UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11871
Commodore Applied Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-3312952
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150 East 58th Street, Suite 3238
New York, New York 10155
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 308-5800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common stock, par value $0.001 per share NASD Over the Counter Bulletin Board (OTCBB)
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [ X ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
As of March 31, 2006, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $1,864,680.19 based upon the
last sale price of the common stock on March 31, 2006 as reported by the NASD
Over the Counter Bulletin Board.
Class Outstanding at April 15, 2006
-------------------------------------------- ------------------------------
[Common Stock, $0.001 par value per share] 7,948,216 shares
DOCUMENTS INCORPORATED BY REFERENCE
None
COMMODORE APPLIED TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PART 1............................................................................................................6
ITEM 1. BUSINESS........................................................................................6
General.........................................................................................6
Environmental Management - Commodore Advanced Sciences, Inc.....................................7
Soil Decontamination--Commodore Solution Technologies, Inc.....................................12
Markets and Customers..........................................................................20
Raw Materials..................................................................................22
Backlog........................................................................................22
Research and Development.......................................................................22
Intellectual Property..........................................................................22
Competition....................................................................................23
Environmental Regulation.......................................................................25
Employees......................................................................................26
ITEM 1A. RISK FACTORS..................................................................................27
ITEM 1B. UNRESOLVED SEC STAFF COMMENTS.................................................................36
ITEM 2. PROPERTIES.....................................................................................37
ITEM 3. LEGAL PROCEEDINGS..............................................................................38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................39
PART II..........................................................................................................41
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES...............................................................................41
Market Information.............................................................................41
Issuance of Common Stock Subsequent to December 31, 2005.......................................42
Dividend Information...........................................................................42
Recent Sales of Unregistered Securities........................................................44
ITEM 6. SELECTED FINANCIAL DATA.........................................................................48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........49
Overview.......................................................................................49
Critical Accounting Policies...................................................................50
Results of Operations..........................................................................51
Off-Balance Sheet Arrangements.................................................................53
Quarterly Results of Operations................................................................54
Liquidity and Capital Resources................................................................55
Net Operating Loss Carryforwards...............................................................62
New Accounting Pronouncements..................................................................62
Forward Looking Statements.....................................................................64
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................65
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........65
ITEM 9A. CONTROLS AND PROCEDURES........................................................................66
ITEM 9B. OTHER INFORMATION..............................................................................66
PART III.........................................................................................................67
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................67
Executive Officers and Directors...............................................................67
Key Employees..................................................................................71
Board Committees...............................................................................71
Audit Committee and Financial Expert...........................................................72
Compensation of Directors......................................................................72
Compliance with Section 16(a) of the Exchange Act..............................................72
ITEM 11. EXECUTIVE COMPENSATION........................................................................74
Summary Compensation...........................................................................74
Stock Options..................................................................................76
Employment Agreements..........................................................................77
Compensation Committee Interlocks and Insider Participation....................................77
Report of the Compensation Committee on Executive Compensation.................................77
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................81
Equity Compensation Plan Information...........................................................81
Ten Year Option Repricings.....................................................................82
Shareholder Return Performance.................................................................84
Security Ownership of Certain Beneficial Owners................................................85
Security Ownership of Management...............................................................87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................90
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................................................92
PART IV..........................................................................................................93
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................93
SIGNATURES......................................................................................................103
SUPPLEMENTAL INFORMATION........................................................................................104
Preliminary Note Regarding Certain Risks and Forward-Looking Statements
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This Annual Report on Form 10-K contains "forward-looking statements."
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company's projected future results, future plans, objectives or
goals or future conditions or events are also forward-looking statements. Actual
results are inherently difficult to predict. Any such forward-looking statements
are subject to the risks and uncertainties that could cause actual results of
operations, financial condition, acquisitions, financing transactions,
operations, expenditures, expansion and other events to differ materially from
those expressed or implied in such forward-looking statements. Any such
forward-looking statements would be subject to a number of assumptions
regarding, among other things, future economic, competitive and market
conditions generally. Such assumptions would be based on facts and conditions as
they exist at the time such statements are made as well as predictions as to
future facts and conditions, the accurate prediction of which may be difficult
and involve the assessment of events beyond the Company's control.
Further, the Company's business is subject to a number of risks and
uncertainties that would affect any such forward-looking statements. These risks
and uncertainties include, but are not limited to:
o the Company's critical need for additional cash to sustain
existing operations and meet existing obligations and capital
requirements (the Company's auditor's opinion on our fiscal 2002,
2003, 2004 and 2005 financial statements contains a "going
concern" qualification in which they express doubt about the
Company's ability to continue in business);
o the ability to generate profitable operations from a large scale
remediation project;
o the ability of the Company to implement its waste processing
operations, including obtaining commercial waste processing
contracts and processing waste under such contracts in a timely
and cost effective manner.
o the timing and award of contracts by the U.S. Department of Energy
for the cleanup of waste sites administered by it;
o the acceptance and implementation of the Company's waste treatment
technologies in the government and commercial sectors;
o the Company's ability to obtain and perform under other large
technical support services projects; developments in environmental
legislation and regulation;
o developments in environmental legislation and regulation;
o the ability of the Company to obtain future financing on favorable
terms;
o other circumstances affecting anticipated revenues and costs;
o the expiration of the Company's nationwide EPA permit in September
2001 (The Company believes that the permit may be renewed subject
to providing additional information. The Company has not
resubmitted information for a new permit); and
o the ability of the Company to replicate on a large scale,
economically viable basis, the results of its technology test
results.
These risks and uncertainties could cause actual results of the Company to
differ materially from those projected or implied by such forward-looking
statements.
5
PART I
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ITEM 1. BUSINESS
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GENERAL
Commodore Applied Technologies, Inc. (the "Company") is an
environmental solutions company offering a range of engineering and technical
services to the public and private sectors related to (i) providing services
related to, environmental management for on-site and off-site identification,
investigation remediation and management of hazardous, mixed and radioactive
waste and (ii) 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)").
The Company's corporate mission is to serve the environmental
remediation market from its primary operating center to profitably provide
government and industry with engineering and remediation solutions to legacy
waste environmental problems. Our strategy focuses the Company on the unique and
high profit niches of hazardous materials conversion and waste remediation.
The Company believes 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.
Demand for our environmental technologies is anticipated to arise
principally from the following sources:
o Stricter legislation and regulations mandating new or increased levels
of air and water pollution control and solid waste management; and
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.
Our business strategy is to expand our environmental technologies
businesses by:
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; and
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.
6
The Company currently has identified two operating segments. These two
segments are as follows: Commodore Advanced Sciences, Inc., which primarily
provides various engineering, sampling, and public relations services to
Government agencies on a fixed rate and lump sum basis; and Commodore Solutions,
Inc., which is commercializing technologies to treat mixed and hazardous wastes.
The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements. The
Company's current monthly operating expenses exceed cash revenues by
approximately $80,000 at December 31, 2005.
The report of our independent registered public accounting firm on our
fiscal 2003, 2004 and 2005 consolidated financial statements contains a "going
concern" qualification in which they express substantial doubt about our ability
to continue in business.
Additional information regarding the business of each segment is set
forth below, and the information in Note 16 to the Company's Consolidated
Financial Statements included in this Annual Report on Form 10-K is incorporated
into this Part I by reference.
The Company was incorporated in Delaware in March 1996. As used in this
Annual Report, and except as the context otherwise requires, the "Company" means
Commodore Applied Technologies, Inc. and its subsidiaries, including Commodore
Solutions, Inc., Commodore Government Environmental Technologies, Inc., and
Commodore Advanced Sciences, Inc. The Company's principal executive offices are
located at 150 East 58th Street, Suite 3238, New York, New York 10155, and its
telephone number at that address is (212) 308-5800.
ENVIRONMENTAL MANAGEMENT--COMMODORE ADVANCED SCIENCES, INC.
The Company, through Commodore Advanced Sciences, Inc. ("Advanced
Sciences"), provides specialized technical and project management products and
services primarily to government-sector customers, including the Department of
Energy ("DOE") and the Department of Defense ("DOD"), and also to private-sector
domestic and foreign industrial customers. Advanced Sciences engages in all
aspects of environmental regulation and compliance, as well as access to leading
technologies and innovative skills related to the identification, investigation,
remediation and management of hazardous, mixed and radiological waste sites.
Advanced Sciences currently operates a network of three offices located in three
states, with its principal executive offices located in Richland, Washington.
The Company's strategy in acquiring Advanced Sciences in 1996 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 is a nationwide firm
specializing in environmental engineering and technical support and waste
management. Advanced Sciences was acquired by the Company in 1996 and is
headquartered in Richland, Washington. Advanced Sciences operates out of three
offices across the country, and qualifies as a small business under seven NAICS
7
codes. Advanced Sciences employs over 30 professionals who are expert in
providing environmental sample collection, transportation, and analyses, meeting
rigorous quality assurance requirements for data validation, while performing in
accord with equally rigorous personnel health and safety requirements. Advanced
Sciences currently has ten commercial analytical laboratories under contract to
provide environmental sample analyses in support of regulatory compliance and
industrial hygiene.
Advanced Sciences' record of program management and technical services
include:
- Environmental Site Restoration Planning - D & D Planning & Implementation Support
- Preliminary Assessments/Site Investigations - Waste Minimization
- Environmental Audits & Assessments - Health & Safety Oversight & Planning
- Underground-Storage-Tank Site Investigation - Biological Sampling and Characterization
- Environmental Impact Assessments & Statements & Remediation
- Structural Engineering Analysis - Remedial Investigations/Feasibility Studies
- Deconstruction Planning - Environmental Pollution Control
- Regulatory Compliance - Hazardous, Radioactive, Toxic & Mixed-Waste
- Federal & State Agency Coordination Management Including Treatment
- Public Involvement Support - Hazardous Waste Site Remediation
The two most significant clients Advanced Sciences has had over the
past 10 years have been the Department of Defense (DOD) and the Department of
Energy (DOE), while also providing services to private industry. Advanced
Sciences' largest office provides environmental characterization and management,
building decontamination and decommissioning (D&D), environmental protection,
remediation, restoration, safety & health, and environmental regulatory
compliance for the Department of Energy's Oak Ridge Complex.
Advanced Sciences has 31 technical staff, all extensively trained in
proper procedures for handling multifarious waste materials and environmental
media. Advanced Sciences' technical staff have more than 500 years of combined
experience performing environmental and waste sampling tasks. Ten of our
personnel hold DOE security clearances.
All Advanced Sciences' sampling personnel maintain currency in the
following minimum training requirements:
o OSHA 40-hour Hazardous Waste Operations and Emergency Response
(HAZWOPER)
o OSHA 8-hr Annual HAZWOPER Refresher
o OSHA HAZWOPER Supervisor
o Hazard Communication (HAZCOM)/Hazardous Materials Information
System (HMIS) training
o Radiation Worker II
8
o First Aid/CPR
o Annual Medical Monitoring
o Respirator Fit Testing
o General Safety
o Hazardous Energy Control (Lockout/Tagout)
o Work Control Process
o Excavation/Penetration Permit
o Construction Equipment Inspection & Maintenance Program
o Hotwork (welding safety)
o Confined Space Program
o Asbestos and Other Fibrous Materials
o Chronic Berylium Disease Prevention
o IATA Dangerous Good Awareness Certificate
o Workplace Substance Abuse Prevention Program participation
From 1996-2002, Advanced Sciences performed waste characterization
sampling and decontamination and decommissioning (D&D) support sampling in
compliance with RCRA and CERCLA requirements. The Advanced Sciences' Sample Team
operated in the most hazardous locations at Rocky Flats--highly contaminated
radioactive and hazardous areas, including glove boxes, confined-space
conditions, and poisonous atmospheres--with zero lost-time accidents or
injuries. The Advanced Sciences' Sample Team was in compliance with all
Occupational Safety and Health Act of 1970 (OSHA), U. S. Environmental
Protection Agency (EPA), and DOE requirements, including conduct of operations,
nuclear/criticality safety, waste generator/certification, and material
handling/safety requirements.
From 1996-2002, Advanced Sciences performed the Rocky Flats
Environmental Technology Site (RFETS) site-wide surface water sampling program,
which included collection of year-round daily samples from streams, ponds, and
the site Sewage Treatment Plant (STP) in compliance with the National Pollutant
Discharge Elimination System (NPDES) Permit. Advanced Sciences' personnel also
collected drinking water, sediment, and soil samples for Safe Drinking Water Act
of 1974 (SDWA) and Rocky Flats Cleanup Agreement (RFCA) compliance.
From 1996 to present, Advanced Sciences' water resources personnel have
managed and performed the Chatfield Basin Water Quality Monitoring Program
involving all major and minor tributaries of the South Platte River in the
Chatfield Basin Watershed, as well as water quality monitoring of Chatfield
Reservoir, located southwest of Denver, CO. Data are reported monthly to the
Chatfield Watershed Authority and annually to the U. S. Army Corps of Engineers
(USACE) and the state of Colorado Water Quality Control Commission (WQCC).
Advanced Sciences has procured and managed all analytical services for this
project, involving five different laboratories per year. Advanced Sciences
personnel perform laboratory audits, resolution of data quality objective (DQO)
and QA issues, data management and reporting, and accruals and invoicing
involving the labs.
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
9
on-site/off-site remediation and waste removal. Advanced Sciences can also
redesign its customers' ongoing production processes and develop engineering
plans and technical specifications to minimize or eliminate the generation of
hazardous waste. The Company believes that Advanced Sciences' integration of
engineering and environmental skills, plus its access to innovative
technologies, provide Advanced Sciences with a competitive advantage in
redesigning production processes.
Technical Services. New technologies play a critical role in both the
remediation of existing waste sites and in the reduction of waste generated by
ongoing production processes. Advanced Sciences has access to the SET technology
and all its derivatives. Additionally, Advanced Sciences has access to the
Supported Liquid Membrane ("SLiM(TM)") technology held by Commodore Separation
Technologies, Inc. ("Separation"). This technology has the ability to
selectively extract heavy metals and radioactive nuclides from liquids and
gasses. The SLiM technology is held in an 85% owned subsidiary of Commodore
Environmental Services, which owns 4.95 % of the Company. Advanced Sciences has
at its disposal, on a per project basis, what it believes are among the most
qualified professionals in the environmental consulting business. Advanced
Sciences' scientists have participated on national boards for risk assessment
and quality assurance, were instrumental in the development of environmental
regulations for the DOE and the DOD, and have served as expert witnesses before
the U.S. Congress and the Nuclear Regulatory Commission. To maintain its
competitive position, Advanced Sciences intends to continue to develop viable
remediation technologies and attract and retain qualified personnel.
