of the extension of the due date of such loans by such persons from June 30, 2001 to May 31, 2002.
On May 23, 2001, a private investor purchased $250,000 of the Company's common stock at the market price. The Company issued to the private investor 1,923,077 shares of common stock of the Company as a result of the equity purchase. In connection with the purchase of the shares of the Company's common stock, the Company issued to the private investor a 2-year warrant for 500,000 shares of the Company's common stock at an exercise price of $0.22 per share.
On June 13, 2001, the Company issued and sold to Milford Capital Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar") one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year warrant for 333,333 shares of the Company's common stock at an exercise price of $0.22 per share. The Company pledged its equipment and SET related intellectual property as collateral for the Milford/Shaar Bridge Loan Notes. The Company shall pay Milford/Shaar principal and interest on a monthly basis in arrears. The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty.
The Company made all payments on the Milford/Shaar Bridge Loan Notes until November 13, 2001. The Company asked for and received a forbearance of payments on the Milford/Shaar Bridge Loan Notes from November 13, 2001 until May 13, 2002.
SERVICES AGREEMENT
In September 1997, the Company, Environmental, Separation, Advanced Sciences, and certain other affiliates of the Company (the "Affiliated Parties") entered into a services agreement, dated as of September 1, 1997 (the "Services Agreement"), whereby the Company and the Affiliated Parties agreed to cooperate in sharing, where appropriate, costs related to accounting services, financial management, human resources and personnel management and administration, information systems, executive management, sales and marketing, research and development, engineering, technical assistance, patenting, and other areas of service as are appropriately and necessarily required in the operations of the Company and the Affiliated Parties (collectively, the "Services"). Pursuant to the Services Agreement, services provided by professional employees of the Company and the Affiliated Parties to one another are charged on the basis of time actually worked as a percentage of salary (including cost of benefits) attributable to that professional. In addition, charges for rent, utilities, office services and other routine charges regularly incurred in the normal course of business are apportioned to the professionals working in the office on the basis of salary, and then charged to any party in respect of whom the professional devoted such time based upon time actually worked. Furthermore, charges from third parties, including, without limitation, consultants, attorneys and accountants, are levied against the party actually receiving the benefit of such services. Pursuant to the Services Agreement, the Company acts as the coordinator of billings and payments for Services on behalf of itself and the other Affiliated Parties.
There was no sharing of services in 1999 and 2000, although, insurance costs were allocated between Affiliated Parties when it was beneficial to insure the family of companies under one policy.
SALE OF COMPANY COMMON STOCK BY ENVIRONMENTAL
In February 1998, Environmental sold (i) 1,381,692 shares of common stock of the Company and (ii) three-year warrants to purchase an aggregate of 150,000 shares of Company common stock at an exercise price equal to $6.00 per share, for an aggregate purchase price of $6.0 million (the "First Tranche Sale") in a private placement (the "Environmental Private Placement") to certain "accredited investors" as defined in Rule 501 of the Securities Act. After deduction of fees and transaction costs associated with the First Tranche Sale totaling approximately $550,000, Environmental received aggregate net proceeds of approximately $5,450,000 from the First Tranche Sale. The shares of the Company's common stock issued and to be issued to the investors in connection with the Environmental Private Placement have been and will be issued from the account of Environmental, which, immediately prior to the First Tranche Sale, owned approximately 52% of the outstanding shares of the Company's common stock.
As of March 31, 1999, Environmental owned approximately 35% of the outstanding shares of Company common stock. [Update]
Pursuant to the terms of the Environmental Private Placement, Environmental was required to issue up to a maximum of 1,618,308 additional shares of the Company's common stock to the investors, for no additional consideration, in the event that 90% of the average closing bid price of the common stock for a certain period of time is less than the $4.3425 per share purchase price of the common stock sold in the First Tranche Sale. Environmental was required to issue an additional 1,400,981 shares of the Company's stock in satisfaction of the price-reset provisions. (Verify whether these shares have been issued and any effect or beneficial ownership calculations) Environmental will, for a certain period of time, have the right and option (but not the obligation) to require the investors to purchase (i) an aggregate amount of additional shares of the Company's common stock equal to 4,000,000 divided by 90% of the average closing price per share of the common stock for the five trading days immediately prior to the closing date of such sale and (ii) warrants to purchase an aggregate of 100,000 shares of the Company's common stock at an exercise price per share equal to the greater of $6.00 or 125% of the per share purchase price of the shares of the Company's common stock sold pursuant to (i) above, for an aggregate purchase price of $4.0 million (the "Second Tranche Sale"). As in the case of the First Tranche Sale, Environmental may be required to issue additional shares of the Company's common stock to the investors in connection with the Second Tranche Sale, for no additional consideration, in the event that 90% of the average closing bid price of the common stock for a certain period of time is less than the per share purchase price of the common stock sold in the Second Tranche Sale.
Pursuant to the terms of the Environmental Private Placement, if during a certain period of time Environmental sells, or the Company issues, any shares of common stock ("First Future Shares") at a price per share that is less than the per share purchase price of the common stock sold in the First Tranche Sale or Environmental sells, or the Company issues, any shares of common stock ("Second Future Shares") at a price per share that is less than the per share purchase price of the common stock sold in the Second Tranche Sale, Environmental will issue to the investors, for no additional consideration, a number of additional shares of the Company's common stock equal to (a) with respect to First Future Shares, an amount equal to the difference between (i) 6,000,000 divided by the price at which the First Future Shares were sold or issued and (ii) 1,381,692, and (b) with respect to Second Future Shares, an amount equal to the difference between (i) 4,000,000 divided by the price at which the Second Future Shares were sold or issued and (ii) the amount equal to the number of shares of common stock sold in the Second Tranche Sale. Notwithstanding the foregoing, the terms "First Future Shares" and "Second Future Shares" do not include any shares of common stock which may be issued in the future upon conversion or exercise of, or pursuant to the terms of any agreement entered into by the Company or Environmental in respect of, securities of the Company and/or Environmental which have been issued prior to February 9, 1998.
The Company has agreed to file registration statements (the "Registration Statements") on Form S-3, or other applicable form of registration statement, under the Securities Act covering all of the shares of common stock that have been and may be issued to the investors in the Environmental Private Placement, and to keep such Registration Statements continuously effective under the Securities Act for a period of two years after their respective effective dates or such earlier date when all shares covered by the Registration Statements have been sold or may be sold without volume restrictions under the Securities Act (the "Effective Period").
FEBRUARY 1998 INTERCOMPANY NOTE
Upon receipt of the net proceeds of the Environmental Private Placement, Environmental provided a $5,450,000 uncollateralized loan to the Company, evidenced by a promissory note (the "Intercompany Note"). Pursuant to the terms of the Intercompany Note, interest on the unpaid principal balance of the Intercompany Note was payable at the rate of 8% per annum semi-annually in cash. The unpaid principal amount of the Intercompany Note was due and payable, together with accrued and unpaid interest, on the earlier to occur of (a) December 31, 1999 or (b) the consummation of any public offering or private placement (other than the Environmental Private Placement) of securities of the Company with net proceeds aggregating in excess of $6.0 million, other than in respect of working capital financing or secured financing of assets received by the Company in the ordinary course of business from any bank or other lending institution, provided that if such funds are raised in a private placement during the period commencing on February 9, 1998 and ending on the last day of the Effective Period, then the Intercompany Note was not payable unless a Registration Statement has been effective for 75 consecutive days and is effective on the date of such repayment. The Company used the net proceeds of the loan solely for working capital and general corporate purposes and not for the satisfaction of any portion of Company debt or to redeem any Company equity or equity-equivalent securities. The Intercompany Note was fully paid off effective September 28, 1998. See "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities--February 1998 Intercompany Note" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
In connection with the loan, the Company amended and restated in its entirety a five-year warrant to purchase 7,500,000 shares of common stock issued to Environmental on December 2, 1996 to, among other things, reduce the exercise price of the warrant from $15.00 per share to $10.00 per share. In addition, the Company issued to Environmental an additional five-year warrant to purchase 1,500,000 shares of common stock at an exercise price of $10.00 per share. See "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities--February 1998 Intercompany Note."
SEPTEMBER 1997 INTERCOMPANY CONVERTIBLE NOTE
In September 1997, Environmental provided a $4.0 million uncollateralized loan to the Company, evidenced by a convertible promissory note (the "Convertible Note"). Pursuant to the terms of the Convertible Note, the Company is obligated to pay Environmental interest only at the rate of 8% per annum, payable quarterly. Unless converted into the Company's common stock at any time, the unpaid principal amount of the Convertible Note is due and payable, together with accrued and unpaid interest, on August 31, 2002. Payment of principal and accrued interest under the Convertible Note is subordinated to all other indebtedness for money borrowed of the Company. Environmental has the right to convert the Convertible Note into shares of the Company's common stock at a conversion price of $3.89 per share. Such conversion price was fixed at approximately 85% of the five-day average closing bid price of the Company's common stock ($4.575 per share) prior to August 22, 1997, the date on which the executive committees of the respective Boards of Directors of the Company and Environmental authorized such loan. In connection with the $4.0 million loan, the Company issued the Environmental a five-year warrant to purchase 1,000,000 shares of the Company's common stock at an exercise price of $5.0325 per share (approximately 110% of the $4.575 five day average closing bid price of the Company's common stock prior to August 22, 1997).
In March 1998, the Company prepaid $2.0 million of the Convertible Note by (i) paying Environmental the sum of $500,000 in cash and (ii) transferring to Environmental the LPM Note. (?) To induce Environmental to accept the Company's prepayment of $2.0 million of the Convertible Note (and thereby give up the right to convert $2.0 million of the Convertible Note into the Company's common stock), the Company issued to Environmental an additional warrant to purchase up to 514,000 shares of the Company's common stock at an exercise price of $4.50 per share. Such exercise price was fixed at approximately 110% of the closing sale price of the Company's common stock on February 20, 1998, the trading day immediately prior to the date the Board of Directors of the Company approved such prepayment. The estimated fair value of such warrant is approximately $340,000. The remaining balance of this Intercompany Convertible Note was paid off effective September 28, 1998. See "Transactions with Lanxide," "Market for Registrant's Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities--September 1997 Intercompany Convertible Note" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
SALE OF SERIES D PREFERRED STOCK BY ENVIRONMENTAL
(Did Environmental convert or sell these shares? See p. 27) In May and August 1997, Environmental sold an aggregate of 88,000 shares of its 7% Series D Convertible Preferred Stock, par value $0.01 per share, with a liquidation preference of $100 per share (the "Series D Preferred Stock"), for an aggregate purchase price of approximately $7.8 million. The Series D Preferred Stock is convertible into shares of the Company's common stock held by Environmental, at a conversion price equal to 85% of the lower of (a) the average of the low prices, or (b) the average of the closing bid prices of the common stock of the Company for the previous five business days ending on the day prior to conversion (the "Average Closing Bid Price"). The conversion price of the Series D Preferred Stock will be equal to certain amounts set forth in the Certificate of Designation, Rights and Preferences for the Series D Preferred Stock if the Average Closing Bid Price of the common stock for any consecutive 30 days is equal to or less than $2.00, provided that in no event will the conversion price of the Series D Preferred Stock be less than $1.50. As of December 31, 1998, the 88,000 shares of Series D Preferred Stock have been converted into an aggregate 4,019,210 shares of the Company's common stock.
The purchasers of the Series D Preferred Stock also received five-year warrants to purchase an aggregate of 1,175,000 shares of the Company's common stock held by Environmental at exercise prices ranging from $5.15 per share to $7.14 per share. Such exercise prices were reset on August 18, 1998 to an exercise price of $0.825. In addition, if the common stock trades at less than 50% of the August 17, 1998 closing bid price for any 10 consecutive trading days, the exercise price is subject to further reset (on one occasion only) to 50% of such August 17, 1998 closing bid price. In addition, affiliates of the finder received warrants to purchase an aggregate of 85,000 shares of common stock from Environmental at exercise prices ranging from $5.15 per share to $7.14 per share. The Company has an effective registration statement on file with the Commission covering the shares of common stock into which the Series D Preferred Stock are convertible, as well as the 1,260,000 shares of common stock transferable by Environmental upon exercise of the foregoing warrants.
LICENSE OF SET TECHNOLOGY
As a result of its acquisition of the capital stock of Commodore Labs, the Company acquired all patents, discoveries, technology and other intellectual property in connection with the SET process, which it later transferred to Solution effective December 1, 1996. Environmental licenses from Solution the
exclusive worldwide right with the right to sublicense, to make, use, sell and exploit, itself or jointly with other third parties, for the life of all patents now or hereafter owned by Solution, the SET process and all related technology underlying such patents and intellectual property in all domestic and international commercial and industrial applications, in connection with the destruction of CFCs and other ozone-depleting substances (the "CFC Business"); provided that such license expressly limits the rights of the licensee(s) and others who may be sub-licensees or users of the Company's patents and technologies to the CFC Business.
FUTURE TRANSACTIONS
In June 1996, the Company's Board of Directors adopted a policy whereby any future transactions between the Company and any of its subsidiaries, affiliates, officers, directors and principal stockholders, or any affiliates of the foregoing, will be on terms no less favorable to the Company than could reasonably be obtained in "arm's-length" transactions with independent third-parties, and any such transactions will also be approved by a majority of the Company's disinterested non-management Directors.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON - -------- ------------------------------------------------------ FORM 10-K ---------
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.
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)
10.1 Employment Agreement, dated June 1, 1995, between Environmental and Neil L. Drobny, and conditional assignment thereof by Environmental to the Company, dated March 29, 1996. (1) 10.2 Employment Agreement, dated August 31, 1995, between Environmental and Carl O. Magnell, and conditional assignment thereof by Environmental to the Company, dated March 29, 1996. (1) 10.3 Form of Employment Agreement, dated July 28, 1993, between Commodore Laboratories, Inc. and Albert E. Abel, with conditional assignment thereof by Commodore Labs to the Company, dated March 29, 1996. (1) 10.4 Employment Agreement, dated October 3, 1994, between Environmental and Vincent Valeri, and conditional assignment thereof by Environmental to the Company, dated March 29, 1996. (1) 10.5 Non-Competition, Non-Disclosure and Intellectual Property Agreement, dated March 29, 1996, between the Company and Gerry D. Getman. (1) 10.6 Employment Agreement, dated as of March 29, 1996. between the Company and Paul E. Hannesson. (2) 10.7 1996 Stock Option Plan of the Company. (1) 10.8 Executive Bonus Plan of the Company. (1) 10.9 Nationwide Permit for PCB Disposal issued by the EPA to Commodore Remediation Technologies, Inc. (1) 10.10 Memorandum of Understanding, dated April 9, 1996, between Teledyne Brown Engineering (a Division of Teledyne Industries, Inc.) and Commodore Government Environmental Technologies, Inc. (1) 10.11 Memorandum of Understanding. dated March 28, 1996, between Sharp Associates, Inc. and the Company. (1) 10.12 Memorandum of Understanding, dated April 12, 1996, between Sverdrup Environmental, Inc. and the Company. (1) 10.13 Credit Facility Agreement and Promissory Note, dated April 5, 1996, between the Company and Chemical Bank, and Guaranty and General Loan and Collateral Agreement, each dated April 5, 1996, between Bentley J. Blum and Chemical Bank. (1) 10.14 Demand Promissory Note, dated December 31, 1995, in the principal amount of $8,925,426, issued by Commodore Labs to Environmental. (1) 10.15 Form of $4,000,000 Promissory Note issued by the Company to Environmental, in partial replacement of the $8,925,426 Demand Promissory Note, dated December 31, 1995, issued by Commodore Labs to Environmental. (1) 10.16 Bond Purchase Agreement, dated December 3, 1993, by and between Environmental and Credit Agricole Deux Sevres. (1) 10.17 License Agreement, dated as of March 29, 1996, by and between the Company and Environmental, relating to the use of SET in the CFC Business. (2) 10.18 Form of Technology and Technical Services Agreement entered into between the Company and CFC Technologies.(2) 10.19 Voting Agreement, dated June 28, 1996, among Environmental, Bentley J. Blum, the Company and National Securities Corporation. (4) 10.20 Agreement and Plan of Merger, dated September 27, 1996, by and between the Company, CXI-ASI Acquisition Corp. and Advanced Sciences, Inc. (5)