Contracts
EDAM - Advanced Science was awarded an Environmental Data Acquisition
and Management contract ("EDAM") by Bechtel Jacobs Company LLC of Oak Ridge, TN
("BJC") in September 2004. Advanced Sciences is the lead small business member
of the Commodore Advanced Sciences Team ("CAST"), which also includes team
members Science Applications International, Inc. (SAIC), and RCS Corporation
(RCS).
CAST is currently performing and managing the EDAM contract. This is a
4-year, $21 million contract that includes sampling, sample management, and data
management of environmental surveillance and regulatory compliance data. EDAM is
a program that supports nearly all of DOE-OR environmental monitoring and
accelerated site closure activities. This program is continuously monitored and
audited for safety, quality, productivity, efficiency, and value to BJC and
DOE-OR.
As part of the routine performance of this contract, CAST coordinates
work with multiple organizations, including other BJC Subcontractors such as:
o Safety and Ecology Corporation for radiological control support,
o Duratek Federal Services for Y-12 Surveillance and Maintenance
Program maintenance and Environmental Management Waste Management
Facility (EMWMF) monitoring,
o other samplers (e.g., Biological Monitoring and Abatement (BMAP)
samplers at Oak Ridge National Laboratory (ORNL), BWXT samplers),
o Y-12 National Security Complex Waste Operations, and
o WesKem, LLC, and other Decontamination & Decommission contractors
on Site Closure projects.
10
Sampling activities under the EDAM contract include collection of
multiple sample types from hundreds of monitoring locations and packaging and
shipping of samples to appropriate analytical laboratories for analysis.
Locations and environments include abandoned burial grounds and hazardous waste
sites, fields and forests, streams, lakes, and ponds. Sampling tasks support a
variety of ongoing monitoring programs, including the Water Resource Restoration
Program (WRRP) to determine the effectiveness of remedial actions conducted
under CERCLA and the ETTP Environmental Monitoring Program. Regulatory
compliance data acquisition and management projects include Resource
Conservation and Recovery Act (RCRA) and National Pollution Discharge
Elimination System (NPDES) permit compliance, the Biological Monitoring and
Abatement Program, and Stormwater Pollution Prevention Program (SWPPP)
activities. All of these compliance sampling programs are closely monitored by
regulators, stakeholders, BJC, and DOE-OR.
Advanced Sciences maintains a daily log of all sampling and inspection
activities, and formal records of all monitoring and inspection activities. CAST
has subcontracted laboratories participating in the DOE Consolidated Audit
Program (DOECAP) to provide acceptable data from both chemical and radiological
analyses within the client's requested timeframe. Subcontracts have also been
established with laboratories capable of performing biological species
identification and enumeration.
The Company believes the EDAM contract may attract more DOE client
groups than are contemplated in the base scope of the contract. The Company is
seeking to extend its environmental monitoring service capabilities to other DOE
sites, such as Portsmouth, OH and Paducah, KY. The current contract backlog for
work is $9.7 million in 2006.
Duratek- Advanced Sciences was awarded a one-year contract from Duratek
Federal Services, Inc. beginning in January 2005, which was renewed in January
2006 for an additional one-year period, to perform environmental monitoring
services at two engineered landfills on the Oak Ridge Reservation. Environmental
monitoring services will include sample collection, packaging and shipping to
offsite analytical laboratories. Samples will be collected from surface water,
groundwater, and landfill leachate collection locations on storm event, weekly,
monthly, and quarterly bases.
UT Battelle: Advanced Sciences provides one engineering person on a
time and material basis to UT Battelle, supporting the site closure at Oak Ridge
National Laboratories (ORNL). The Advanced Sciences personnel provide structural
engineering assessment services under this contract. The time and material
contract remains on-going through 2006.
Denver Regional Water Council of Governments: Advanced Sciences is
contracted annually to sample surface waters, streams, groundwater wells and
watersheds to Chatfield Watershed Authority located southwest of Denver. The
contract is ongoing through 2006. A similar and ongoing contract for Cherry
Creek Basin Water Authority is also ongoing.
Tetra Tech Contract: Advanced Sciences provides engineering support
under Tetra Tech's general engineering support contract with Bechtel Jacobs Co,
LLC. Bechtel Jacobs is responsible for environmental oversight of the U.S. DOE's
Oak Ridge, TN site. Advanced Sciences provides 1 to 3 engineering personnel on a
time and material basis to Tetra Tech on a contract basis which is expected to
continue through June 30, 2006.
11
WESKEM - Advanced Sciences was awarded a one-year contract in March
2005 from WESKEM LLC., of Oak Ridge to support their sampling efforts with the
Waste Disposition Services Project. The Sample Management Office (SMO) services
required to meet the needs of this project are: (i) Assistance with the
preparation of analytical statement of works (SOW), (ii) Maintenance of
laboratory performance metrics, (iii) Procurement of best value laboratories,
(iv) Performance of contract verification of data, and (v) Tracking of samples
and sample residue. This contract is ongoing and has been extended through
September 2006.
Joint Ventures
Nuvotec, Inc., Joint Venture. In April 2002, Commodore Government
Environmental Technologies, Inc. ("Government Technologies"), a wholly-owned
subsidiary of the Company, entered into a LLC agreement with Technical Resources
International, Inc., ("TRI"), a wholly owned subsidiary of Nuvotec, Inc., as a
non-exclusive means by which each party (and their affiliates) could pursue
mixed waste treatment contracts on a limited, domestic basis. TRI is a provider
of contract services to the DOE and to the public utilities market. The purpose
of the joint venture, known as Nuvoset, LLC (the "Nuvoset LLC"), a Delaware
limited liability company, encompassed all aspects of mixed waste
characterization, treatment, storage, transportation and disposal through the
use, application and commercialization of the technologies of the Nuvotec LLC
partners. The Nuvoset, LLC was dissolved in 2003 by agreement between the
parties.
SOIL DECONTAMINATION--COMMODORE SOLUTION TECHNOLOGIES, INC.
The Company, through Commodore Solutions, Inc. ("Solutions"), has
developed and has commercialized its patented process known as SET. Based on the
results of its extensive testing and commercial processing activities, the
Company believes that SET is capable of effectively treating and decontaminating
soils and other materials, including sludges, sediments, oils and other
hydrocarbon liquids, metals, clothing and porous and non-porous structures and
surfaces, by destroying PCBs, pesticides, dioxins, chlorinated substances and
other toxic contaminants to an extent sufficient to satisfy current federal
environmental guidelines. The Company also believes that, based on the results
of additional tests, SET is capable of neutralizing substantially all known
chemical weapons materials and warfare agents, explosives and concentrating
certain radioactive wastes for more effective disposal.
The Company's smallest SET systems are bench scale, capable of treating
materials in up to one kilogram quantities utilized in laboratory tests and
feasibility studies. This equipment has been shipped to third party facilities
with permits to receive and test radioactive materials, such as Mountain States
Analytical Laboratories. In 1995 the Company constructed two mobile, trailer
mounted treatment systems. These systems are capable of being mobilized to waste
sites and operated to test SET's applicability at actual waste sites, such as
New Bedford Harbor, MA and Port Hueneme, CA. The Company's first pilot scale
system, the S/4, was constructed in 1995. It was used to test larger masses of
heterogeneous contaminated materials, up to 500 pounds per batch.
In December 1995, the Company received its first commercial contract
for application of the SET technology. The Company teamed with Ionics RCC in
Bellevue, WA to apply their combined processes to the potential remediation of
18,000 cubic yards of PCB contaminated sediments dredged from the Acushnet River
and stored at the New Bedford Harbor Superfund Site. Ionics RCC's B.E.S.T.
12
process solvent-extracted contaminants from the sediments, leaving a highly
contaminated heavy residue which was successfully treated by SET. The residue
contaminants included PCBs with levels as high as 70,000 ppm, as well as
dibenzodioxins and dibenzofurans with toxic equivalents as high as 35,000 ppt.
The tests were performed as part of a treatability study to determine which of
three alternatives were more economically feasible - thermal desorption,
vitrification, and the Company's SET process. Foster Wheeler Environmental
Corporation, who conducted the tests at the site for EPA, concluded in its
formal report that SET was effective and more economical than the other
processes.
In early 1996, the Company began construction of its first commercial
scale SET system, the L1200, at a previously rented facility in Marengo, Ohio.
This machine is capable of treating 1200 gallons of contaminated liquids per
day. In July, 1997, this machine was demonstrated to EPA as a chemical
destruction system for PCBs. In the tests conducted, waste oils contaminated
with PCBs at levels exceeding 20,000 ppm were consistently rendered
non-detectable for PCBs. The nationwide EPA operating permit was issued for this
machine as a result of the test program. Two of these units have been
constructed.
In September 1996, the Company's SET technology was selected as one of
ten innovative technologies to participate in the Department of Commerce's Rapid
Commercialization Initiative. The Department of Defense provided a test site at
the Navy Construction Battalion base at Port Hueneme, CA. Various test matrices
from several facilities around the world were provided for SET processing.
Included were materials contaminated with pesticides and PCBs, as well as
activated charcoal - the by-product of a soil washing process. The Company
mobilized its mobile 15 liter reactor system (CMDU2) to the site, and was
successful in treating six solid matrix waste streams.
In September 1997, the Department of Energy ("DOE") contacted the
Company regarding a application of the SET process at its Weldon Spring
Superfund Site near St. Louis, MO. Through its Project Management Contractor,
MK-Ferguson, the Company was contracted to treat 40 drums of materials
contaminated with PCBs, pesticides, uranium/thorium, and various RCRA materials
including MEK, benzene, TCE, and TCA. The Company mobilized its S/4 unit to the
Weldon Spring site and successfully treated this material to CERCLA requirements
for on site land disposal. During the project, in late March of 1998, Commodore
once again successfully demonstrated the process to EPA.
In 1999 the Company constructed a mobile system capable of treating
many matrices in up to 100 pound batches; the SL-2. It was specifically designed
and built as a stand alone skid mounted system, requiring only electrical hookup
for operation enabling the SL-2 to may be shipped in sea land containers or on a
single truck. This system has operated at three rad/RCRA/TSCA permitted
facilities, successfully treating low-level mixed wastes.
In 1999 the Company introduced its largest current commercial SET
system, the S-10, capable of treating various matrices in batch sizes of up to
3,500 pounds with throughputs up to 1 ton per hour. The S-10 was first used to
treat PCB contaminated soils for a Department of Defense ("DOD") site in
Harrisburg, Pennsylvania (project completed in July, 2001).
13
In October 1999 the Company's SL-2 treatment system was shipped to the
Rad/RCRA/TSCA permitted Waste Control Specialists LLC site near Andrews, TX,
where it successfully treated Freon still bottoms and other miscellaneous
matrices, including NaK, that were also contaminated with LLRW. This was a
commercial application, resulting in the removal of RCRA components such that
over 4,000 pounds of treated materials could be subsequently buried at the
Envirocare Utah facility.
In February 2000 the Company's SL-2 treatment system was utilized in a
treatability study at the Envirocare Utah facility. The solid waste provided for
the treatability study contained low-level radioactive sludge contaminated with
RCRA listed halocarbons. The SET process was very effective in removing the RCRA
materials to sub-ppm quantities, well below regulatory levels for land disposal.
The SET process was commercialized during the calendar year 2000. In
May 2000, the Company mobilized its S-10 system to Harrisburg, Pennsylvania to
begin processing PCB contaminated soils at the Pennsylvania Air National Guard's
base located at the Harrisburg International Airport (the "Initial Harrisburg
Contract"). The Company completed the contract in July 2001, remediating
approximately 340 tons of excavated soils to levels deemed unregulated for
disposal by the U.S. Environmental Protection Agency (the "EPA"). The Company
believes this is the first time a non-thermal process has treated
PCB-contaminated soils to levels allowing them to be replaced in the original
excavation.
Additionally, the Company performed several treatability studies for
third party customers during 2000, as well as continued internal testing and
process development. At Envirocare of Utah ("Envirocare"), the SET process
successfully treated water treatment sludge from a waste stream provided by the
Brookhaven National Laboratory (the "Envirocare Study"). Under current,
non-Commodore technology treatment processes at Envirocare, this waste could not
be treated to meet land disposal regulation requirements. The waste stream was a
laboratory mixed waste (radioactive) sludge, contaminated with lead and high
levels of RCRA organic compounds. The Envirocare Study waste contained the
hazardous waste codes F001, F003, F005, and D008. The Envirocare Study waste
stream also contained high water content, approximately 75%. The Company
successfully treated the material such that it was suitable for land disposal.
The results of the Envirocare Study were presented to the participants of the
Waste Management Conference in Tucson, Arizona in February 2001. In the case of
third party treatability studies, customer location processing and new patent
data set construction, all tests and processing results were verified by
independent laboratories agreed upon by the Company and/or the respective
client. In the case of internal Company process development testing, results
were verified with Company owned analytical equipment in addition to periodic
independent off-site testing.
In January 2001 the Company entered into a contract with Waste Control
Specialists, LLC ("WCS") for the treatment of various mixed waste streams stored
at the WCS facility near Andrews, Texas. This work employed the Company's SL-2
SET system and was completed in August 2001. No large scale waste treatment was
performed at this site. The contract was terminated by the Company because of
the failure of WCS to obtain a waste treatment permit in a timely manner in 2003
and all of the Company's SET equipment was removed from the WCS site.
In November 2001 the Company entered into a contract with American
Ecology Recycle Center ("AERC", Oak Ridge, Tennessee) for the treatment of 32
drums of Freon still bottom mixed wastes, as well as consultation regarding the
regulatory requirements for the treatment. Work commenced in November, employing
the Company's SL-2 SET system, and was essentially completed in 2002. As an
14
adjunct to that work, the Company entered into a contract with the University of
California (prime contractor for the Department of Energy's Los Alamos National
Laboratory) in March 2002 to dispose approximately 12,000 pounds of activated
sodium remaining from tests involving the Clinch River Breeder Reactor performed
by Rensselaer Polytechnic Institute twenty five years ago. The Company believes
this is the first time activated sodium (Na22) has been employed as a reactant
to treat other regulated waste materials (the AERC still bottoms).
In July 2002 the Company acquired all the SET equipment formerly
associated with Teledyne-Commodore LLC. The Company plans to utilize this
equipment for treating Department of Energy ("DOE") legacy mixed waste materials
for disposal at major DOE sites in the United States. The Company has not
utilized this equipment to date.
In October 2003 the Company entered into a contract with ToxCo Metals,
("ToxCo"), Oak Ridge. Advanced Sciences, teamed with ToxCo, was performing
sodium disposition for the Department of Energy at ToxCo's facility in Oak
Ridge, Tennessee. This contract commenced late in 2003, and was expected to be
completed late in 2004. The DOE canceled the contract in late 2004 because they
determined that the sodium was subject to the Secretary of Energy's moratorium
on releasing scrap metals for recycling.