10.21 Agreement and Plan of Merger, dated September 27, 1996, by and between the Company CXI-ASE Acquisition Corp. and A.S. Environmental, Inc. (5) 10.22 Agreement of Transfer, dated as of December 1, 1996 by and between the Company and Advanced Sciences. (11) 10.23 Bill of Sale, dated as of December 1, 1996, by and between the Company and Commodore Advanced Sciences, Inc. (11) 10.24 Stock Purchase Agreement, dated as of December 2, 1996, between the Company and Environmental. (6) 10.25 Employment Agreement, dated as of October 31, 1996, between Environmental and Edwin L. Harper. (7) 10.26 Employment Agreement, dated as of October 1, 1996, between the Company and Thomas E. Noel. (5) 10.27 Form of Employment Agreement between Environmental and Paul E. Hannesson. (8) 10.28 8% convertible note for $4.0 million from the Company to Environmental. (9) 10.29 8% non-convertible note for $5,450,000 from the Company to Environmental. (10) 10.30 Teaming Agreement, dated March 18, 1997, by and between ICF Kaiser Engineers, Inc. and Advanced Sciences. 10.31 Memorandum of Understanding between Lockheed Martin Advanced Environmental Systems, Inc. and Advanced Sciences. 10.32 Services Agreement, dated as of September 1, 1997, by and among the Company, Environmental, Separation, Advanced Sciences and other affiliated companies named therein. (14) 10.33 Amended and Restated 1996 Stock Option Plan. (13) 10.34 Securities Purchase Agreement, dated November 4, 1999, between Commodore Applied Technologies, Inc. and The Shaar Fund Ltd. (16) 10.35 Registration Rights Agreement, dated November 4, 1999, between Commodore Applied Technologies, Inc. and the Shaar Fund Ltd. (16) 10.36 Finder's Agreement, dated August 17, 1999, between Commodore Applied Technologies, Inc. and Avalon Research Group, Inc. (16) 10.37 Securities Purchase Agreement, dated March 15, 2000, between Commodore Applied Technologies, Inc. and The Shaar Fund Ltd. (16) 10.38 Registration Rights Agreement, dated March 15, 2000, between Commodore Applied Technologies, Inc. and the Shaar Fund Ltd. (16) 10.39 Warrant to purchase 340,000 shares of common stock of Commodore Applied Technologies, Inc. issued to William J. Russell. (20) 10.40 Warrant to purchase 340,000 shares of common stock of Commodore Applied Technologies, Inc. issued to Tamie P. Speciale. (20) 10.41 Warrant to purchase 300,000 shares of common stock of Commodore Applied Technologies, Inc. issued to Diane Archangeli. (20) 10.42 Warrant to purchase 20,000 shares of common stock of Commodore Applied Technologies, Inc. issued to Arthur Berry & Company, Inc. (20) 10.43 Specimen Form of Common Stock Certificate. (1) 10.44 Promissory Note, dated September 15, 2000, issued to Shelby T. Brewer in the principal amount of $500,000. (20)
10.45 Registration Rights Agreement, dated September 15, 2000 issued to Shelby T. Brewer. (20) 10.46 Stock Pledge Agreement, dated September 15, 2000 between Commodore Environmental Technologies, Inc., and Shelby T. Brewer. (20) 10.47 Warrant to purchase 100,000 shares of common stock of Commodore Applied Technologies, Inc. issued to Shelby T. Brewer. (20) 10.48 Amended and Restated Promissory Note, dated September 15, 2000, issued to Shelby T. Brewer in the principal amount of $500,000. (20) 10.49 Registration Rights Agreement, dated March 15, 2001 issued to Shelby T. Brewer. (20) 10.50 Secured Promissory Note, dated November 13, 2000, issued to Klass Partners Ltd. in the principal amount of $250,000. (20) 10.51 Secured Promissory Note, dated November 13, 2000, issued to Mathers Associates in the principal amount of $150,000. (20) 10.52 Secured Promissory Note, dated November 13, 2000, issued to Jon Paul Hannesson in the principal amount of $75,000. (20) 10.53 Secured Promissory Note, dated November 13, 2000, issued to Stephen A. Weiss in the principal amount of $25,000. (20) 10.54 Amended and Restated Stock Purchase Agreement, dated August 30, 2000, by and among Commodore Applied Technologies, Inc., Dispute Resolution Management, Inc., William J. Russell and Tamie P. Speciale. (18) 10.55 Securities Purchase Agreement, dated November 13, 2000, by and among Commodore Applied Technologies, Inc., Commodore Environmental Services, Inc., Mathers Associates, Klass Partners, Ltd., Jon Paul Hannesson and Stephen A. Weiss. (20) 10.56 Security Agreement, dated November 13, 2000 by and among Mathers Associates, Klass Partners, Ltd., Jon Paul Hannesson, Stephen A. Weiss and Commodore Applied Technologies, Inc. (20) 10.57 Registration Rights Agreement, dated November 13, 2000, among Mathers Associates, Klass Partners, Ltd., Jon Paul Hannesson, Stephen A. Weiss and Commodore Applied Technologies, Inc. (20) 10.58 Dispute Resolution Management, Inc. Undertaking Letter, dated November 13, 2000. (20) 10.59 Nationwide Permit Extension for PCB Disposal issued by the EPA to Commodore Remediation Technologies, Inc. (20) 10.60 Contract between Commodore Solutions and Waste Control Specialists dated February 12, 2000. (20) 10.70 Conversion Notice, dated April 9, 2001 between S. Brewer Enterprises, Inc. and the Company for the conversion of $250,000 of the Restated Brewer Note. (20) 10.71 Memorandum of Understanding for Amendment of $500,000 CXI Bridge Loan Documents, dated April 16, 2001, by and among the Company, Commodore Environmental Services, Inc., Mathers Associates, Jon Paul Hannesson and Stephen A. Weiss. (20) 10.72 Klass Partners Ltd. Agreement for Amendment of CXI Bridge Loan Documents, dated April 16, 2001, by the Company and Klass Partners, Ltd. (20) 10.73 Warrant to purchase 300,000 shares of common stock of the Company issued to Mathers Associates. (20) 10.74 Warrant to purchase 75,000 shares of common stock of the Company issued to Jon Paul Hannesson. (20) 10.75 Warrant to purchase 75,000 shares of common stock of the Company issued to Krista S. Hannesson. (20) 10.76 Warrant to purchase 50,000 shares of common stock of the Company issued to Stephen A. Weiss. (20) *10.77 Memorandum of Understanding for Amendment of $500,000 CXI Bridge Loan Documents, dated April 16, 2001, by and among the Company, Commodore Environmental Services, Inc., Mathers Associates, Klass Partners, Jon Paul Hannesson and Stephen A. Weiss.
*10.78 Warrant to purchase 222,222 shares of common stock of the Company issued to Klass Partners. *10.79 Warrant to purchase 166,667 shares of common stock of the Company issued to Mathers Associates. *10.80 Warrant to purchase 41,666 shares of common stock of the Company issued to Jon Paul Hannesson. *10.81 Warrant to purchase 41,666 shares of common stock of the Company issued to Krista S. Hannesson. *10.82 Warrant to purchase 27,778 shares of common stock of the Company issued to Stephen A. Weiss. *10.83 Securities Purchase Agreement dated May 22, 2001, between Commodore Applied Technologies, Inc., and Dr. Marion Dana. *10.84 Registration Rights Agreement dated May 22, 2001, between Commodore Applied Technologies, Inc., and Dr. Marion Dana. *10.85 Warrant to purchase 500,000 shares of common stock of the Company issued to Dr. Marion Dana. *10.86 Secured Promissory Note, dated June 13, 2001, issued to Milford Capital & Management in the principal amount of $500,000. *10.87 Secured Promissory Note, dated June 13, 2001, issued to the Shaar Fund, Ltd. in the principal amount of $500,000. *10.88 Registration Rights Agreement dated June 13, 2001, between Commodore Applied Technologies, Inc., and Milford Capital & Management. *10.89 Registration Rights Agreement dated June 13, 2001, between Commodore Applied Technologies, Inc., and the Shaar Fund, Ltd. *10.90 Warrant to purchase 166,667 shares of common stock of the Company issued to Milford Capital & Management. *10.91 Warrant to purchase 166,667 shares of common stock of the Company issued to the Shaar Fund, Ltd. 10.92 Amended and Restated Stock Purchase Agreement, dated September 21, 2001, by and among Commodore Applied Technologies, Inc., Dispute Resolution Management, Inc., William J. Russell and Tamie P. Speciale. (21) 10.93 Amended and Restated Stock Purchase Agreement, dated October 31, 2001, by and among Commodore Applied Technologies, Inc., Dispute Resolution Management, Inc., William J. Russell and Tamie P. Speciale. (22) *10.94 Forbearance Agreement dated January 11, 2002, between Commodore Applied Technologies, Inc., and Milford Capital & Management. *10.95 Forbearance Agreement dated January 11, 2002, between Commodore Applied Technologies, Inc., and the Shaar Fund, Ltd. *10.96 Forbearance Agreement dated February 13, 2002, between Commodore Applied Technologies, Inc., and Milford Capital & Management. *10.97 Forbearance Agreement dated February 13, 2002, between Commodore Applied Technologies, Inc., and the Shaar Fund, Ltd. *10.98 Forbearance Agreement dated March 13, 2002, between Commodore Applied Technologies, Inc., and Milford Capital & Management.
*10.99 Forbearance Agreement dated March 13, 2002, between Commodore Applied Technologies, Inc., and the Shaar Fund, Ltd. *10.100 LLC Agreement, dated April 2, 2002, between Technical Resources, Inc. (a wholly owned subsidiary of Nuvotec, Inc.) and Commodore Government Environmental Technologies, Inc. 16.1 Letter regarding change in certifying accountant. (12) 16.2 Letter regarding change in certifying accountant. (17) *22.1 Subsidiaries of the Company. 99.1 Debt Repayment Agreement, dated September 28, 1998, between the Company and Environmental. (15) 99.2 Registration Rights Agreement, dated September 28, 1998, between the Company and Environmental. (15)
* Filed herewith.
(1) Incorporated by reference and filed as Exhibit to Registrant's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 2, 1996 (File No. 333-4396).
(2) Incorporated by reference and filed as Exhibit to Registrant's Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on June 11, 1996 (File No. 333-4396).
(3) Incorporated by reference and filed as Exhibit to Registrant's Amendment No. 2 to Registration Amendment No.2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on June 25, 1996 (File No. 333-4396).
(4) Incorporated by reference and filed as Exhibit to Registrant's Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 1, 1996 (File No. 333-4396).
(5) Incorporated by reference and filed as Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 15, 1996 (File No. 1-11871).
(6) Incorporated by reference and filed as Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 27, 1997 (File No. 1-11871).
(7) Incorporated by reference and filed as Exhibit to Amendment No. 3 to Registration Statement on Form S-1 of Separation filed with the Securities and Exchange Commission on January 23, 1997 (File No. 333-11813).
(8) Incorporated by reference and filed as Exhibit to Annual Report on Form 10-K for the fiscal year ended December 31, 1996 of Environmental filed with the Securities and Exchange Commission on April 15, 1997 (File No. 0-10054).
(9) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 1997 (File No. 1-11871).
(10) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 23, 1998 (File No. 1-11871).
(11) Incorporated by reference and filed as an Exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission on April 15, 1997 (File No. 1-11871).
(12) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 1996 (File No. 1-11871).
(13) Incorporated by reference and filed as an Exhibit to the Registrant's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on December 5, 1997 (File No. 333-41643).
(14) Incorporated by reference and filed as an Exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Securities and Exchange Commission on March 31, 1998 (File No. 1-11871).
(15) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 1999 (File No. 1-11871).
(16) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 1999 (File No. 1-11871).
(17) Incorporated by reference and filed as Exhibit to Amendment No. 5 to Registrant's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on September 12, 1999 (File No. 333-95445).
(18) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 23, 1999 (File No. 1-11871).
(19) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2000 (File No. 1-11871).
(20) Incorporated by reference and filed as an Exhibit to Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000 filed with the Securities and Exchange Commission on May 04, 2001 (File No. 1-11871).
(21) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 26, 2001 (File No. 1-11871).
(22) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 31, 2001 (File No. 1-11871).
Reports on Form 8-K: - --------------------
1. The Company filed a Current Report on Form 8-K, dated January 18, 2001, with respect to a press release regarding the appointment of Shelby T. Brewer as our new President and Chief Executive Officer and the resignation of Paul E. Hannesson as President and Chief Executive Officer.
2. The Company filed a Current Report on Form 8-K, dated September 26, 2001, regarding a 30-day extension to its repurchase obligation under the Stock Purchase Agreement with Dispute Resolution Management, Inc., until October 29, 2001.
3. The Company filed a Current Report on Form 8-K, dated October 31, 2001, regarding an 80-day extension to its repurchase obligation under the Stock Purchase Agreement with Dispute Resolution Management, Inc., until January 16, 2002.
4. The Company filed a Current Report on Form 8-K, dated January 16, 2002, regarding a 120-day extension to its repurchase obligation under the Stock Purchase Agreement with Dispute Resolution Management, Inc., until May 16, 2002.
SIGNATURES
Pursuant to the requirements to Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 2002 COMMODORE APPLIED TECHNOLOGIES, INC.
By: /s/ James M. DeAngelis ----------------------------------------- James M. DeAngelis, Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Shelby T. Brewer Chairman of the Board and Chief April 15, 2002 - ----------------------- Executive Officer (principal Shelby T. Brewer executive officer)
/s/ James M. DeAngelis Senior Vice President and Chief April 15, 2002 - ----------------------- Financial Officer (principal James M. DeAngelis financial officer)
/s/ Bentley J. Blum Director April 15, 2002 - ----------------------- Bentley J. Blum
/s/ Herbert A. Cohen Director April 15, 2002 - ----------------------- Herbert A. Cohen
/s/ Paul E. Hannesson Director April 15, 2002 - ----------------------- Paul E. Hannesson
/s/ David L. Mitchell Director April 15, 2002 - ----------------------- David L. Mitchell
/s/ Edward L. Palmer Director April 15, 2002 - ----------------------- Edward L. Palmer
/s/ William R. Toller Director April 15, 2002 - ----------------------- William R. Toller
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The Company has not sent to its security holders any annual report or proxy material during the 2001 fiscal year.
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2001 and 2000
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
Index - --------------------------------------------------------------------------------
Page ----
Commodore Applied Technologies, Inc.
Independent Auditors' Report
Consolidated Balance Sheet as of December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Commodore Applied Technologies, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Commodore Applied Technologies, Inc. and Subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2001, 2000, and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commodore Applied Technologies, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000, and 1999, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a working capital deficit and has suffered recurring losses that raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
TANNER+CO.
Salt Lake City, Utah February 22, 2002
Non-Cash Investing and Financing Activities:
- ----
o A debtholder converted $250 of debt to 1,041,667 shares of common stock
o The Company recorded $408 of unpaid dividends to holders of preferred stock
o The Company financed prepaid assets with notes payable of $123
o The Company issued warrants valued at $70 with a debt issuance
o The Company received equipment with book value of $30 from an unconsolidated subsidiary
- ----
Effective August 31, 2000, the Company acquired an 81% interest in Dispute Resolution Management, Inc. (DRM) (see Note 6). Consideration consists of the following:
9.5 million option shares of common stock $ 13,122 6.0 million shares of common stock 6,563 Warrants to purchase 1 million shares of common stock 959 Future payment guarantee 7,412 --------------
Total consideration $ 28,056 --------------
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows Continued - --------------------------------------------------------------------------------
2000 - Continued - ----
Assets and liabilities acquired:
Accounts receivable $ 157 Property and equipment 124 Prepaids and other current assets 47 Goodwill 25,095 Covenant not to compete 2,625 Other assets 36 Accounts payable (61) Accrued expenses (5) Note payable (470) --------------
$ 27,548 --------------
Cash received $ 508 --------------
o A shareholder of the Company transferred 100,000 shares of its common stock in the Company to holders of notes payable from the Company. The common stock was valued at $500 with $167 considered prepaid and $333 expensed as interest.
o The Company issued a warrant valued at $89 in connection with a debt issuance.
o The Company converted 45,000 shares of Series E & F Preferred Stock to 440,581 shares of common stock.
o The Company financed equipment and prepaid assets with notes payable and long-term debt of $459.
o The Company accrued $420 of unpaid dividends to holders of Preferred Stock.
- ----
In 1999, 51,489 shares of Series B, C and D Preferred Stock held by Commodore with an aggregate value of $2,001 were converted into common stock (Note 12).