In December 2003 the Company entered into a contract with Envirocare of
Utah ("Envirocare"), Clive, Utah for the treatment of mixed wastes, as well as
consultation regarding the regulatory requirements for the treatment.
Preliminary feasibility testing commenced in March 2004, employing the Company's
SL-2 SET system. The Company is hopeful this may result in the first multi-year
installation and contract for the SET technology but no commercial work has
resulted to date.
The Company has generated aggregate revenues of less than $1,600,000
from the implementation of the SET technology since 1999.
The SET Technology
Beginning in the early 1980's, a small research and development
company, A. L. Sandpiper Corporation, began experimenting with solvated electron
solutions using a different approach from that applied in laboratories for
decades.
In addition to the usual surrogates and spiked laboratory materials,
Sandpiper also obtained and experimented with actual contaminated soil samples
using bench scale metal pressure vessels. Sandpiper improved the process,
discovered that it could be applied to many recalcitrant remediation problems,
and obtained several U.S. patents for the application of solvated electron
solutions (the "SET" technology) to environmental cleanup. Sandpiper was
acquired by Commodore Environmental Services, Inc., in 1993. Since then
Commodore Environmental Services and Commodore Applied Technologies have
invested additional resources in the technology, developing it into commercial
application.
The process is based upon a chemical phenomenon discovered by Sir
Humphrey Davy in 1865, shown below for the liquid phase of a sodium and
potassium solution:
Na(0) + K(0) NH(3) Na+ + K+ + 2e - (the solvated solution)
15
The solution has been called solvated electrons since the dissolved
metal releases electrons to the solution in huge numbers. These electrons, also
know as free radicals, are the most powerful reducing agents known, quickly
reacting with many compounds. Most of the alkali metals readily dissolve in
anhydrous ammonia releasing their valance electrons into the ammonia in a
relatively rare but stable state unassociated with any atom. In this state, both
the electrons and the metal atoms are available to react with other elements and
compounds.
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;
16
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.
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 permit authorized treatment of soils at contamination levels
greater than 1,000 ppm PCBs, and also authorized treatment of miscellaneous
metallic materials. Commodore's initial EPA Nationwide Permit was the first (and
only) to be issued for nationwide use as a totally enclosed, non-thermal,
chemical destruction process for PCB contaminated organic material. The test
results, confirmed by EPA's contract program laboratory, indicated organics
contaminated with weathered PCBs exceeding 5,000 ppm, were treated to non-detect
levels of PCBs. 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.
17
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.
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. The Company has performed treatability studies and actual
commercial applications of the SET process that have resulted in successful
treatment of over 120 regulated compounds. 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 Company has performed various treatability studies and processed
commercial quantities of waste utilizing the SET process. This activity has
resulted in the successful treatment of over 120 regulated compounds.
Additionally, the Company has conducted several thousand tests of the SET
technology 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.
The following test results of the Company's SET technology are provided
below from the analytical results from several of the treatability studies and
commercial applications mentioned above.
Destruction of Organics by the SET Technology in Various Solid Materials
----------------------------- --------------- ----------------------- --------------------- ------------------
Pre Treatment Post-Treatment
Source of Material Analyte Material Type (mg/kg) (mg/kg)
----------------------------- --------------- ----------------------- --------------------- ------------------
Harrisburg, PA PCB Sand, clay 777 <1.0
----------------------------- --------------- ----------------------- --------------------- ------------------
Los Alamos, NM PCB Sand, silt, clay 77 <2.0
----------------------------- --------------- ----------------------- --------------------- ------------------
New York PCB Sand, silt 1,250 <2.0
----------------------------- --------------- ----------------------- --------------------- ------------------
Monroe, LA PCB Sand, silt, clay 8.8 <1.0
----------------------------- --------------- ----------------------- --------------------- ------------------
Hawaii PCB Volcanic Soil 102 0.2
----------------------------- --------------- ----------------------- --------------------- ------------------
North Island Naval Shipyard PCB Activated Carbon 512 0.93
----------------------------- --------------- ----------------------- --------------------- ------------------
ConTech PCB Solid Resin 1,212 0.5
----------------------------- --------------- ----------------------- --------------------- ------------------
New Bedford, MA PCB Sludge 32,800 1.3
----------------------------- --------------- ----------------------- --------------------- ------------------
New Bedford, MA Dioxin Sludge .04 ND
----------------------------- --------------- ----------------------- --------------------- ------------------
Dahlgren, VA DDD Clay 15 <.02
----------------------------- --------------- ----------------------- --------------------- ------------------
Weldon Spring, MO TCE Corn cob 6,400 <0.5
----------------------------- --------------- ----------------------- --------------------- ------------------
Weldon Spring, MO PCB Metal Capacitors 5.6 <0.2
----------------------------- --------------- ----------------------- --------------------- ------------------
Los Alamos RDX Soil 3,850 <1.0
----------------------------- --------------- ----------------------- --------------------- ------------------
Eastern Utility TCE Soil 48,000 0.5
----------------------------- --------------- ----------------------- --------------------- ------------------
18
Compounds Successfully Treated by SET Technology
---------------------------------------------- ------------------------------------------- --------------------------------------
1,1,1-Trichloroethane bis(2-Chloroethyl)ether m-Dichlorobenzene
---------------------------------------------- ------------------------------------------- --------------------------------------
1,1,2-Trichloro-1,2,2-trifluoroethane bis(2-Chloroisopropyl) ether Methoxychlor
---------------------------------------------- ------------------------------------------- --------------------------------------
1,1-Dichloroethane Bromacil Methylethyl ketone
---------------------------------------------- ------------------------------------------- --------------------------------------
1,1-Dichloroethylene Bromodichloromethane Methylisobutyl ketone
---------------------------------------------- ------------------------------------------- --------------------------------------
1,2-Dinitrotoulene Bromomethane/Methylbromide Methyl methacrylate
---------------------------------------------- ------------------------------------------- --------------------------------------
1,2,3,5-Tetrachlorobenzene Butyl alcohol Methylethyl ketone
---------------------------------------------- ------------------------------------------- --------------------------------------
1,2,3-Trichloropropane Butyl benzyl phthalate Naphthalene
---------------------------------------------- ------------------------------------------- --------------------------------------
1,2,4-Trichlorobenzene Carbofuran phenol Nitrobenzene
---------------------------------------------- ------------------------------------------- --------------------------------------
1,2-Dibromoethane/Ethylene dibromide Carbon disulfide o-Dichlorobenzene
---------------------------------------------- ------------------------------------------- --------------------------------------
1,2-Dichloroethane Carbon tetrachloride o-Nitroaniline
---------------------------------------------- ------------------------------------------- --------------------------------------
1,2-Dichloropropane Chlorobenzene o-Nitrophenol
---------------------------------------------- ------------------------------------------- --------------------------------------
1,4 Dioxane Chlorobenzilate p-Chloroaniline
---------------------------------------------- ------------------------------------------- --------------------------------------
2,4,5-Trichlorophenol Chlorodane p-Chloro-m-cresol
---------------------------------------------- ------------------------------------------- --------------------------------------
2,4,5-Trichlorophenoxyacetic acid/2,4,5-T Chlorodibromomethane p-Dichlorobenzene
---------------------------------------------- ------------------------------------------- --------------------------------------
2,4,6-Tribromophenol Chloroethane p-Dimethylaminoazobenzene
---------------------------------------------- ------------------------------------------- --------------------------------------
2,4,6-Trichlorophenol Chrysene Pentachlorobenzene
---------------------------------------------- ------------------------------------------- --------------------------------------
2,4-Dichlorophenoxyacetic acid/2,4-d cis-1,3-Dichloropropylene Pentachlorophenol
---------------------------------------------- ------------------------------------------- --------------------------------------
2,4-Dinitrophenol Cresols PETN
---------------------------------------------- ------------------------------------------- --------------------------------------
2,4-Dinitrotoluene Dalapon Phenanthrene
---------------------------------------------- ------------------------------------------- --------------------------------------
2,6-Dichlorophenol DDD p-Nitroaniline
---------------------------------------------- ------------------------------------------- --------------------------------------
2,6-Dinitrotoluene DDE Polychlorinated biphenyls (all)
---------------------------------------------- ------------------------------------------- --------------------------------------
2-Chloro-1,3-butadiene DDT Pyrene
---------------------------------------------- ------------------------------------------- --------------------------------------
2-Chloroethyl vinyl ether Decamba Silvex/2,4,5-TP
---------------------------------------------- ------------------------------------------- --------------------------------------
2-sec-Butyl-4,6-dinitrophenol/Dinoseb Dibenzo(a,h)anthracene Tetrachloroethane
---------------------------------------------- ------------------------------------------- --------------------------------------
3-Methylcholoanthrene Dibromomethane Tetrachloroethylene
---------------------------------------------- ------------------------------------------- --------------------------------------
4,4-Methylene bis (2-chloroaniline) Dichlorobenzene Tetryl
---------------------------------------------- ------------------------------------------- --------------------------------------
4,6-Dinitro-o-cresol Dichlorodifluoromethane Toxaphene
---------------------------------------------- ------------------------------------------- --------------------------------------
4-Bromophenyl phenylether DieldrinTetrachlorobenzene trans-1,2-Dichloroethylene
---------------------------------------------- ------------------------------------------- --------------------------------------
5-Nitro-o-toluidine Dioxins (all) trans-1,3-DichloropropyleneDieldrin
---------------------------------------------- ------------------------------------------- --------------------------------------
Acenaphthene Ethylbenzene Tribromomethane/Bromoform
---------------------------------------------- ------------------------------------------- --------------------------------------
Acenaphthlene Fluoranthene Trichloroethane
---------------------------------------------- ------------------------------------------- --------------------------------------
Anthracene Freon (all) Trichloroethylene
---------------------------------------------- ------------------------------------------- --------------------------------------
Atrazine Furans (all) Trichlorofluoromethane
---------------------------------------------- ------------------------------------------- --------------------------------------
Benomyl Halons (all) tris-(2,3-Dibromopropyl) phosphate
---------------------------------------------- ------------------------------------------- --------------------------------------
Benzal chloride Heptachlor Vernolate
---------------------------------------------- ------------------------------------------- --------------------------------------
Benzo(a)anthracene Heptachlor epoxide Vinyl chloride
---------------------------------------------- ------------------------------------------- --------------------------------------
Benzo(a)pyrene Hexachlorobenzene Xylenes-mixed isomers
---------------------------------------------- ------------------------------------------- --------------------------------------
Benzo(b)fluoranthene Hexachlorobutadiene
---------------------------------------------- ------------------------------------------- --------------------------------------
Benzo(b)fluoranthene Hexachlorocyclopentadiene
---------------------------------------------- ------------------------------------------- --------------------------------------
Benzo(g,h,I)perylene Chemical warfare agents
---------------------------------------------- ------------------------------------------- --------------------------------------
Benzo(g,h,i)perylene Hexachloroethane
---------------------------------------------- ------------------------------------------- --------------------------------------
Malathion Idomethane
---------------------------------------------- ------------------------------------------- --------------------------------------
Benzo(k)fluoranthene Indeno(1,2,3-cd)pyrene
---------------------------------------------- ------------------------------------------- --------------------------------------
bis(2-Chloroethoxy)methane Isosafrole
---------------------------------------------- ------------------------------------------- --------------------------------------
19
Destruction of Halogenated Materials in Liquids by the SET Technology
------------------------- ------------------------ --------------------- --------------------
Pre-Treatment Post-treatment
Material Analyte (mg/L) (mg/L)
------------------------- ------------------------ --------------------- --------------------
Used Motor oil PCB 23,339 <1.0
------------------------- ------------------------ --------------------- --------------------
Transformer oil PCB 509,000 20*
------------------------- ------------------------ --------------------- --------------------
Mineral Oil PCB 5,000 <0.5
------------------------- ------------------------ --------------------- --------------------
Hexane PCB 100,000 0.5
------------------------- ------------------------ --------------------- --------------------
Aqueous sludge Freon 113 276 ND
------------------------- ------------------------ --------------------- --------------------
Aqueous sludge TCE 262 ND
------------------------- ------------------------ --------------------- --------------------
Oil CCl 200,000 <0.5
------------------------- ------------------------ --------------------- --------------------
Refrigerant R 23 999,999 ND
------------------------- ------------------------ --------------------- --------------------
Oil Dioxin 0.4 .000002
------------------------- ------------------------ --------------------- --------------------
Oil Malathion 900,000 ND
------------------------- ------------------------ --------------------- --------------------
Freon Acetone 7,600 < LDR
------------------------- ------------------------ --------------------- --------------------
Freon Carbon Tet 14 < LDR
------------------------- ------------------------ --------------------- --------------------
Freon Ethylbenzene 287 < LDR
------------------------- ------------------------ --------------------- --------------------
Freon Methylene Chloride 1,600 < LDR
------------------------- ------------------------ --------------------- --------------------
Freon 1,1,1, TCA 69 < LDR
------------------------- ------------------------ --------------------- --------------------
Freon TCE 41 < LDR
------------------------- ------------------------ --------------------- --------------------
Freon Toluene 77 < LDR
------------------------- ------------------------ --------------------- --------------------
Freon Xylenes 690 < LDR
------------------------- ------------------------ --------------------- --------------------
Freon Freon-113 600,000 < LDR
------------------------- ------------------------ --------------------- --------------------
MARKETS AND CUSTOMERS
General
The Company markets its services and technologies to governmental and
industrial customers throughout the United States. The Company also plans to
target customers in markets abroad, particularly in Eastern Europe and the
Middle East. A majority of the Company's sales are technical in nature and
involve senior technical and management professionals, supported by the
Company's marketing groups. During the year ended December 31, 2005, sales of
approximately 100% of the Company's environmental management services were
derived from contracts with federal, state and municipal government agencies.
Contracts with governmental customers generally may be terminated at any time at
the option of the customer. In 2005, Advanced Sciences' Oak Ridge Contracts,
Aurora, CO contracts and ToxCo contracts accounted for approximately 98.5%, 0.5%
and 1%, respectively of the Advanced Sciences' sales. In 2004, the Company had
three customers which accounted for 38%, 28%, and 19%, respectively of the
Advanced Sciences' sales. In 2003, the Company had three customers which
accounted for 24%, 20%, and 15%, respectively of the Advanced Sciences' sales.
The Company has benefited from its long-term relationships with many of its
customers that result in repeat business.
20
Soil Decontamination
The Company anticipates that the initial market for commercial
applications of SET will be the hazardous and mixed waste and industrial
by-products treatment and disposal market. Mixed waste is material that contains
both a hazardous and radioactive component. The most common methods of treatment
and disposal of hazardous wastes and industrial by-products include landfilling,
chemical and biological treatment and incineration. Most of the current
treatment and disposal methods entail air pollution and transportation risks. In
a mixed waste, both hazardous and nuclear regulations apply, making disposal
difficult, if not impossible. Currently, there exists very limited disposal
options and these may not provide a permanent solution. Certain of these
treatment and disposal methods result in large volumes of residual waste, which
may require further treatment prior to disposal. As a result, a number of these
methods are encountering increased public resistance and added regulatory
oversight.
As with any new technology or process, there has been initial
resistance to the use of SET on a large scale, especially in connection with a
strong vested interest on the part of the U.S. Military (based on substantial
expenditures and commitments previously made) to use incineration for the
destruction of weapons. In addition, other prospective projects for the Company
have already been committed to other forms of destruction technology, including
incineration, plasma arc, vitrification, molten metal, molten salt, chemical
neutralization, biological treatment, catalytic electrochemical oxidation and
supercritical wet oxidation. The Company, and its collaborative partners, have
been attempting to overcome such competition by introducing SET in smaller
clean-up projects and through feasibility studies demonstrating its
applicability to larger projects, such as the Initial Harrisburg Contract during
the years 2000 and 2001, and the WCS Fixed Facility Processing Contract during
the year 2001. 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 over the next twenty years. 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.
21
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, 2005, total potential backlog for the Company was
approximately $9,761,000 as compared with approximately $5,400,000 as of
December 31, 2004. The total backlog represents work for which the Company has
entered into a signed agreement or purchase order with respect thereto or has
received an order to proceed with work up to a specified dollar amount. The
Company estimates that all of the total backlog represents work that will be
completed in the next 12 months. Backlog amounts have historically resulted in
revenues; however, no assurance can be given that all amounts included in
backlog will ultimately be realized, even if covered by written contracts or
work orders.
RESEARCH AND DEVELOPMENT
Research and development activities are ongoing and utilize internal
technical staff, as well as independent consultants retained by the Company and
its subsidiaries. All such activities are company-sponsored. Research and
development expenditures for the Company and its subsidiaries were $5,000,
$9,000, and $70,000 for the years ended December 31, 2005, 2004, and 2003,
respectively.
INTELLECTUAL PROPERTY
The Company currently has sixteen (16) issued U.S. and foreign patents.
The average life expectancy for the currently issued patents is 11.67 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
22
un-patented proprietary information originated by such persons while in the
employ of the Company. The Company also requires potential collaborative
partners to enter into confidentiality and non-disclosure agreements.
There can be no assurance that any patents that may hereafter be
obtained, or any of the Company's confidentiality and non-disclosure agreements,
will provide meaningful protection of the Company's confidential or proprietary
information in the case of unauthorized use or disclosure. In addition, there
can be no assurance that the Company will not incur significant costs and
expenses, including the costs of any future litigation, to defend its rights in
respect of any such intellectual property.
COMPETITION
Soil Decontamination
The Company anticipates that the market for commercial private sector
applications of SET will be hazardous and non-hazardous waste and industrial
by-products treatment and disposal, in particular the more recalcitrant "mixed"
wastes (wastes containing a radioactive element). Several large domestic and
international companies and numerous small companies, many of whom have
substantially greater financial and other resources than the Company, compete
with the Company in this market. The Company primarily competes in the hazardous
waste treatment market in the U.S., a market valued at over $3.7 billion for
2005. 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
companies with permitted waste treatment and disposal sites, including Energy
Solutions, Pacific EcoSolution, and American Ecology, as well as other treatment
companies such as Duratek and PermaFix. The Company's revenues for 2005 account
for less than 1 percent of the dollar volume of the hazardous waste market. 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, bio-remediation, molten salt, chemical
neutralization, catalytic electrochemical oxidation and supercritical wet
oxidation.
23
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
consulting 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 $9 to $10 billion for 2006. The DOE and DOD are expected to
account for approximately 66% of such expenditures. Commodore Advanced Sciences
currently occupies a position in the waste management and environmental services
arena by virtue of its long-term record for providing environmental services to
the United States government.
External developments and forces affecting Advanced Sciences include
competition from its competitors, as well as, demographic and technological
trends that influence the composition and needs of its customer base and the
usefulness and competitive position of its services. In addition, in order to
maintain its position in its market, Advanced Sciences must be able to respond
to economic trends and regulatory actions that affect the usefulness and
accessibility of its services and control its costs of doing business.
In the hazardous waste management market, Advanced Sciences'
competitors include such firms as Roy F. Weston, Jacobs Engineering, Science
Applications International Corp., CH2M Hill and CDM, all of whom have greater
financial and other resources than the Company. In providing environmental
impact assessment services, Commodore Advanced Sciences' principal competitors
in this market sector include Tetra Tech, The Earth Technology Corp., Battelle,
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.
24
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.
25
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 allowed it to use SET on-site to
treat PCB-contaminated soils and metallic surfaces, although the permit is
currently expired. The Nationwide Permit contains numerous conditions for
maintaining the Nationwide Permit and there can be no assurance that the Company
will be able to comply with such conditions to maintain and/or secure renewal of
the Nationwide Permit. In addition, if environmental legislation or regulations
are amended, or are interpreted or enforced differently, the Company may be
required to meet stricter standards of operation and/or obtain additional
operating permits or approvals. Failure to obtain such permits or otherwise
comply with such regulatory requirements could have a material adverse effect on
the Company and its operations. Various revisions to the equipment and process
parameters are being made to the existing permit. The Company believes that the
revised permit will be issued pending the final site selection for the full or
part-time operation of any SET system for the treatment of PCB wastes. The
revised permit will require the Company to fund closure costs associated with
the implementation of any SET system for the treatment of PCB wastes. The
closure costs are calculated on a site-by-site basis and are funded accordingly
by the Company.
EMPLOYEES
As of December 31, 2005, the Company (including all of its direct and
indirect subsidiaries) had a total of 36 full-time and 2 part-time employees, of
which approximately 30 are engineers, scientists, environmental technicians and
other professionals. None of such employees are covered by collective bargaining
agreements and the Company's relations with its employees are believed to be
good.
OTHER INFORMATION
See Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K for information regarding revenue from customers, a measure
of profit or loss and total assets for each of the Company's segments for the
last 3 fiscal years.
26
ITEM 1A. RISK FACTORS
----------------------
Investing in our securities involves a material degree of risk. Before
making an investment decision, you should carefully consider the risk factors
set forth below as well as other information we include or incorporate by
reference in this annual report and the additional information in the other
reports we file with the U.S. Securities and Exchange Commission ("SEC").
Credit and Business Risks
The documents governing our indebtedness restrict our ability and the ability of
our subsidiaries to engage in some business transactions.
We have entered into a loan arrangement with the Shaar Fund, Ltd that
is secured by essentially all the assets in the Company that are not related to
the receivable line of credit facility with Commerce Funding Corporation (the
"New Shaar Note"). The New Shaar Note is used to fund working capital and
general corporate requirements. As of December 31, 2005, the outstanding balance
was $5,426,233. The agreements governing the Shaar Loan restricts our ability
and the ability of our subsidiaries to, among other things, engage in the
following actions:
o declare or pay dividends on and redeem or repurchase capital
stock;
o transfer assets or make loans between us and some of our
subsidiaries;
o make material changes in the nature or conduct of our business;
o merge or consolidate with, acquire substantially all of the stock
or assets of any other companies; and
o transfer or sell assets.
Our failure to comply with obligations under the New Shaar Note could
result in an event of default. A default, if not cured or waived, could permit
acceleration of our indebtedness. We cannot be certain that we will be able to
remedy any default. If our indebtedness is accelerated, we cannot be certain
that we will have funds available to pay the accelerated indebtedness or that we
will have the ability to refinance the accelerated indebtedness on terms
favorable to us or at all.
Our Receivables Line of Credit may restrict our ability and the ability of our
subsidiaries to engage in some business transactions.
We have entered into a secured credit facility (the "Credit Facility")
which consists of a one-year, $2 million receivables financing line of credit to
fund working capital and general corporate requirements. As of December 31,
2005, the outstanding balance was $141,000.
Our failure to comply with obligations under the Credit Facility could
result in an event of default under the facility. A default, if not cured or
waived, could permit acceleration of our indebtedness. We cannot be certain that
we would be able to remedy any default. If our indebtedness is accelerated, we
cannot be certain that we will have funds available to pay the accelerated
indebtedness or that we will have the ability to refinance the accelerated
indebtedness on terms favorable to us or at all.
We Have Liquidity Problems and are Uncertain of Our Continued Access to Loans
Our current monthly operating expenses exceed cash revenues by
approximately $80,000. Currently, this cash shortfall is being covered by loans
from The Shaar Fund, Ltd., but The Shaar Fund, Ltd. may discontinue these loans
27
at any time and for any reason. If that happened, we would not be able to meet
our current obligations and would be unable to continue operations unless
alternative funding was obtained.
In addition, we owe $888,000 in loans that are currently due or are
payable on demand. Although the lenders on these loans have not yet called the
loans, the Company does not currently have the ability to pay these loans absent
additional financing.
If we are able to obtain financing to cover these obligations, it
probably would involve additional dilution to shareholders or additional
financial risk to the Company.
Our Ability to Operate as a Going Concern is in Doubt
The report of our independent registered public accounting firm on our
fiscal 2003, 2004 and 2005 consolidated financial statements contains a "going
concern" qualification in which they express substantial doubt about our ability
to continue in business.
As shown in the consolidated financial statements for the years ended
December 31, 2005, 2004, and 2003, the Company incurred losses of $2,714,000,
$2,404,000, and $2,957,000, respectively. The Company has also experienced net
cash inflows (outflows) from operating activities of ($1,337,000), ($1,532,000),
and ($955,000) for the years ended December 31, 2005, 2004 and 2003
respectively. At December 31, 2005 and 2004 the Company had working capital
(deficit) of ($4,586,000) and ($6,389,000) respectively. Overall, the Company
has experienced significantly greater revenues and has improved its
income/(loss) from operations from (988,000) to (2,000,000) for the year ended
December 31, 2005 compared to the year ended December 31, 2004.
Our losses have resulted from a combination of:
o costs associated with expansion of our environmental management
services business.
o large expenditures for infrastructure to support our anticipated
future growth;
o significant costs associated with our commercialization
activities;
o financing and interest expenses;
o inadequate revenues due to significant delays in our obtaining
material project contracts from potential governmental and
private-sector customers; and
o general and administrative expenses.
Until we are able to obtain additional significant environmental
services contracts, or one or more large projects for our SET technology, we
will continue to experience losses.
28
Our Business Strategy Depends on Business Collaborations
In the environmental services and hazardous waste treatment markets,
the Company may not be able to enter into favorable business collaborations and
might thus be required to bid upon projects for its own account. If such bids
were successful, the Company would be required to make significant expenditures
on personnel and capital equipment which would require significant financing.
Even if the Company is successful in achieving favorable business
collaborations, the implementation of such arrangements and the expansion of the
Company's business may require the commitment of significant capital resources
toward the hiring of technical and operational support personnel, the
development of a waste treatment facility for SET, and the building of equipment
for on-site remediation of contaminated elements. In the event the Company is
presented with one or more significant environmental services contracts,
reclamation or clean-up projects, individually or in conjunction with
collaborative working partners, it may require additional capital to take
advantage of such opportunities. There can be no assurance that such financing
will be available or, if available, that it will be on favorable terms.
Our previously reported losses could increase due to our inability to accurately
estimate the overall risks, revenue, or costs on a contract.
We generally enter into three principal types of contracts with our
clients: firm fixed-price, fixed-unit-rate, and time-and-materials award. Under
our firm fixed-price and fixed-unit-rate contracts, we receive a fixed price
regardless of the actual costs we incur and, consequently, we are exposed to a
number of risks. These risks include underestimation of costs, problems with new
technologies, unforeseen costs or difficulties, delays beyond our control and
economic and other changes that may occur during the contract period. Under our
time-and-materials contracts, we are paid for labor and costs incurred at
negotiated contractual rates. Profitability on these contracts is driven by the
extent of utilization of our billable personnel and cost control.
Accounting for a contract requires judgment relative to assessing the
contract's estimated risks, revenue, and costs, and on making judgments on other
technical issues. Due to the size and nature of several of our contracts, the
estimation of overall risks, revenue and costs at completion is complicated and
subject to many variables. Changes in underlying assumptions, circumstances, or
estimates may also adversely affect future period financial performance.
We may continue to encounter difficulties in pursuing our growth objectives.
Although the Department of Energy has indicated that a number of new
contracts will be awarded in 2006 and 2007, governmental awards are frequently
delayed. Additionally, we cannot predict whether we will be successful in
obtaining new federal services business awards. In some instances, we may choose
to bid as the lead of a prime contractor team. In the past, we have operated
mainly as a subcontractor or in a minority position on the prime contractor
team. We expect to be bidding against organizations that have substantially
greater resources and experience in being the leading prime contractor or
sub-contractor for these kinds of projects.
In light of these uncertainties for new business awards in our
commercial and federal services business units, our growth plan anticipates
pursuing new opportunities for providing services with respect to sampling and
data management, low-level radioactive waste treatment at DOE sites in the
United States. In many of these potential opportunities, we may not have
experience comparable to our current and past experience in our federal and
29
commercial businesses. Thus, we may be subject to a range of risks in obtaining
and performing these types of businesses, the adequacy and experience of
management, and the adequacy of operational resources and technical capabilities
needed to perform these mandates successfully. We cannot predict whether we will
be successful in obtaining or performing any new business initiatives in these
new business areas.
Government Contracting Risks
The U.S. government can audit and disallow claims for compensation under our
government contracts, and can terminate those contracts without cause.
Our government contracts, which are primarily with the DOE and DoD,
are, and are expected to continue to be, a significant part of our business. We
derived approximately 100% of our consolidated revenues in 2005 and 96% of our
consolidated revenues in 2004 from contracts funded by the DOE. The work that we
performed for customers that represented greater than 10% of the Company's
segment revenues were with a prime contractor, Bechtel Jacobs Engineering.
Allowable costs under government contracts are subject to audit by the U.S.
government. To the extent that these audits result in determinations that costs
claimed as reimbursable are not allowable costs or were not allocated in
accordance with Federal government regulations, we could be required to
reimburse the U.S. government for amounts previously received. In addition, if
we were to lose and not replace our revenues generated by one or more of the
U.S. government contracts, our businesses, financial condition, results of
operations, and cash flows could be adversely affected.
We have a number of contracts and subcontracts with agencies of the
U.S. government, principally for environmental services and data management,
that extend beyond one year and for which additional government funding has not
yet been appropriated. We cannot be certain that the U.S. government will
appropriate such funds.