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
December 31, 2001 and 2000 (In thousands except share and per share data) - --------------------------------------------------------------------------------
1. Summary of Background Significant Commodore Applied Technologies, Inc. and subsidiaries Accounting ("Applied"), is engaged in the destruction and Policies neutralization of hazardous waste from other materials. Applied owns technologies related to the separation and destruction of polychlorinated biphenyls (PCBs) and chlorofluorocarbons (CFCs).
Applied is currently working on the commercialization of these technologies through development efforts, licensing arrangements and joint ventures. Through Commodore Advanced Sciences, Inc. ("CASI"), formerly Advanced Sciences, Inc., a subsidiary acquired on October 1, 1996, Applied has contracts with various government agencies and private companies in the United States and abroad. As some government contracts are funded in one year increments, there is a possibility for cutbacks as these contracts constitute a major portion of CASI's revenues, and such a reduction would materially affect the operations. However, management believes the subsidiary's existing client relationships will allow Applied to obtain new contracts in the future.
Through Dispute Resolution Management, Inc. (DRM), a subsidiary acquired August 30, 2000, Applied provides a package of services to help companies recover financial settlements from insurance policies to defray costs associated with environmental liabilities.
Principles of Consolidation The consolidated financial statements include the accounts of Applied and its majority-owned subsidiaries. Dispute Resolution Management, Inc. is included in the consolidated operations from August 30, 2000 (date of acquisition) (see Note 6). All significant intercompany balances and transactions have been eliminated. The investment in Teledyne-Commodore, LLC, a 50% owned joint venture with Teledyne Environmental, Inc., was accounted for under the lower of cost or market at December 31, 2000. During the year ended December 31, 2001, the joint venture was dissolved, and the Company's share of the related loss was included in losses of unconsolidated subsidiaries.
- --------------------------------------------------------------------------------
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
1. Summary of Cash and Cash Equivalents Significant Applied considers cash and highly liquid debt Accounting instruments with original maturities of three months or Policies less at the date of purchase to be cash equivalents. Continued Concentration of Credit Risk and Significant Customers Applied maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Applied has not experienced any losses in such accounts.
With respect to trade receivables, Applied generally does not require collateral as the majority of Applied's services are performed for the U.S. Government and prime contractors that serve the U.S. Government. Applied believes it is not exposed to any significant credit risk on cash, cash equivalents and trade receivables.
Sales to major customers which exceeded 10 percent of revenues are as follows:
Years Ended December 31, ------------- -------------- --------------- 2001 2000 1999 ------------- -------------- ---------------
Customer A $ 3,252 $ 1,476 $ 3,692 Customer B $ 1,148 $ 742 $ 1,006 Customer C $ - $ 11,618 $ 12,287
The contract with Customer C ended on December 31, 2000.
Risk and Uncertainty Applied's operations involving the separation and destruction of PCBs requires a permit from the EPA. Applied had a valid nationwide permit related to the treatment of PCBs in certain substances. The permit expired September 15, 2001. Applied is currently in the process of applying for a renewal of the permit. Until the permit is reviewed, Applied is not permitted to service any contracts which utilize Applied's separation and destruction technology related to the treatment of PCB's. Presently, there is no information to suggest that the EPA will not renew Applied's permit or grant them the requested revision.
- --------------------------------------------------------------------------------
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
1. Summary of Property and Equipment Significant Property and equipment are recorded at cost. Accounting Improvements which substantially increase the useful Policies lives of assets are capitalized. Maintenance and repairs Continued are expensed as incurred. Upon retirement or disposal, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recorded in the Statement of Operations. Provisions for depreciation are computed on the straight-line method based on the estimated useful lives of the assets which range from 3-5 years.
Intangible Assets Goodwill represents the fair value of securities issued plus the fair value of net liabilities assumed in connection with the acquisition of DRM (see Note 6). Goodwill is being amortized on a straight-line basis over its estimated 20 year life. Completed technology represents certain technology and related patents acquired in connection with the purchase of third-party interests in Commodore Laboratories, Inc. ("Labs"). Completed technology and patents are being amortized on a straight-line basis over their estimated 7 and 17 year lives, respectively. Covenants to compete are amortized over 5 years which is the life of the covenant (see Note 6).
Impairment of Long-Lived Assets Applied reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through undiscounted future cash flows. If it is determined that an impairment loss has occurred based on expected cash flows, such loss is recognized in the Statement of Operations.
During the year ended December 31, 2001 the Company recorded an impairment on its equipment and related patents of completed technology of $776 and $627, respectively.
During the year ended December 31, 2000 the unamortized goodwill associated with the purchase of CASI was determined to be impaired and was written off in the amount of $6,586.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
1. Summary of Revenue Recognition Significant Substantially all of Applied's revenues are generated by Accounting its subsidiaries, CASI and DRM. CASI revenues consist of Policies engineering and scientific services performed for the Continued U.S. Government and prime contractors that serve the U.S. Government under a variety of contracts, most of which provide for unit prices. Revenue under unit price contracts are recorded when the services are provided.
Prior to 2001, most of CASI's contracts provided for reimbursement of costs plus fixed fees. Direct and indirect contract costs incurred in reimbursement plus cost contracts are subject to audit by the Defense Contract Audit Agency ("DCAA"). Management does not expect these audits to materially affect the financial statements and have established appropriate allowances to cover potential audit disallowances. Contract revenues have been recorded in amounts which are expected to be realized upon final settlement. The DCAA has audited CASI's contracts through 1996. An allowance for doubtful accounts and potential disallowances has been established based upon the portion of billed and unbilled receivables that management believes may be uncollectible.
DRM revenue is recognized on retainers according to the terms of each contract. Revenue is recognized on contingent success fees as each dispute with each insurer is resolved and a binding settlement agreement has been executed by all parties.
Research and Development Research and development expenditures are charged to operations as incurred.
Income Taxes Income taxes are determined in accordance with Statement of Financial Accounting Standards ("SFAS") 109, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the difference between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS 109 also provides for the recognition of deferred tax assets if it is more likely than not that the assets will be realized in future years.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
1. Summary of Stock-Based Compensation Significant Compensation costs attributable to stock option and Accounting similar plans are recognized based on any difference Policies between the quoted market price of the stock on the date Continued of the grant over the amount the employee is required to pay to acquire the stock (in the intrinsic value method under Accounting Principles Board Opinion 25). SFAS 123, "Accounting for Stock-Based Compensation," requires companies electing to continue to use the intrinsic value method to make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. Applied has adopted the disclosure only provisions of SFAS 123.
Fair Value of Financial Instruments The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Accounts receivable, notes receivable, cash equivalents, long term debt and the line of credit are financial instruments that are subject to possible material market variations from the recorded book value. The Company has reflected in the financial statements debt discounts which are being amortized over the estimated lives of the obligations. The debt discounts bring the obligations to a market rate of interest. The fair value of these financial instruments approximate the recorded book value as of December 31, 2001 and 2000.
Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications Certain amounts in prior years have been reclassified to conform with the current year presentation.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
2. Going The accompanying consolidated financial statements have Concern been prepared under the assumption that Applied will continue as a going concern. Such assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, Applied incurred losses for the years ended December 31, 2001, 2000 and 1999. Applied also has a working capital deficit at December 31, 2001. The consolidated financial statements do not include any adjustments that might be necessary should Applied be unable to continue as a going concern.
Applied's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitability. Potential sources of cash include new contracts, external debt, the sale of new shares of Company stock or alternative methods such as mergers or sale transactions. No assurances can be given, however, that the Company will be able to obtain any of these potential sources of cash.
3. Receivables The components of Applied's trade receivables are as follows as of December 31, 2001 and 2000:
2001 2000 --------------------------------
Contract receivables: Amounts billed $ 1,202 $ 4,807 Retainages 26 25 --------------------------------
1,228 4,832
Less: Allowance for doubtful accounts and potential disallowances (411) (296) --------------------------------
Total receivables, net $ 817 $ 4,536 --------------------------------
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
3. Receivables The balances billed but not paid by customers pursuant Continued to retainage provisions are due upon completion and acceptance of the contracts.
Substantially all of CASI trade receivables are pledged to collateralize its line of credit (see Note 8).