All contracts with agencies of the U.S. government are subject to
unilateral termination at the option of the customer. In the event of a
termination, we would not receive projected revenues or profits associated with
the terminated portion of those contracts; however, all costs incurred prior to
termination are recoverable in accordance with Federal Acquisition Regulations.
In addition, government contracts are subject to specific procurement
regulations, contract provisions, and a variety of other socioeconomic
requirements relating to the formation, administration, performance, and
accounting of these contracts. Many of these contracts include express or
implied certifications of compliance with applicable laws and contract
provisions. As a result of our government contracting, claims for civil or
criminal fraud may be brought by the government for violations of these
regulations, requirements, or statutes. We may also be subject to qui tam
litigation brought by private individuals on behalf of the government under the
Federal Civil False Claims Act, which could include claims for up to treble
damages. Further, if we fail to comply with any of these regulations,
requirements, or statutes, our existing government contracts could be
terminated, we could be suspended from government contracting or subcontracting,
including federally funded projects at the state level, and our ability to
participate in foreign projects funded by the United States could be adversely
affected. If one or more of our government contracts are terminated for any
reason, or if we are suspended from government work, we could suffer a
significant reduction in expected revenues.
Most of our government contracts are awarded through a regulated competitive
bidding process. The inability to complete existing government contracts or win
new government contracts over an extended period could harm our operations and
adversely affect our future revenues.
Most of our government contracts are awarded through a regulated
competitive bidding process. Some government contracts are awarded to multiple
competitors, which increases overall competition and pricing pressure and may
30
require us to make sustained post-award efforts to realize revenues under these
government contracts. In addition, government clients can generally terminate or
modify their contracts at their convenience. Moreover, even if we are qualified
to work on a new government contract, we might not be awarded the contract
because of existing government policies designed to protect small businesses and
underrepresented minority contractors. The inability to complete existing
government contracts or win new government contracts over an extended period
could harm our operations and adversely affect our future revenues.
If our partners fail to perform their contractual obligations on a project, we
could be exposed to legal liability, loss of reputation and profit reduction or
loss on the project.
We perform projects jointly with outside partners, entering into
subcontracts, joint ventures, and other contractual arrangements so that we can
jointly bid and perform on particular projects. Success on these joint projects
depends in large part on whether our partners fulfill their contractual
obligations satisfactorily. If any of our partners fail to satisfactorily
perform their contractual obligations as a result of financial or other
difficulties, we may be required to make additional investments and provide
additional services in order to make up for our partner's shortfall. If we are
unable to adequately address our partner's performance issues, then our client
could terminate the joint project, exposing us to legal liability, loss of
reputation, and reduced profit or loss on the project.
Our future success will likely depend, in part, on the success of our
existing collaborative relationships. Collaborative arrangements involve risks
that the participating parties may disagree on business decisions and strategies
resulting in potential delays, additional costs, and risks of litigation. Our
inability to successfully maintain existing collaborative relationships or enter
into new collaborative arrangements could have a material adverse effect on our
results of operations.
Regulatory Risks
Our services expose us to significant risks of liability and our insurance
policies may not provide adequate coverage.
When we perform our hazardous waste treatment services, our personnel
and equipment may be exposed to radioactive and hazardous materials and
conditions. Although we are committed to a policy of operating safely and
prudently, we may be subject to liability claims by employees, customers, and
third parties as a result of such exposures. In addition, we may be subject to
fines, penalties, or other liabilities arising under environmental or safety
laws. To date, we have been able to obtain liability insurance for the operation
of our business. However, there can be no assurance that our existing liability
insurance is adequate or that it will be able to be maintained or that all
possible claims that may be asserted against us will be covered by insurance. A
partially or completely uninsured claim, if successful and of sufficient
magnitude, could have a material adverse effect on our results of operations and
financial condition.
We operate in a highly regulated industry requiring our customers and us to have
and comply with federal, state, and local government permits and approvals.
We and our customers operate in a highly regulated environment.
Facilities utilizing our hazardous waste treatment technology are required to
have federal, state, and local government permits and approvals. Any of these
permits or approvals may be subject to denial, revocation, or modification under
various circumstances. Failure to obtain or comply with the conditions of
permits or approvals or with environmental and safety laws may adversely affect
our operations and may subject us to penalties and other sanctions.
31
In addition to regulatory requirements, environmental laws impose joint
and several liabilities for the cleanup of contamination upon the current and
former owners and operators of contaminated property and on any party who
arranges for the disposal or treatment of hazardous substances at a facility
that is or becomes contaminated. Such liability is imposed without regard to
fault and regardless of knowledge or compliance with environmental requirements.
There can be no assurance that we will not face such liability in the future.
In addition, if new environmental legislation or regulations are
enacted or existing legislation or regulations are amended or are interpreted or
enforced differently, we or our customers may be required to obtain additional
operating permits or approvals. Changes in environmental requirements also may
require us to change or improve our waste management technologies and services
and incur additional expenses. There can be no assurance that we will be able to
meet all of the applicable regulatory requirements.
Changes in existing environmental laws, regulations, and programs could reduce
demand for our environmental services, which could cause our revenues to
decline.
A significant amount of our engineering services and hazardous waste
treatment business is generated either directly or indirectly as a result of
existing Federal and state laws, regulations, and programs related to pollution
and environmental protection. Federal, state, and local environmental
legislation and regulations require substantial expenditures and impose
liabilities for noncompliance. Accordingly, a relaxation or repeal of these laws
and regulations, or changes in governmental policies regarding the funding,
implementation, or enforcement of these programs, could result in a decline in
demand for environmental services that may have a material adverse effect on our
revenue.
Competition Risks
We face increasing competition in the provision of environmental services and
waste treatment technologies.
The environmental services and hazardous waste treatment industry is
characterized by several large companies and numerous small companies. Any of
these companies may possess or develop technologies superior to our
technologies. In addition, we compete with companies offering environmental
services and hazardous waste treatment technologies alternatives. In our
services business, our competitors range from major national and regional
environmental service and consulting firms with large environmental services
staffs to small local firms. To the extent that our competitors offer more
cost-effective management technology alternatives or offer comparable services
at lower prices, our ability to compete effectively could be adversely affected.
Our success depends on attracting and retaining qualified personnel in a
competitive environment.
We are dependent upon our ability to attract and retain highly
qualified managerial and business development personnel, skilled technical
specialists, and experts in a wide range of scientific, engineering, and health
and safety fields. Competition for key personnel is intense. We cannot be
certain that we will retain our key managerial, business development, and
technical personnel or that we will attract or assimilate key personnel in the
future. Failure to retain or attract such personnel could materially adversely
affect our businesses, financial position, results of operations, and cash
flows.
We are also highly dependent upon the technical expertise and
management experience of our senior management. The loss of the services of any
of these individuals could have a material adverse effect on our results of
32
operations and financial condition. Senior management is not subject to
employment agreements. There are no "key man" life insurance policies on any
members of senior management or any other personnel.
Other Risks
Certain Anti-Takeover Provisions and Potential Adverse Effect on Market Price of
Securities from Issuance of Preferred Stock
The Company's certificate of incorporation, as amended (the
"Certificate of Incorporation"), and by-laws (the "By-laws") contain certain
provisions that could have the effect of delaying or preventing a change of
control of the Company, which could limit the ability of security holders to
dispose of their shares in such transactions. The Certificate of Incorporation
authorizes the Board of Directors to issue one or more series of preferred stock
without stockholder approval. Such preferred stock could have voting and
conversion rights that adversely affect the voting power of the holders of
Convertible Preferred Stock or Common Stock, or could result in one or more
classes of outstanding securities that would have dividend, liquidation or other
rights superior to those of the Convertible Preferred Stock or Common Stock.
Issuance of such preferred stock may have an adverse effect on the then
prevailing market price of the Convertible Preferred Stock or Common Stock.
Additionally, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware general corporate law (DGCL), which prohibits the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Section 203 of the DGCL could have the effect of delaying
or preventing a change of control of the Company.
Our Charter Contains Authorized, Unissued Preferred Stock That May Inhibit A
Change Of Control Of Our Company Under Circumstances That Could Give You An
Opportunity To Realize A Premium Over Prevailing Market Prices Of Our
Securities.
Our certificate of incorporation and by-laws contain provisions that
could make it more difficult for a third party to acquire the company under
circumstances that could give stockholders an opportunity to realize a premium
over then-prevailing market prices of our securities. Our certificate of
incorporation authorizes our board of directors to issue preferred stock without
stockholder approval and upon terms as it may determine. The rights of holders
of our common stock are subject to, and may be adversely affected by, the rights
of future holders of preferred stock. In addition, our by-laws require
stockholders to provide advance notice to nominate candidates for election as
directors and to submit proposals for consideration at stockholder meetings.
Section 203 of the Delaware General Corporation Law makes it more difficult for
an "interested stockholder" (generally a 15% stockholder) to effect various
business combinations with a corporation for a three-year period after the
stockholder becomes an "interested stockholder." In general, these provisions
may discourage a third party from attempting to acquire our company and,
therefore, may inhibit a change of control of our company
The value of our Common Stock could continue to be volatile.
Our Common Stock has experienced substantial price volatility. In
addition, the stock market has experienced extreme price and volume fluctuations
that have affected the market price of many companies and that have often been
unrelated to the operating performance of these companies. The overall market
and the price of our Common Stock may continue to fluctuate greatly. The trading
price of our Common Stock may be significantly affected by various factors,
including:
33
o quarter-to-quarter variations in our financial results, including
revenue, profits, and other measures of financial performance or
financial condition;
o ability to continue to finance any shortfalls in cash flows which
currently average $80,000 per month:
o conversion of our convertible debt and preferred stock instruments
into the Company's common stock will be dilutive;
o announcements of new contracts or technological development;
o announcements by us or our competitors of significant
acquisitions;
o resolution of threatened or pending litigation;
o status of our collaborative arrangements or those of competitors;
o changes in investors' and analysts' perceptions of our business or
any of our competitors' businesses;
o investors' and analysts' assessments of reports prepared or
conclusions reached by third parties;
o changes in environmental legislation;
o patent or proprietary rights developments;
o broader market fluctuations; and
o general economic or political conditions.
Additionally, volatility or a lack of positive performance in our stock
price may adversely affect our ability to retain key employees, many of whom are
granted stock options, the value of which are dependent on the performance of
our stock price.
Our quarterly operating results may fluctuate significantly, which could have a
negative effect on the price of our Common Stock.
Our quarterly revenue, expenses, and operating results may fluctuate
significantly because of a number of factors, including:
o unanticipated changes in contract performance that may affect
profitability, particularly with contracts that have funding
limits;
o the timing of resolutions on requests for equitable adjustments
("REAs"), and other contract adjustments;
o the seasonality of the spending cycle of our public sector
clients, notably the Federal government, and the spending patterns
of our commercial sector clients;
o employee staff levels and utilization rates;
o the ability of our clients to terminate engagements without
penalties;
o delays incurred in connection with an engagement;
o the size and scope of engagements;
o changes in the prices of services offered by our competitors;
o changes in accounting rules; and
o general economic or political conditions.
34
Variations in any of these factors could cause significant fluctuations
in our operating results from quarter to quarter and could result in net losses.
Absence of Dividends on Common Stock
The Company has never declared or paid any dividends on its Common
Stock. The declaration and payment in the future of any cash or stock dividends
on the Common Stock will be at the discretion of the Board of Directors of the
Company and will depend upon a variety of factors, including the ability of the
Company to service its outstanding indebtedness, the Company's future earnings,
if any, capital requirements, financial condition and such other factors as the
Company's Board of Directors may consider to be relevant from time to time.
Pursuant to the terms governing the Convertible Preferred Stock, the Company's
Board of Directors may not declare dividends payable to the holders of Common
Stock unless and until all accrued cash dividends through the most recent past
annual payment date have been paid in full to the holders of the Convertible
Preferred Stock. Earnings of the Company, if any, not paid as dividends to
holders of the Convertible Preferred Stock are expected to be retained for use
in expanding the Company's business. Accordingly, the Company does not expect to
declare or pay any dividends on its Common Stock in the foreseeable future.
Potential Adverse Effect on Market Price of Securities from Future Sales of
Common Stock
Assuming the conversion of all securities convertible into Common Stock
and the exercise of all warrants and options to purchase Common Stock using the
closing stock quote as April 5, 2006, the Company will have approximately
51,214,691 shares of Common Stock outstanding as of December 31, 2005. Of such
shares, 27,814,469 shares of Common Stock will be freely tradable without
restriction or further registration under the Securities Act, subject, if
purchased by "affiliates" of the Company, to the volume and certain other
limitations of Rule 144 promulgated under the Securities Act. The remaining
23,400,222 shares of Common Stock are "restricted securities" as defined in Rule
144 promulgated under the Securities Act, and may only be sold in the public
market if such shares are registered under the Securities Act or sold in
accordance with Rule 144 or another exemption from registration under the
Securities Act. No prediction can be made as to the effect, if any, that future
sales of shares, or the availability of shares for future sale, will have on the
market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares of Common Stock issued
upon the conversion of the Convertible Preferred Stock and the exercise of
outstanding warrants and stock options), or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock. If
such sales reduce the market price of the Common Stock, the Company's ability to
raise additional capital in the equity markets could be adversely affected.
Future Sales Of Our Common Stock May Have A Depressive Effect On The Market
Price Of Our Stock
Sales of substantial amounts of our common stock, or the perception
that those sales could occur, could adversely affect prevailing market prices
for our common stock. On a fully-diluted basis (not including the shares of our
common stock underlying any of our outstanding convertible preferred stock or
the conversion feature of the New Shaar Note), approximately 13,977,679 shares
of our common stock would be outstanding as of December 31, 2005. Of such
35
shares, 12,282,389 shares would be freely tradable without restriction or
further registration under the Securities Act, except to the extent those shares
are held by our "affiliates." The remaining 1,695,290 shares are "restricted
securities" as defined in Rule 144 promulgated under the Securities Act, and may
only be sold in the public market if those shares are registered under the
Securities Act of 1933, as amended, or sold in accordance with Rule 144 or
another exemption from registration.
Our Stock Price Could Decline Due to Sales of Shares Issued upon Conversion of
the Series J Convertible Preferred Stock or the New Shaar Note or by Short
Sales.
To the extent the Series J convertible preferred stock and/or the
balance of the New Shaar Note are converted into shares of our common stock, or
dividends in respect of those securities are paid in shares of our common stock
rather than cash, a significant number of additional shares of common stock may
be sold into the market, which could decrease the price of our common stock due
to additional supply of shares relative to demand in the market. In that case,
we could be required to issue an increasingly greater number of shares of our
common stock upon future conversions of Series J convertible preferred stock and
/or the exercise of the conversion feature on the New Shaar Note, sales of which
could further depress the price of our common stock and have a material adverse
effect on the value of your investment. Moreover, since the conversion prices of
the Series J convertible preferred stock and the conversion feature on the New
Shaar Note will be based on the average of the closing prices of our common
stock over a period of ten trading days prior to conversion, but in no case
greater than $0.50 per share or less than $0.05 per share, the conversion prices
could be less than the actual market price of our common stock on the date of
conversion.