4. Property Property and equipment consist of the following: and Equipment Average December 31 Useful Life 2001 2000 --------------------------------------
Machinery and equipment 3 $ 599 $ 2,386 Furniture and fixtures 5 469 417 Computer equipment 4 882 944 Leasehold improvements 5 19 19 ------------------------
1,969 3,766
Less: accumulated depreciation and amortization (1,245) (1,783) ------------------------
Total property and equipment $ 724 $ 1,983 ------------------------
During the year ended December 31, 2001 an impairment loss of $776 was recorded against the machinery equipment.
5. Other Assets Applied had an investment in a joint venture with Teledyne Environmental, Inc. (LLC). Applied did not record its equity in the losses of the LLC in 2000 and 1999 as the LLC agreement states that members of the LLC can only be asked to fund approved capital calls and Applied has no obligation to fund these 2000 and 1999 losses. During the year ended December 31, 2001, the joint venture was dissolved, and the Company's share of the related loss to dissolve the joint venture was included in losses of unconsolidated subsidiaries. The Company recorded a loss of $295, for the year ended December 31, 2001, from its investment in the joint venture.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
5. Other Assets The Company received its equipment back as a Continued distribution in dissolving the joint venture. The Company recorded the equipment at the net book value of the joint venture which is the lower of cost or market.
6. Acquisition On August 30, 2000, Applied completed a stock purchase of Dispute agreement with Dispute Resolution Management, Inc. (DRM) Resolution and its two shareholders. This agreement amended and Management restated in its entirety the terms of an agreement and plan of merger, dated August 30, 2000, which Applied had previously entered into with DRM and its shareholders.
Under terms of the current agreement, Applied purchased 81% of the issued and outstanding capital stock of DRM from the two existing shareholders. The consideration to these shareholders (and their designees) consisted of:
a) 10.5 million shares of Applied common stock. Of these 10.5 million shares, 9.5 million shares are subject to a one-year option to repurchase any or all shares. The option has been extended and currently expires May 16, 2002. b) 5 million shares of Applied common stock in exchange for an option to purchase the remaining 19% interest in DRM. The option expires after five years and the option price will be based upon the relative appraised values of DRM and Applied at the time of purchase. c) Five-year warrants to purchase up to an aggregate of 1.0 million shares of Applied common stock at an exercise price of $2.00 per share. d) Quarterly earn-out distributions equal to 35% of the cash flow of DRM over an earn-out period commencing as of September 1, 2000 and ending December 31, 2005. Applied has agreed that if DRM has not distributed to these shareholders a total of $10.0 million in cash in earn-out payments by December 31, 2003, Applied will make up the difference between $10.0 million and the actual cash distributed. This difference can be paid in cash or Applied common shares at Applied's sole discretion.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
6. Acquisition Applied has an absolute and irrevocable obligation to of Dispute repurchase, by the end of the option period, that number Resolution of 9.5 million shares of Applied common stock necessary Management to provide the holders of those shares with a total of Continued $14.5 million. It is Applied's intention to exercise its option to reacquire these shares during the period and sell these shares to generate the cash necessary to meet the $14.5 million obligation. The obligation was recorded as a note payable and interest has been imputed on the note payable to record debt at the time of acquisition of $13,122.
The former owners of DRM have entered into five-year employment agreement with DRM providing for starting salaries of $262 per year, with annual increases of not more than 5%. In addition, these individuals have entered into five-year non-competition agreements with DRM.
Applied has valued the consideration given as follows:
9.5 million option common shares $ 13,122 5.0 million common shares 5,469 1.0 million common shares 1,094 Warrants to purchase 1.0 million shares 959 Future payment guarantee 10,000 Imputed interest on future payment guarantee (2,588) --------------
Total $ 28,056 --------------
DRM's equity at the date of acquisition was $414. Applied's 81% share of this equity was $336.
Applied recorded the difference between the consideration given of $28,056 and its ownership in DRM equity of $336 as follows:
Covenants not to compete $ 2,625 Goodwill 25,095 --------------
Total $ 27,720 --------------
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
6. Acquisition Covenants not to compete are amortized over their 5 of Dispute year life. Goodwill is amortized over 20 years. Resolution Management Continued
7. Other Other accrued liabilities consist of the following: Accrued Liabilities 2001 2000 ------------------------------
Dividend payable $ 816 $ 408 Compensation and employee benefits 658 652 Loss reserve 200 357 Related parties 185 185 Accrued consulting - 185 Severance payments - 76 Other 178 626 ------------------------------
$ 2,037 $ 2,489 ------------------------------
8. Line of At December 31, 2001 and 2000, CASI had a $108 and Credit $1,459 outstanding balance, respectively, on a revolving line of credit. The line of credit is not to exceed 85% of eligible receivables or $2,500 and is due October 2002 with interest payable monthly at prime plus 2.0 percent (6.75% at December 31, 2001). The credit line is collateralized by the assets of CASI and is guaranteed by Applied. The line of credit contains certain financial covenants and restrictions including minimum ratios that CASI must satisfy.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
9. Notes Payable Notes payable consist of the following at December 31:
2001 2000 -------------------------------
Obligation to minority shareholders of DRM wherein the minority shareholders are to receive $14,500 cash from the Company through the repurchase of the 9.5 million option common shares issued to the minority shareholders' (see note 6). The Company has imputed an interest rate of 10.5% on the obligation which is secured by Commodore's ownership of DRM. The obligation was originally due in August 2001 and has been extended through May 2002 $ 14,500 $ 14,500
Unamortized discount for imputed interest rate through original maturity date of August 2001. - (919)
Notes payable to individuals with interest at 15%, due in aggregate monthly installments, beginning in July 2001, of $83,33 plus interest, maturing through June 2002. In connection with the notes, Applied issued warrants to purchase 333,334 shares of stock which were valued at $70,000 and recorded as a discount on the notes to be amortized over their respective terms 583 -
Unamortized discount for warrants (18) -
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
9. Notes Payable Continued
Notes payable to individuals with interest at 12%, originally due February 13, 2001 and extended until May 31, 2002, secured by DRM accounts receivable. In connection with this note, one of the majority shareholders of the Company sold 1 million shares of the Company's common stock it owned to the note holders at a discount. The discounted amount of $500,000 was recorded as interest expense over the original term of the loan 216 500
Note payable to an officer of the Company with interest at 9.75%. The note is unsecured and is convertible into common stock of the Company at the market rate of the common stock. During 2001 the officer converted $250,000 of the note for 1,041,667 shares of common stock. The note was originally due March 15, 2001 but has been extended until December 31, 2001. The Company also has imputed a discount for warrants issued for $89 in connection with the note which is being amortized over the original term of the note 250 500
Unamortized discount imputed for warrants - (29)
Notes payable to an insurance company with interest at 8.18%, secured by an insurance contract and due December 2001. 124 130 -------------------------------
$ 15,655 $ 14,682 -------------------------------
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
10. Long-Term The Company has the following long-term debt at December Debt 31:
2001 2000 -------------------------------
Obligation to the minority shareholders of DRM wherein the Company has guaranteed to distribute 35% of the cash flows of DRM to the 19% minority shareholders in amounts not less than $10,000 by December 31, 2003 (see note 6). The Company has imputed interest on the obligation at 10.5%, and the obligation is secured by the Company's ownership of DRM. The Company has also estimated the current and long-term portions of the obligation $ 8,583 $ 10,000
Unamortized discount for imputed interest rate (1,592) (2,389)
Notes payable to an entity requiring monthly payments of $11, plus interest at 8.5% secured by an insurance contract 89 221 -------------------------------
7,080 7,832
Less current maturities (2,650) (2,650) -------------------------------
$ 4,430 $ 5,182 -------------------------------
Future maturities on long-term debt are as follows:
Year ---- 2002 $ 2,650 2003 4,430 -------------
Total $ 7,080 -------------
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
11. Income Taxes Applied provides for deferred income taxes on temporary differences which represent tax effects of transactions reported for tax purposes in periods different than for book purposes.
The provision for income taxes for the years ended December 31 results in an effective tax rate which differs from federal income tax rates as follows:
2001 2000 1999 -----------------------------------------
Expected tax benefit at federal statutory rate $ (2,228) $ (3,890) $ (1,355) State income tax benefit, net of federal income tax benefit (393) (686) (239) Interest accretion 753 333 - Other 226 453 - Change in valuation allowance 1,642 3,790 1,594 -----------------------------------------
Income tax benefit $ - $ - $ - -----------------------------------------
The components of the net deferred tax as of December 31, are as follows
2001 2000 ---------------------------
Reserve for uncollectable receivables and potential disallowances $ 226 $ 242 Depreciation and Amortization (41) 88 Net operating loss carryforward 11,500 10,192 Impairment charges 2,480 2,034 Other 99 66 ---------------------------
14,264 12,622
Valuation allowance (14,264) (12,622) ---------------------------
Net deferred taxes $ - $ - ---------------------------
Applied conducts a periodic examination of its valuation allowance. Factors considered in the evaluation include recent and expected future earnings and Applied's liquidity and equity positions. As of December 2001, 2000 and 1999, Applied has established a valuation allowance for the entire amount of net deferred tax assets.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
11. Income Taxes Applied has net operating loss ("NOL") carryforwards at Continued December 31, 2001 of approximately $31,000 which expire in years 2010 through 2021. The NOL carryforwards are limited to use against future taxable income due to changes in ownership and control.
12. Stockholders' Series B, C & D Convertible Preferred Stock Equity Effective September 28, 1998, Applied authorized and issued three new series of Preferred Stock. Series B, C and D Preferred Stock were authorized up to 25,000, 15,000 and 25,000 shares, respectively, all at $.001 par value.
Each of the Series B, C and D Preferred Stock is convertible into common shares of Applied; each has a par value of $.001 and a stated value of $100 per share; each carries a dividend rate of $6.00 per share per annum from the date of issuance, payable quarterly commencing December 31, 1998, when, and if declared by the Board of Directors; and each has non-cumulative dividends. During 1998 the Company issued 20,909 shares of Series B, 10,189 shares of Series C, and 20,391 shares of Series D Convertible Preferred Stock for an aggregate amount of $2,001 (see Note 15). Applied did not declare any dividend payment as of December 31, 1998.
The Series B, C and D Convertible Preferred Stock is convertible into Common Stock at any time prior to redemption at a conversion rate of 142.9 shares of Common Stock for each share of Series B and D Convertible Preferred Stock and 133.3 shares of Common Stock for each share of Series C Convertible Preferred Stock (an effective conversion price of $.70 and $.75 per share of Common Stock, respectively). The conversion price is subject to adjustment under certain circumstances, including Applied taking action to change the number of Common Shares outstanding, such as declaring a stock dividend.
In November 1999, all of the outstanding shares of Series B, C and D Convertible Preferred Stock was converted into 7,258,533 shares of common stock.
Series E Convertible Preferred Stock Effective November 4, 1999, Applied issued 335,000 shares of Series E Convertible Preferred Stock with a stated value of $10 per share.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
12. Stockholders' Series E Convertible Preferred Stock - Continued Equity This stock has a dividend rate of 12% per annum through Continued April 30, 2000 and thereafter 5% per annum paid quarterly. In addition the stock has a special dividend at the rate of 7.5% per annum which began to accrue on May 1, 2000, payable on May 1, 2001. The special dividend will not be paid on any stock converted to common stock on or before April 30, 2001.
The Series E Convertible Preferred Stock has a liquidation preference of $10 per share. In connection with the issuance of the Series E Convertible Preferred Stock, the Company issued warrants to purchase 572,500 shares of common stock at a purchase price equal to 110% of the market price on the date of closing ($1.20). These warrants were valued at $60 and expire on November 4, 2004.
The Series E Convertible Preferred Stock is convertible into common stock at any time on or after April 30, 2000 at a conversion price equal to the arithmetic mean of the closing prices of common stock as reported in the American Stock Exchange for the ten trading days immediately preceding the date of conversion.
During the years ended December 31, 2001 and 2000, 70,000 shares and 35,000 shares of Series E Convertible Preferred Stock were converted into 2,000,000 shares and 330,992 shares of common stock, respectively. As of December 31, 2001 there are 230,000 shares of Series E preferred stock outstanding.
Series F Convertible Preferred Stock In March 2000, Applied issued 266,700 shares of Series F Convertible Preferred Stock with a stated value of $10 per share. Transaction costs on the issuance totaled $230 resulting in net proceeds to the Company of $1,770.
The stock has a dividend rate of 12% per annum through September 30, 2000 and thereafter 5% per annum paid quarterly. In addition the stock has a special dividend at the rate of 7.5% per annum which began to accrue October 1, 2000, payable on October 1, 2001. The special dividend will not be paid on stock converted to common stock on or before September 30, 2001.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
12. Stockholders' Series F Convertible Preferred Stock - Continued Equity The Series F Convertible Preferred Stock has a Continued liquidation preference of $10 per share. In connection with the issuance of Series F Convertible Preferred Stock, the Company issued warrants to purchase 363,475 shares of common stock at $1.93875 per share. These warrants expire on March 16, 2005.
The Series F Convertible Preferred Stock is convertible into common stock at any time on or after September 30, 2000. On conversion, the investor will receive for each converted preferred share the greater number of common stock as determined by (1) the face value per share ($10) plus accrued dividends divided by the average of the closing prices over a ten consecutive trading day period ending on the trading day immediately preceding the conversion date, or (2) $7.50 (the cash invested for each preferred share) divided by $1.93875.
During the years ended December 31, 2001 and 2000, 76,500 shares and 10,000 shares of Series F Convertible Preferred Stock were converted to 2,072,225 shares and 109,589 shares of common stock, respectively. The Company has 180,200 shares of Series F convertible stock outstanding at December 31, 2001.
The holders of all series of convertible preferred stock have the right, voting as a class, to approve or disapprove of the issuance of any class or series of stock ranking senior to or on a parity with the convertible preferred stock with respect to declaration and payment of dividends or the distribution of assets on liquidation, dissolution or winding-up. Upon liquidation, dissolution or winding up of Applied, holders of Series E and Series F Convertible Preferred Stock are entitled to receive liquidation distributions equivalent to $10.00 per share before any distribution to holders of the Common Stock or any capital stock ranking junior to the Series E Convertible Preferred Stock.
Cumulative unpaid dividends on Preferred Stock is $816 and $408 at December 31, 2001 and 2000.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
13. Stock Options Applied has adopted the intrinsic value method of and Stock accounting for stock options and warrants under APB 25 Warrants with footnote disclosures of the pro forma effects as if the FAS 123 fair value method had been adopted.
Had compensation expense for Applied's employee stock options been determined based on the fair value at the grant date for awards in 2001, 2000 and 1999 consistent with the provisions of FAS 123, Applied's net loss per share would have been increased to the pro forma amounts indicated below:
2001 2000 1999 ------------------------------------------------
Net loss - as reported $ (6,554) $ (11,441) $ (3,985) Net loss - pro forma $ (6,810) $ (12,619) $ (6,335) Loss per share - as reported $ (.13) $ (.34) $ (0.16) Loss per share - pro forma $ (.14) $ (.37) $ (0.26)
FAS 123 requires stock options to be valued using an approach such as the Black-Scholes option pricing model. The Black-Scholes model calculates the fair value of the grant based upon the following assumptions about the underlying stock: The expected dividend yield of the stock is zero, the assumed volatility is 212%, the expected risk-free rate of return is 4.6 - 6.5 percent, calculated as the rate offered on U.S. Government securities with the same term as the expected life of the options, and the expected term is the maximum possible term under the option.