If the sale of a large amount of shares of our common stock upon
conversion of the Series J convertible preferred stock and the exercise of the
conversion feature on the New Shaar Note results in a decline in the price of
our common stock, this event could encourage short sales of our common stock by
stockholders, or margin calls upon investors in our common stock. Short sales or
margin calls could place further downward pressure on the price of our common
stock.
No corporation actions requiring stockholder approval can take place
without the approval of our controlling stockholders. The executive officers,
directors, and entities affiliated with them, in the aggregate, beneficially own
approximately 42 percent of our voting stock. These stockholders acting together
or with others would be able to decide or significantly influence all matters
requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combination transactions. This
concentration of ownership may have the effect of delaying or preventing a
merger or other business combination transaction, even if the transaction would
be beneficial to our other stockholders.
ITEM 1B. UNRESOLVED SEC STAFF COMMENTS
None.
36
ITEM 2. PROPERTIES.
------- -----------
The Company's principal executive offices are located in New York, New
York. The Company leases approximately 2,000 square feet of office space in New
York from an affiliate of Bentley J. Blum, a director and principal stockholder
of Commodore Environmental Services, Inc. ("Environmental") and a director of
the Company, Solution, Commodore Separation Technologies, Inc. ("Separation"),
Advanced Sciences and certain other subsidiaries and affiliates of the Company.
Such space also serves as the principal executive offices of Environmental and
certain of its affiliates. Although the Company's lease for the New York City
space expired in December 1998, the Company has been permitted to use the New
York City office space during 1999, 2000, 2001, 2002, 2003, 2004, 2005 and 2006
in exchange for providing general and director & officer insurance coverage to
Environmental and Separation under its policy. In November 2003 the Company
issued 1,367,790 warrants to Mr. Blum for consideration for the loans made to
the Company, the usage of office space and personnel of the Blum Asset Trust
over the last five years, and debt forbearance on the Blum Demand Note.
In addition to the New York, New York facilities, since April 2000, the
Company has leased approximately 1,600 square feet of space in Alexandria,
Virginia from Dr. 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 $1,700
per month.
The Company leases approximately 400 square feet of laboratory, office
and storage space at Kirtland Air Force Base in Albuquerque, New Mexico for
rental payments in the amount of $735 per month, pursuant to a month-to-month
lease arrangement.
The Company leases approximately 1000 square feet of exterior covered
storage space for the Company's industrial and waste processing equipment in
Hobbs, New Mexico for rental payments in the amount of $263 per month, pursuant
to a month-to-month lease arrangement.
The Company leases approximately 1500 square feet of storage for
various pieces of the Company's industrial and waste processing equipment from
Mr. Jon Rogers, an employee of the Company, in Mount Gilead, Ohio for rental
payments in the amount of $500 per month, pursuant to a month-to-month lease
arrangement.
The Company leases approximately 500 square feet of storage for raw
materials to be used in the Company's waste processing equipment in Mobile,
Alabama for rental payments in the amount of $172 per month, pursuant to a
month-to-month lease arrangement.
Advanced Sciences' principal executive and administrative offices are
located in Richland, Washington. Advanced Science leases approximately 3,750
square feet of space for rental payments in the amount of $3,500 per month under
a yearly lease.
In addition to the Richland, Washington facilities, Advanced Sciences
has leased approximately 1,600 square feet of space in Oak Ridge, TN for its
administrative functions, on a three year lease, for a rental payment in the
amount of $1,900 per month. Additionally, Advanced Sciences leases approximately
37
5,500 square feet of space at K-1035, at a DOE facility in Oak Ridge for its
operational staff for the EDAM contract, on a three year lease, for a rental
payment in the amount of $3,385 per month.
Advanced Sciences also leases approximately 1,000 square feet of space
for field operations in Wheat Ridge, Colorado for a rental payment in the amount
of $840 per month.
The Company believes that the foregoing properties will satisfy the
business and operational needs of the Company and its subsidiaries in the
present and in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
------- -----------------
Indemnification Matters
The Company, along with several other entities, in a prior year
guaranteed a performance bond of Separation relating to the Port of Baltimore
contract. The Company was notified on June 28, 2000 that the performance bond is
being called. It is not known, at this time, the amount, if any, the Company's
share of liability will be.
As of April 15, 2006, no litigation has been filed against the Company,
or any of the Company's subsidiaries with respect to this indemnification issue.
The Company is currently investigating all of the relevant facts and
circumstances in connection with the Surety's potential claim or cause of
action. No amount has been recorded in the financial statements as the Company
is unable to determine a loss amount, if any, on the issue of indemnification.
Incidental Matters
------------------
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.
38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------- ----------------------------------------------------
Note: Share information presented in Item 14 is not adjusted for the
1:20 reverse split effective August 29, 2005.
Commodore Applied Technologies, Inc. (CXII:OTCBB) 2003 Annual Meeting Results
The Fitzpatrick Hotel
687 Lexington Avenue, New York, NY 10015
February 8, 2005 - 11:00 a.m. EST
--------------------------------------------------------------------------------
Number of Outstanding Shares - 134,346,053
Shares Eligible to Vote - 130,908,553
Shares Voted in Person or by Proxy - 122,364,910 (93.41%)
This Report indicates that stockholders owning a majority of the issued and
outstanding shares of the Company's Common Stock have voted:
1. to elect Bentley J. Blum, Shelby T. Brewer, Frank E. Coffman,
James M. DeAngelis, Paul E. Hannesson, O. Mack Jones, VADM Michael
P. Kalleres and William A. Wilson as Directors;
2. to authorize our Board of Directors in its discretion, to amend
our Certificate of Incorporation to effect a reverse stock split
in a ratio of between 1-for-10 and 1-for-20, without further
approval of our stockholders; and
3. to ratify Tanner + Co. as the Company's independent auditors for
the year ended December 31, 2004.
REPORT OF INSPECTORS OF ELECTION
--------------------------------
David Rillera and Thomas Kamish certified that they were the duly
appointed Inspectors of Election for the Annual Meeting of Stockholders held on
February 8, 2005 (the "Meeting") of Commodore Applied Technologies, Inc., a
Delaware corporation, and that the results of the votes cast at the Meeting were
as follows:
PROPOSAL 1. Election of Directors
----------- ---------------------
For Withheld
----------------- ------------------
Bentley J. Blum 120,830,686 98.7% 1,534,224 1.3%
----------------- ------------------
Shelby T. Brewer, PhD 121,407,115 99.2% 957,795 0.8%
----------------- ------------------
Frank E. Coffman, PhD 120,994,640 98.5% 1,370,270 1.1%
----------------- ------------------
James M. DeAngelis 120,018,765 98.1% 2,346,145 1.9%
----------------- ------------------
Paul E. Hannesson 120,935,901 98.8% 1,429,009 1.2%
----------------- ------------------
O. Mack Jones 120,935,701 98.8% 1,429,209 1.2%
----------------- ------------------
VADM Michael P. Kalleres 120,997,190 98.9% 1,367,720 1.1%
----------------- ------------------
William A. Wilson 120,996,190 98.9% 1,368,720 1.1%
----------------- ------------------
39
PROPOSAL 2. To authorize our board of directors in its discretion, to
amend our certificate of incorporation to effect a reverse
stock split in a ratio of between 1-for-10 and 1-for-20,
without further approval of our stockholders.
For Against Abstain
-------------------- ------------------ -------------------
111,466,595 85.1% 10,841,095 8.3% 57,220
-------------------- ------------------ -------------------
PROPOSAL 3. Ratification of Appointment of Tanner + Co. as Commodore's
Independent Auditors for the Year Ending December 31, 2004.
For Against Abstain
-------------------- --------------- --------------------
120,688,393 99.75% 298,317 0.25% 1,378,260
-------------------- --------------- --------------------
40
PART II
--------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY A ND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES.
------------------------------------------
MARKET INFORMATION
On June 28, 1996, the Company issued common stock and warrants at
initial public offering prices of $6.00 per share and $0.10 per warrant. The
Company's warrants, previously extended from June 16, 2001, expired on June 16,
2002. On March 6, 2003, the Common Stock ceased to be listed on the American
Stock Exchange ("AMEX") and began trading in the over-the-counter market in the
so-called "pink sheets" of the National Quotation Bureau, Inc. and the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. (the "OTC
Bulletin Board or OTCBB"), where it is currently traded under the symbol CXII.
On August 29, 2005, at the close of business, the Company effectuated
the previously approved reverse stock split with the established ratio of 1-for
20. Applied common stock began trading on a reverse-split basis on August 30,
2005. As a result of the reverse stock split, every 20 shares of Applied common
stock were combined into one share of Applied common stock. As a result of the
reverse stock split, the issued and outstanding shares of Applied common stock
were reduced from approximately 156 million shares to approximately 7.8 million
shares. The number of authorized shares is not reduced. Shares of Applied common
stock trade on the Nasdaq Over the Counter Bulletin Board Market under the
symbol CXIA. As of March 31, 2006, there were 283 record holders of the
Company's common stock.
The following table sets forth, for the fiscal periods shown, the high
and low sale prices (rounded to the nearest cent) for the Company's common stock
as reported on the AMEX (prior to March 6, 2003) and on the OTCBB (after March
6, 2003).
Common Stock
----------------
High Low
---- ---
Fiscal 2005
First Quarter.......................... $0.34 $0.12
Second Quarter......................... 0.21 0.10
Third Quarter.......................... 0.30 0.12
Fourth Quarter......................... 0.27 0.09
Fiscal 2004
First Quarter.......................... $0.60 $0.20
Second Quarter......................... 1.00 0.40
Third Quarter.......................... 0.60 0.40
Fourth Quarter......................... 0.40 0.20
All stock quotes have been adjusted for the 1 for 20 reverse split of the
Company's common stock on August 29, 2005.
41
ISSUANCE OF COMMON STOCK SUBSEQUENT TO DECEMBER 31, 2005
None.
DIVIDEND INFORMATION
Exchange Agreement of Series E Preferred Stock and Series F Preferred Stock
On April 12, 2005, the Company authorized the issuance of 550,000
shares of Series I Convertible Preferred Stock ("Series I Preferred"), par value
$0.001 per share, each such share of Series I Preferred having a stated value of
$10.00 per share. These preferred shares are convertible into common stock at
the rate of the average closing price of the Company's common stock for the
previous ten trading days, and the conversion rate is not to exceed $0.57 per
share. Non-cumulative dividends accrue at ten percent, and will be payable
quarterly beginning February 2006. The Company has reserved 3,750,000 shares of
common stock for the potential conversion of the Series I Convertible Preferred
Stock into common stock.
Also on April 12, 2005, a Series E and F preferred stockholder agreed
to exchange all of their Series E and F preferred stock and all accrued and
unpaid dividends thereon, for 395,302 shares of Series I Convertible Preferred
Stock. Effective October 1, 2005, 388,302 shares of Series I Preferred were
exchanged for 388,302 shares of Series J Preferred. The preferred stockholder
has 0 shares of Series I preferred stock at December 31, 2005.
Exchange Agreement of Series I Preferred Stock for Series J Preferred Stock
Effective October 1, 2005, the Company authorized the issuance of
550,000 shares of Series J Convertible Preferred Stock ("Series J Preferred"),
par value $0.001 per share, each such share of Series J Preferred having a
stated value of $10.00 per share. These preferred shares are convertible into
common stock at the rate of the average closing price of the Company's common
stock for the previous ten trading days, and the conversion rate no less than
$0.05 and no more than $0.50 per share. Non-cumulative dividends accrue at ten
percent, and will be payable quarterly beginning February 2006. The Company has
reserved 40,000,000 shares of common stock for the potential conversion of the
Series J Convertible Preferred Stock and the Amended and Restated Shaar Note
into common stock.
Also, effective October 1, 2005, a Series I Preferred stockholder
agreed to exchange 388,302 shares of their Series I Preferred, excluding all
accrued and unpaid dividends thereon, for 388,302 shares of Series J Preferred.
The preferred stockholder has 388,302 shares of Series J Preferred at December
31, 2005.
Series H Preferred Stock
------------------------
The holders of the Company's Series H Convertible Preferred Stock, par
value ($0.001) per share (the "Series H Preferred"), are entitled to a dividend
rate of 3% over the term of the securities. Through December 31, 2005, the
Company had not paid cash dividends and the Company has accrued $80,789 in
unpaid dividends. The Company has the option to pay the dividends accrued in all
periods in additional shares of Series H Preferred.
42
Series I Preferred Stock
------------------------
The holders of the Company's Series I Convertible Preferred Stock, par
value ($0.001) per share (the "Series I Preferred"), are entitled to a dividend
of 10% over the term of the securities. Through December 31, 2005, the Company
has accrued $183,697 in unpaid dividends. The Company has the option to pay the
dividends accrued in all periods after March 31, 2006 in the Company's common
stock rather than cash. During 2005 the Company has not paid any of the accrued
dividends on all of the converted Series I Preferred shares to date.
Series J Preferred Stock
------------------------
The holders of the Company's Series J Convertible Preferred Stock, par
value ($0.001) per share (the "Series J Preferred Stock"), are entitled to a
dividend of 10% over the term of the securities. Through December 31, 2005, the
Company has accrued $96,632 in unpaid dividends. The Company has the option to
pay the dividends accrued in all periods after March 31, 2006 in the Company's
common stock rather than cash. During 2005, no shares of the Company's Series J
Preferred Stock were converted.
Common Stock
------------
The Company has never paid cash dividends on its common stock. Any
future determination by the Board of Directors of the Company with respect to
the payment of cash dividends on the common stock of the Company will depend on
the ability of the Company to service its outstanding indebtedness, the
Company's future earnings, capital requirements, the financial condition of the
Company and such other factors as the Company's Board of Directors may consider.
The Company currently intends to retain its earnings, if any, to finance the
growth and development of its business, to repay outstanding indebtedness and
does not anticipate paying cash dividends on its common stock in the foreseeable
future.
43
RECENT SALES OF UNREGISTERED SECURITIES
Exchange Agreement of Series I Preferred Stock for Series J Preferred Stock
Effective as of October 1, 2005, the Company authorized the issuance of
550,000 shares of Series J Convertible Preferred Stock ("Series J Preferred"),
par value $0.001 per share, each such share of Series J Preferred having a
stated value of $10.00 per share.
The Series J Preferred shall have the following rights, privileges, and
limitations:
a) The conversion feature shall be exercisable immediately.
b) The conversion price of the Series J Preferred shall be determined
by the average closing price of Company's common stock in the
previous 10 trading days, but in no event shall the conversion
price be more than $0.50 per share or less than $0.05 per share.
c) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
d) The Series J Preferred shall have a non-cumulative annual dividend
of 10%, payable in cash or shares of the Company's common stock at
the Company's election.
e) Dividend will be paid quarterly commencing March 31, 2006, to the
Holders of record of shares of the Series J Preferred Stock.
f) The Company has reserved 40,000,000 shares of its common stock for
the conversion of the Series J Preferred and the Amended New Shaar
Convertible Note.
Effective as of October 1, 2005, the Company entered into an exchange
agreement with The Shaar Fund, LTD (the "New Shaar Exchange Agreement"). Under
terms of the New Shaar Exchange Agreement, the Company agreed that Shaar will
exchange all of its right, title and interest in and to the remaining
outstanding shares of the Series I Preferred (excluding all other accrued and
unpaid dividends thereon) for 388,302 shares of the Company's Series J
Preferred. See "MD&A - Liquidity and Capital Resources."
2005 Amended New Shaar Convertible Note
Effective as of October 1, 2005, Shaar and the Company have agreed to
amend the New Shaar Convertible Note (the "Amended New Shaar Convertible Note").
The Amended New Shaar Convertible Note shall have the following rights,
privileges, and limitations:
a) The Amended New Shaar Convertible Note bears an interest rate of
10% per annum, which is payable in cash or shares of the
Company's common stock at the Company's election.
b) Interest shall accrue on the principal amount for a one year
period ("Deferral Period"). On March 22, 2006, the Company will
owe a single lump sum payment to the holder in an amount equal to
all interest that accrued during the Deferral Period. This lump
sum payment has not been made as of April 17, 2006.
c) Beginning April 15, 2006, and monthly thereafter on the 15th day
of each month until March 22, 2009 ("Maturity Date"), the Company
shall pay to Shaar all accrued and unpaid interest ("Interest
44
Payments")on the principal balance of the note accruing during the
prior month.
d) On the Maturity Date, the Company shall make a single lump sum
payment to Shaar equal to the outstanding principal balance of the
Amended New Shaar Convertible Note ("Principal Balance"), together
with all accrued and unpaid interest.
e) At the option of Shaar, the outstanding Principal Balance may be
converted, either in whole or in part, into shares of the
Company's common stock.
f) The conversion price of the payment of the Principal Balance, the
Deferral Period, and the Interest Payments shall be determined by
the average closing price of Company's common stock in the 10
trading days preceding the conversion date, but in no event shall
the conversion price be more than $0.50 per share or less than
$0.05 per share ("Conversion Price").
g) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
h) The Amended New Shaar Convertible Note may not be prepaid by the
Company prior to the Maturity Date.
i) The Company has reserved 40,000,000 shares of its common stock for
the conversion of the Amended New Shaar Convertible Note and the
Series J Preferred.
2005 Exchange Agreement of Series E Preferred Stock and Series F Preferred Stock
Effective as of April 12, 2005, the Company authorized the issuance of
550,000 shares of Series I Convertible Preferred Stock ("Series I Preferred"),
par value $0.001 per share, each such share of Series I Preferred having a
stated value of $10.00 per share.
The Series I Preferred shall have the following rights, privileges, and
limitations:
a) The conversion feature shall be exercisable immediately.
b) The conversion price of the Series I Preferred shall be determined
by the average closing price of Company's common stock in the
previous 10 trading days, but in no event shall the conversion
price be more than $0.57 per share.
c) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
d) The Series I Preferred shall have a non-cumulative annual dividend
of 10%, payable in cash or shares of the Company's common stock at
the Company's election.
e) Dividend will be paid quarterly commencing May 15, 2005, to the
Holders of record of shares of the Series I Preferred Stock.
Dividends until February 14, 2006 shall accrue but shall not be
payable until February 15, 2006.
f) The Company will reserve 3,750,000 shares of its common stock for
the conversion of the Series I Preferred.
Effective as of April 12, 2005, the Company entered into an exchange
agreement with The Shaar Fund, LTD (the "Shaar Exchange Agreement"). Under terms
of the Shaar Exchange Agreement, the Company agreed that Shaar will exchange all
of its right, title and interest in and to the remaining outstanding shares of
the Series E Preferred and Series F Preferred (including all other accrued and
unpaid dividends thereon) for 395,302 shares of the Company's Series I
Preferred. Effective October 1, 2005, 388,302 shares of Series I Preferred were
exchanged for 388,302 shares of Series J Preferred
45
April 2005 New Shaar Convertible Note
Additionally, under the Shaar Exchange Agreement, the Company issued an
Amended and Restated Secured Promissory Note of the Company, amending and
restating a note originally issued June 13, 2001, which such Note has an
outstanding principal balance as of April 12, 2005 of $3,251,585.35 ("Old Shaar
Note").
Effective as of April 12, 2005 Shaar executed a purchase agreement
("Milford Capital Purchase Agreement") to Milford Capital & Management
("Milford"). In accordance with the terms of the Milford Capital Purchase
Agreement, Shaar purchased a secured promissory note of the Company, initially
issued to Milford on June 13, 2001, in the original principal amount of
$500,000, which had an outstanding principal balance on March 31, 2005 of
$188,149 ("Old Milford Note"), together with (i) all interest, additional
obligations, forbearance fees, exit fees, penalties and other amounts due and
payable from time to time under or in connection with the Old Milford Note, and
(ii) the Forbearance Amount in connection with the Forbearance Agreement, dated
January 30, 2004, between Milford and the Company, and Shaar in which Shaar
agreed to forgive payment from the Company to Shaar of $300,000 of accrued and
unpaid dividends on shares of the Company's Series E Preferred held by Shaar
("Forgiven Dividends") and consented to the transfer of the dollar value of the
Forgiven Dividends to Milford as part of the forbearance fee payable to Milford
under the Forbearance Agreement of 2004.
Shaar and the Company have agreed that Shaar will exchange the
outstanding principal amount of the Old Shaar Note and the Old Milford Note
(including all accrued and unpaid interest, unpaid fees and Forgiven Dividends)
for the Company's newly issued 10% convertible secured promissory note (the "New
Shaar Convertible Note").
The New Shaar Convertible Note shall have the following rights,
privileges, and limitations:
a) The New Shaar Convertible Note bears an interest rate of 10% per
annum, which is payable in cash or shares of the Company's common
stock at the Company's election.
b) Interest shall accrue on the principal amount for a one year
period ("Deferral Period"). On March 22, 2006, the Company will
owe a single lump sum payment to the holder in an amount equal to
all interest that accrued during the Deferral Period. This lump
sum payment has not been made as of April 17, 2006.
c) Beginning April 15, 2006, and monthly thereafter on the 15th day
of each month until March 22, 2009 ("Maturity Date"), the Company
shall pay to Shaar all accrued and unpaid interest ("Interest
Payments")on the principal balance of the note accruing during the
prior month.
d) On the Maturity Date, the Company shall make a single lump sum
payment to Shaar equal to the outstanding principal balance of the
New Shaar Convertible Note ("Principal Balance"), together with
all accrued and unpaid interest.
e) At the option of Shaar, the outstanding Principal Balance may be
converted, either in whole or in part, into shares of the
Company's common stock.
f) The conversion price of the payment of the Principal Balance, the
Deferral Period, and the Interest Payments shall be determined by
the average closing price of Company's common stock in the 10
46
trading days preceding the conversion date,, but in no event shall
the conversion price be more than $0.57 per share ("Conversion
Price").
g) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
h) The New Shaar Convertible Note may not be prepaid by the Company
prior to the Maturity Date.
On April 27, 2005, a private investor purchased $100,000 of the
Company's common stock at the market price. The Company issued the private
investor 500,000 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 3-year warrant for 200,000
shares of the Company's common stock at an exercise price of $0.20 per share.
The Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities. See "Liquidity and Capital
Resources."
The recipients of securities in the transactions described above
represented their 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 certificates or warrants
representing the securities issued in this transaction. The Company made
available to the recipients, 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 recipients were
offered the opportunity, prior to exchanging and/or 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 these
transactions 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.
47
ITEM 6. SELECTED FINANCIAL DATA.
------- ------------------------
The following table presents selected financial data of the Company, as
of December 31, 2005, 2004, 2003, 2002 and 2001 and for the years then ended.
The following selected historical data is derived from the Company's
Consolidated Financial Statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report.
Consolidated Statement of Operations Data: (in thousands, except per share data)
2001 2002 2003 2004 2005
------------ ----------- ---------- ------------ ------------
Revenue:
Contract revenues............... $ 4,590 $ 3,710 $ 660 $ 738 $ 10,275
Cost of sales:
Cost of revenues................ 3,369 2,108 811 919 9,132
Research and development........ 423 297 70 9 5
General and administrative...... 2,420 1,792 1,700 1,674 2,072
Depreciation and amortization... 658 314 267 136 54
Impairment of Machinery 776 -- -- -- --
Impairment of Patents 627 -- -- -- --
----------------------------------------------------------------------
Loss from operations................ (3,683) (801) (2,188) (2,000) (988)
----------------------------------------------------------------------
Interest income................. 38 -- -- -- --
Interest expense................ (226) (104) (769) (404) (1,183)
Net gain (loss) on embedded derivative liability -- -- -- -- (543)
Equity in net losses of subsidiary. (295) -- -- -- --
----------------------------------------------------------------------
Loss before income taxes ........... (4,166) (905) (2,957) (2,404) (2,714)
----------------------------------------------------------------------
Income taxes.................... -- - -- -- --
Loss on disposal of discontinued operations -- (4,134) -- -- --
Loss gain from discontinued operations (2,388) (933) -- -- --
----------------------------------------------------------------------
Net loss ........................... $ (6,554) $ (5,972) $ (2,957) $ (2,404) $ (2,714)
Deemed dividends accrued to preferred stockholders (408) (528) (374) (291) (4,067)
Net loss applicable to common shareholders (6,962) (6,500) (3,331) (2,695) (6,781)
Net loss per share -- basic and diluted $ (2.62) $ (2.25) $ (.72) $ (.43) $ (0.93)
Weighted average number of shares (000's)
---------------------------------------------------
basic and diluted.............. 2,662 2,889 4,602 6,334 7,309
Consolidated Balance Sheet Data: (in thousands)
2001 2002 2003 2004 2005
------------ ----------- ---------- ------------ ------------
Cash and cash equivalents......... $ 170 $ 59 $ -- $ 15 $ 65
Assets held for sale - DRM........ 29,407 -- -- -- --
Total assets...................... 31,200 736 246 369 2,417
Long term debt.................... -- 431 1,575 3,034 5,426
Liabilities held for sale - DRM... 22,165 -- -- -- --
Total liabilities................. 29,629 5,025 6,898 9,697 12,281
Stockholders' (deficit) equity.... 1,571 (4,289) (6,652) (9,328) (9,864)
48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------- -----------------------------------------------------------------------
OF OPERATIONS.
--------------
OVERVIEW
The Company is engaged in providing a range of engineering and
technical services to the public and private sectors related to (i) providing
services related to, environmental management for on-site and off-site
identification, investigation remediation and management of hazardous, mixed and
radioactive waste; and (ii) remediating contamination in soils, liquids and
other materials and disposing of or reusing certain waste by-products by
utilizing SET.
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. The Company has access to technologies
related to the separation and destruction of mixed waste, polychlorinated
biphenyls (PCBs) and chlorofluorocarbons (CFCs). The Company is currently
working on the commercialization of these technologies through development
efforts, licensing arrangements and joint ventures.
The Company has identified two reportable segments in which it
operates, based on the guidelines set forth in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131. These two
segments are as follows: Commodore Advanced Sciences, Inc., which primarily
provides various environmental sampling, analysis and data management services
to Government agencies on a lump sum and fixed cost basis; and Commodore
Solutions, Inc., which is commercializing technologies to treat mixed and
hazardous waste.
The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements. The
Company's current monthly operating expenses exceed cash revenues by
approximately $80,000. Currently, the Company is addressing this cash shortfall
through loans from The Shaar Fund, Ltd., but The Shaar Fund, Ltd. is under no
obligation to continue to make such advances to the Company. If this lender
decided to discontinue advances, the Company would not be able to meet its
current obligations. In addition, the Company owes $888,000 in loans that are
currently due or are payable on demand. Although the lenders on these loans have
not yet called the loans, the Company does not currently have the ability to pay
these loans absent additional financing.
The report of our independent registered public accounting firm on our
fiscal 2003, 2004 and 2005 consolidated financial statements contains a "going
concern" qualification in which they express substantial doubt about our ability
to continue in business. The Company currently requires additional cash to
sustain existing operations and to meet current obligations and ongoing capital
requirements.
49
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in conformity with U.S. generally
accepted accounting principles. As such, we are required to make certain
estimates, judgments and assumptions that we believe are reasonable based upon
the information available. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented.
Our accounting policies that are the most important to the portrayal of
our financial condition and results, and which require the highest degree of
management judgment relate to the reserves for doubtful accounts receivable and
the valuation of stock and options issued for services.
Reserves for Doubtful Accounts
Management estimates the amount of required reserves for the potential
non-collectibility of accounts receivable based upon the customer's financial
condition, age of the customer's receivables, changes in payment histories, and
consideration of other relevant factors. Because the reserve for doubtful
accounts is an estimate of events that have not yet occurred, we could incur
additional charges or benefits in the future to reflect differences between
estimated and actual collections.
Valuation of Stock, Options and Embedded Derivatives
We value and account for the issuance of equity instruments, embedded
or otherwise, to non-employees to acquire goods and services based on the fair
value of the goods and services or the fair value of the equity instrument at
the time of issuance, whichever is more reliably measurable. The fair value of
stock issued for goods or services is determined based on the quoted market
price on the date the commitment to issue the stock has occurred. The fair value
of stock options, warrants granted to non-employees for goods or services is
calculated on the date of grant using the Black-Scholes options pricing model.
The fair value of the embedded derivatives consisting of conversion features
included in a note payable and in the Series I Convertible Preferred Stock is
calculated using the Black-Scholes options pricing model.
Revenue Recognition
Substantially all the Company's current revenues consist of engineering
and scientific services performed for the U.S. Government and prime contractors
that serve the U.S. Government under a variety of contracts, most of which
provide for unit prices. Revenue under unit price contracts are recorded when
the services are provided.
Most of the Company's historical 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 has 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 the Company's contracts through 1999. An allowance for potential
disallowances is recorded as a reduction in revenue based upon the portion of
billed and unbilled receivables that management believes may be disallowed upon
audit by the DCAA.