Stock Options In December 1998, Applied adopted its 1998 Stock Option Plan pursuant to which officers, directors, key employees and/or consultants of Applied can receive non-qualified stock options to purchase up to an aggregate 5,000,000 shares of Applied's Common Stock. During 1999 and 2000 Applied increased the number of shares authorized by 5,000,000 shares each year resulting in 15,000,000 shares currently available under the 1998 stock option plan. Exercise prices applicable to stock options issued under this Plan represent no less than 100% of the fair value of the underlying common stock as of the date of grant. Stock options granted under the plan may vest immediately or for any period up to five years.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
13. Stock Options A summary of the status of options granted under the and Stock Plan as of December 31, 2001, 2000 and 1999 and changes Warrants during the periods then ended is presented below Continued
The following table summarizes information about employee stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable ----------------------------------------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercisable Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------------------------------------------------------------------------------ $0.25 - $0.44 2,257,200 7.00 years $0.37 2,384,765 $ 0.38 $0.63 - $1.44 2,504,833 7.00 years $0.99 1,289,827 $ 0.89 $2.00 - $6.00 357,375 4.10 years $4.86 357,375 $ 4.86 -----------------------------------------------------------------
5,119,408 6.80 years $0.99 4,031,937 $ 0.94 -----------------------------------------------------------------
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
13. Stock Stock Warrants Options Outstanding warrants (vested and not vested) at December and Stock 31, 2001 are asfollows: Warrants Continued
Granted Number of Current 1998 and Granted Granted Granted Warrants Exercise Expiration Prior 1999 2000 2001 2001 Price Date -------------------------------------------------------------------------------
7,500,000 3,405,444 2,764,141 - 13,669,585 $ 5.50 December 2003 19,407 - - - 19,407 5.80 August 2002 60,000 - - - 60,000 3.68 September 2002 1,000,000 356,092 270,568 - 1,626,660 3.09 August 2002 514,000 148,267 127,596 - 789,863 2.93 March 2003 1,500,000 266,861 49,020 - 1,815,881 1.24 February 2004 - 312,500 - - 312,500 1.20 November 2004 - 250,000 - - 250,000 1.20 November 2004 - - 25,000 - 25,000 1.94 March 2005 - - 250,000 - 250,000 1.94 March 2005 - - 113,475 - 113,475 1.94 March 2005 - - 100,000 - 100,000 1.06 September 2002 - - 1,000,000 - 1,000,000 2.00 August 2005 - - - 1,000,000 1,000,000 0.22 May 2003 - - - 333,334 333,334 0.22 June 2006 ------------------------------------------------------
10,593,407 4,739,164 4,699,800 1,333,334 21,365,705 ------------------------------------------------------
There were no warrants exercised in 2001, 2000 or 1999. As of December 31, 2001 all warrants are exercisable.
14. Earnings Per All earnings per share amounts reflect the Share implementation of SFAS 128 "Earnings per Share". Basic earnings per share are computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of shares determined for the basic computations plus the number of shares that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
14. Earnings Per Share Continued Years Ended December 31, -------------------------------------------- 2001 2000 1999 --------------------------------------------
Net loss $ (6,554) $ (11,441) $ (3,985) Preferred stock dividends (408) (634) (63) --------------------------------------------
Net loss available to common shareholders $ (6,962) $ (12,075) $ (4,048) --------------------------------------------
Weighted average common shares outstanding (basic) 53,241,000 35,866,000 24,819,000 Series E Convertible Preferred Stock (*) (*) (*) Series F Convertible Preferred Stock (*) (*) - Employee Stock Options (*) (*) (*) Warrants issued in connection with various transactions (*) (*) (*) -------------- -------------- ------------
Weighted average common shares outstanding (diluted) 53,241,000 35,866,000 24,819,000 -------------- -------------- ------------
Net loss per share - basic and diluted $ (.13) $ (.34) $ (.16) -------------- -------------- ------------
(*) Due to Applied's loss from continuing operations in 2001, 2000 and 1999, the incremental shares issuable in connection with these instruments are anti-dilutive and accordingly not considered in the calculation.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
15. Related Party The Company had the following material related party Transactions transactions:
Effective September 20, 2000, Applied received a $500 loan from an affiliated individual. This loan matures on December 31, 2001 and bears interest at 9.75%, payable monthly. The note can be converted into Applied common shares at an exchange rate of one share for every $1.0625 of loan value. In addition, the Company issued a warrant to purchase 100,000 Applied common shares at $1.0625. The warrant expires September 20, 2002 and was valued at $89, which will be amortized to interest expense over the life of the related debt. During 2001 the individual converted $250 of debt to 1,041,667 shares of common stock leaving a note payable of $250 to the individual at December 31, 2001.
The Company at December 31, 2001 and 2000 has obligations relating to the purchase of 81% of DRM (see Notes 6, 9 and 10).
During the year ended December 31, 2000 a shareholder of the Company sold, at a discount, 1,000,000 common shares that it owned of Applied to individuals who loaned $500 to Applied. The discount amount of $500 was used to offset receivables from related parties and result in a net related party payable of $160 and $247 as of December 31, 2001 and 2000, respectively.
In addition, the Company has payables to related parties of $185 at December 31, 2001 and 2000 recorded in accrued liabilities. The Company expensed as bad debt $109 of related party receivables during the year ended December 31, 2000.
The Company has notes payable and long-term debt to officers and shareholders of the Company. See Notes 9 and 10.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
16. Commitments Operating Leases and Applied and its subsidiaries are committed under Contingencies non-cancelable operating leases for office space and other equipment. Future obligations under the leases are as follows:
2002 $ 216 2003 147 2004 116 2005 11 ---------------
$ 490 ---------------
Rent expense approximated $429, $403 and $332 in 2001, 2000 and 1999, respectively.
Executive Bonus Plan Applied has a five-year Executive Bonus Plan (the "Bonus Plan") under which a number of executives and employees of Applied are entitled to formula bonuses. No bonuses are accrued at December 31, 2001 and 2000.
Employment Agreements The Company has entered into employment agreements with the two former owners of DRM which provide for salaries of not less than $275 each through December 31, 2002 and not less than $290 each through December 31, 2003.
Litigation Applied has matters of litigation arising in the ordinary course of business which in the opinion of management will not have a material adverse effect on its financial condition or results of operations.
Guarantee The Company, along with several other entities, in a prior year guaranteed a performance bond of Separation relating to the Port of Baltimore contract. The Company was notified on June 28, 2000 that the performance bond is being called. It is not known, at this time, the amount, if any, the Company's share will be. The maximum exposure is approximately $390.
17. 401(K) The Company has adopted a 401(K) savings plan for all Savings Plan employees who qualify as to age and service. Contributions by the Company are discretionary. The Company made annual contributions to the plan of approximately $0, $48 and $91 during the years ended December 31, 2001, 2000 and 1999, respectively.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
18. Segment Using the guidelines set forth in SFAS No. 131, Information "Disclosures About Segments of an Enterprise and Related Information," Applied has identified three reportable segments as follows:
1. CASI, which primarily provides various engineering, legal, sampling and public relations services to Government agencies on a cost plus basis.
2. Solution, which, through CASI, has equipment to treat mixed and hazardous waste through a patented process using sodium and anhydrous ammonia.
3. DRM from August 30, 2000 (date of acquisition) to December 31, 2000, which provides a package of services to help companies recover financial settlements from insurance policies to defray costs associated with environmental liabilities.
Common overhead costs are allocated between segments based on a record of time spent by executives.
Applied evaluates segment performance based on the segment's net income (loss). The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Applied's foreign and export sales and assets located outside of the United States are not significant. Summarized financial information concerning Applied's reportable segments is shown in the following tables.
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - --------------------------------------------------------------------------------
19. Recent In June 2001, the Financial Accounting Standards Board Accounting ("FASB") issued SFAS No. 141, "Business Combinations," Pronounce- and SFAS No. 142, "Goodwill and Other Intangible ments Assets." SFAS No. 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and that certain acquired intangible assets in a business combination be recognized as assets separate from goodwill. SFAS No. 142 requires that goodwill and other intangibles determined to have an indefinite life are no longer to be amortized but are to be tested for impairment at least annually. SFAS No. 142 requires that an impairment test related to the carrying values of existing goodwill be completed within the first six months of 2002. Impairment losses on existing goodwill, if any, would be recorded as the cumulative effect of a change in accounting principle as of the beginning of 2002. The adoption of this accounting standard may have a significant impact on the Company's future results of operations and financial condition.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires an asset retirement obligation to be recorded at fair value during the period incurred and an equal amount recorded as an increase in the value of the related long-lived asset. The capitalized cost is depreciated over the useful life of the asset and the obligation is accreted to its present value each period. SFAS No. 143 is effective for the Company beginning January 1, 2003 with earlier adoption encouraged. The Company is currently evaluating the impact the standard will have on its future results of operations and financial condition.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", effective beginning January 1, 2002. SFAS No. 144 retains the requirement to recognize an impairment loss only where the carrying value of a long-lived asset is not recoverable from its undiscounted cash flows and to measure such loss as the difference between the carrying amount and fair value of the asset. SFAS No. 144, among other things, changes the criteria that have to be met to classify an asset as held-for-sale and requires that operating losses from discontinued operations be recognized in the period that the losses are incurred rather than as of the measurement date. The Company adopted the accounting standard effective January 1, 2002 which may have a significant impact on the Company's financial condition or results of operations.
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