50
RESULTS OF OPERATIONS
Year ended December 31, 2005 compared to Year ended December 31, 2004
Revenues were $10,275,000 for the year ended December 31, 2005,
compared to $738,000 for the year ended December 31, 2004. The increase in
revenues is due to the increases in revenue contribution by Advanced Sciences as
certain contracts were renewed and other contracts were initiated.
In the case of Advanced Sciences, revenues were $10,189,000 for the
year ended December 31, 2005, compared to $698,000 for the year ended 2004.
Revenues in 2004 were primarily from engineering and scientific services
performed for the United States government under two contracts similar to those
in place in 2003. Advanced Sciences had four major customers in 2005, one of
which represents more than 10% of annual revenue. The combined revenue for these
four customers was $10,020,000 or 98% of the Company's total 2005 revenue. The
increase in revenues at Advanced Sciences is primarily the result of the award
of the EDAM contract, renewal of existing contracts, and overall, more
subcontract work being performed in 2005. Cost of sales increased from $548,000
for 2004 to $9,078,000 for 2005. An increase in cost of sales at Advanced
Sciences was the result of greater revenues due to the operation of the EDAM
contract. The Company has a substantial backlog for a similar volume of work for
the EDAM contract for the calendar year 2006. Revenues and associated expenses
in relation to the EDAM contract are expected to be consistent with those
observed in calendar year 2005. All other operating expenses remained constant
as a direct result of operating efficiencies on the remaining contracts.
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 $86,000 for the year ended
December 31, 2005 as compared with $40,000 for the year ended December 31, 2004.
The decrease is primarily due to the decrease in feasibility studies and
commercial processing. Revenues in 2005 were primarily from remediation services
performed for a scrap metal recycling company in the U.S. under a subcontract.
Solution had one major customer which represented more than 10% of annual
revenue. The revenue for this customer was $86,000 or 100% of the Solution's
total 2005 revenue. The increase in revenues at Solution is primarily the result
of marginally greater subcontract work being performed in 2005. Cost of sales
was $54,000 for the year ended December 31, 2005 as compared to $371,000 for the
year ended December 31, 2004. The decrease in cost of sales is attributable to
less machinery and equipment refurbishment costs relating to the revenues
produced for subcontract work being performed in 2005. 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, 2005, the Company incurred research and
development costs of $5,000, as compared to $9,000 for the year ended December
31, 2004. 100% of the research and development costs are attributable to the
operations of Advanced Sciences in 2005 and Solutions in 2004. In 2005, the
Company invested less money in laboratory work then it had in 2004.
General and administrative expenses for the year ended December 31,
2005 were $2,072,000 as compared to $1,674,000 for the year ended December 31,
2004. This increase reflects the impact of the EDAM contract and some of the
restructuring steps in the Company throughout 2005.
51
In the case of Advanced Sciences, general and administrative costs
increased from $308,000 for the year ended December 31, 2004 to $618,000 for the
year ended December 31, 2005. This increase reflects increased sales and
marketing focus and the costs associated with Advanced Sciences bid and proposal
efforts as Advanced Sciences continues to expand its contract base and seek new
contracting opportunities. Solution incurred general and administrative costs of
$16,000 for the year ended December 31, 2005 as compared with $120,000 for the
year ended December 31, 2004. This decrease was primarily due to a decreased
sales and marketing effort for Solution's services. All expenditures for the
year ended December 31, 2005 were directly related to bid and proposal expenses,
which may result in contracts that will produce revenue in 2006 and beyond.
The increase in interest expense of $779,000 from 2004 to 2005 is
primarily related to (i) greater balances on the Amended and Restated Shaar
Note, (ii) higher balances on the Company's line of credit, and (iii) non-cash
expenses related to the amortization of the embedded derivative debt discount on
the associated convertible note payable.
For the year ended December 31, 2005, the Company incurred a net loss
of $2,714,000 as compared to a net loss of $2,404,000 for the year ended
December 31, 2004. The increase in the net loss was a direct result of the
recognition of non-cash expenses associated with the embedded derivative
features concerning various financial instruments of the Company for the year
ended December 31, 2005 compared to the year ended December 31, 2004. On April
11, 2005, Applied, through the issuance of the Series I Preferred and the
Amended and Restated Shaar Note, recorded an embedded derivative liability due
to the conversion feature of these financial instruments pursuant to SFAS No.
133 and EITF 00-19. Applied recorded a non-cash other expense of ($543,000) for
the year ended December 31, 2005. The fair value of the embedded derivatives
consisting of conversion features included in a note payable and in the Series I
Convertible Preferred Stock is calculated using the Black-Scholes options
pricing model. Effective as of October 1, 2005, the Company issued Series J
Preferred in exchange for the Series I Preferred as well as further amending the
Amended and Restated Shaar Note, and the Company reclassified the derivative
liability into equity as a result of the changes. Overall, the Company has
experienced significantly greater revenues and has improved its income/(loss)
from operations from (988,000) to (2,000,000) for the year ended December 31,
2005 compared to the year ended December 31, 2004.
Year ended December 31, 2004 compared to Year ended December 31, 2003
Revenues were $738,000 for the year ended December 31, 2004, compared
to $660,000 for the year ended December 31, 2003. The increase in revenues is
due to the increases in revenue contribution by Advanced Sciences as certain
contracts were renewed and other contracts were initiated.
In the case of Advanced Sciences, revenues were $698,000 for the year
ended December 31, 2004, compared to $568,000 for the year ended 2003. Revenues
in 2004 were primarily from engineering and scientific services performed for
the United States government under two contracts similar to those in place in
2003. Advanced Sciences had two major customers in 2004, each of which
represents more than 10% of annual revenue. The combined revenue for these two
customers was $698,000 or 100% of the Company's total 2004 revenue. The increase
in revenues at Advanced Sciences is primarily the result of the renewal of
existing contracts and overall, more subcontract work being performed in 2004.
Cost of sales decreased from $721,000 for 2003 to $548,000 for 2004. A reduction
in cost of sales at Advanced Sciences resulted from greater operating
52
efficiencies on existing contracts and a reduction in overhead expenses.
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 $40,000 for the year ended
December 31, 2004 as compared with $92,000 for the year ended December 31, 2003.
The decrease is primarily due to the decrease in feasibility studies and
commercial processing. Revenues in 2004 were primarily from remediation services
performed for a scrap metal recycling company in the U.S. under a subcontract.
Solution had one major customer which represented more than 10% of annual
revenue. The revenue for this customer was $40,000 or 100% of the Solution's
total 2004 revenue. The decrease in revenues at Solution is primarily the result
of less subcontract work being performed in 2004. Cost of sales was $371,000 for
the year ended December 31, 2004 as compared to $90,000 for the year ended
December 31, 2003. The increase in cost of sales is attributable to greater
manufacturing costs of specialty equipment and sales 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, 2004, the Company incurred research and
development costs of $9,000, as compared to $70,000 for the year ended December
31, 2003. 100% of the research and development costs are attributable to the
operations of Solution. In 2004, the Company invested more money in capital
expenditures and less in laboratory work then it had in 2003. Advanced Sciences
did not incur research and development costs in the years 2003 and 2004.
General and administrative expenses for the year ended December 31,
2004 were $1,674,000 as compared to $1,700,000 for the year ended December 31,
2003. This decrease reflects the impact of some of the restructuring steps in
the Company throughout 2004.
In the case of Advanced Sciences, general and administrative costs
decreased from $570,000 for the year ended December 31, 2003 to $308,000 for the
year ended December 31, 2004. This decrease reflects the impact of some
restructuring steps in Advanced Sciences (including principally a outsourcing of
certain administrative functions) the Company made throughout 2004 to increase
operating efficiencies. Solution incurred general and administrative costs of
$120,000 for the year ended December 31, 2004 as compared with $73,000 for the
year ended December 31, 2003. This increase was primarily due to an increased,
focused sales and marketing effort for Solution's services, which may result in
contracts that will produce revenue in 2005 and beyond.
The decrease in interest expense of $365,000 from 2003 to 2004 is
primarily related to lower, amortized non-cash interest costs associated with
the Milford/Shaar Note and the Weiss Group Note and lower balances on the
Company's line of credit.
The Net Loss was $2,404,000 for the year ended December 31, 2004,
compared to $2,957,000 for the year ended December 31, 2003. The decrease in the
net loss was a result of increased revenues and the decreased interest expenses
for the year ended December 31, 2004 compared to the year ended December 31,
2003.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements, such as financing or
variable interest entities, that either have, or are reasonably likely to have,
a current or future material effect on financial condition, changes in financial
53
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the last eight quarters. This information has been derived
from our unaudited consolidated financial statements, which, in management's
opinion, have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
quarters presented. This information should be read in conjunction with the
audited consolidated financial statements and related notes included elsewhere
in this Form 10-K. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
Quarter Ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2005 2005 2005 2005
-------------- ------------ ------------- -----------------
(unaudited)
(In thousands, except per share data)
Revenue $ 1,626 $ 2,733 $ 3,900 $ 2,016
Income (loss) from operations (329) (305) 151 (505)
Net income available (loss applicable) to common
stockholders (544) (5,114) (341) (782)
Net income (loss) per common share:
Basic & diluted $ (0.08) $ (0.69) $ (0.04) $ (0.10)
Weighted average basic common shares:
Basic & diluted 6,817 7,442 7,819 7,830
Quarter Ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2004 2004 2004 2004
-------------- ------------ ------------- -----------------
(unaudited)
(In thousands, except per share data)
Revenue $ 182 $ 112 $ 155 $ 289
Loss from operations (595) (681) (511) (213)
Net income available (loss applicable) to common
stockholders (746) (851) (699) (399)
Net income (loss) per common share:
Basic & diluted $ (0.13) $ (0.13) $ (0.11) $ (0.06)
Weighted average basic common shares:
Basic & diluted 5,929 6,362 6,364 6,558
Fluctuations in Quarterly Results
Factors that may affect quarterly results include:
54
o the award and successful operation of the EDAM contract in Oak Ridge,
TN;
o the recognition of non-cash expenses associated with the embedded
derivative from the conversion features on the Series I Preferred and
the New Shaar Note;
o the interest expense associated with the increased amounts of notes
payables;
o the introduction, development, timing, competitive pricing and market
acceptance of our environmental services and those of our competitors;
and
o changes in general economic conditions that could affect customer
expenditures for environmental services.
The June 30, 2005 and September 30, 2005 information above varies from
the amounts previously reported on Form 10Q/A and 10Q, respectively. Instead of
recording the initial value of the embedded derivative of $8,603,000 as other
expense, the above information records the embedded derivative as a debt
discount of $4,361,000 and a deemed dividend of $3,702,000. The debt discount
was amortized by $227,000 and $273,000 in the three months ended June 30, 2005
and September 30, 2005, respectively, in the above information.
As a result of the factors listed above and elsewhere in the
"Forward-Looking Statements" and "Risk Factors" sections of this Form 10-K, it
is possible that in some future periods our results of operations may fall below
management's expectations as well as the expectations of public market analysts
and investors. If revenue falls below management's expectations in any quarter
and we are unable to reduce expenses, our operating results will be lower than
expected.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005 and December 31, 2004 Advanced Sciences had a
$141,000 and $0 outstanding balance, respectively, on its two million dollar,
receivables revolving line of credit. The line of credit is based on credit
worthy receivables of Advanced Sciences.
The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements. The
Company's current monthly operating expenses exceed cash revenues by
approximately $80,000 at December 31, 2005. Currently, the Company is addressing
this cash shortfall though loans from The Shaar Fund, Ltd., but The Shaar Fund,
Ltd. is under no obligation to continue to make such advances to the Company. If
this lender decided to discontinue advances, the Company would not be able to
meet its current obligations. In addition, the Company owes $888,000 in loans
that are currently due or are payable on demand as of March 31, 2006. Although
the lenders on these loans have not yet called the loans, the Company does not
currently have the ability to pay these loans absent additional financing.
The Company has experienced a significant increase in total assets for
the year ended December 31, 2005. The majority of the increase was in accounts
receivable, net. Accounts receivable, net, for the period ended December 31,
2005 was $2,065,000 as compared to $259,000 for the year ended December 31,
2004. The increase in accounts receivable, net, is due to the increases in
revenue contribution by Advanced Sciences by the EDAM contract in Oak Ridge, TN.
Approximately 90% of the accounts receivable, net, figure has been collected
within 45 days of the period ended December 31, 2005. The remaining approximate
10% of the accounts receivable, net, amounts are deemed retainage by the
Company's main client, Bechtel Jacobs, and is released to the Company on a
periodic basis when the Company completes certain work orders that the retainage
has been applied to.
The report of our independent registered public accounting firm on our
fiscal 2003, 2004 and 2005 consolidated financial statements contains a "going
concern" qualification in which they express substantial doubt about our ability
to continue in business. The Company currently requires additional cash to
sustain existing operations and to meet current obligations and ongoing capital
requirements.
For the year ended December 31, 2005, the Company incurred a net loss
of $2,714,000 as compared to a net loss of $2,404,000 for the year ended
December 31, 2004. The increase in the net loss was a direct result of the
recognition of non-cash expenses associated with the embedded derivative
55
features concerning various financial instruments of the Company for the year
ended December 31, 2005 compared to the year ended December 31, 2004. On April
11, 2005, Applied, through the issuance of the Series I Preferred and the
Amended and Restated Shaar Note, recorded an embedded derivative liability due
to the conversion feature of these financial instruments pursuant to SFAS No.
133 and EITF 00-19. Applied recorded a non-cash other expense of ($543,000) for
the year ended December 31, 2005. The fair value of the embedded derivatives
consisting of conversion features included in a note payable and in the Series I
Convertible Preferred Stock is calculated using the Black-Scholes options
pricing model. Effective as of October 1, 2005, the Company issued Series J
Preferred in exchange for the Series I Preferred as well as further amending the
Amended and Restated Shaar Note, and the Company reclassified the derivative
liability into equity as a result of the changes. Overall, the Company has
experienced significantly greater revenues and has improved its income/(loss)
from operations from (988,000) to (2,000,000) for the year ended December 31,
2005 compared to the year ended December 31, 2004.
As shown in the consolidated financial statements for the years ended
December 31, 2005, 2004, and 2003, the Company incurred losses of $2,714,000,
$2,404,000, and $2,957,000, respectively. The Company has also experienced net
cash inflows (outflows) from operating activities of ($1,337,000), ($1,532,000),
and ($955,000) for the years ended December 31, 2005, 2004 and 2003
respectively. At December 31, 2005 and 2004 the Company had working capital
(deficit) of ($4,586,000) and ($6,389,000) respectively. The decrease in the
working capital deficit from December 31, 2004 to December 31, 2005 is mainly
due to the decrease in Company's loss from operations from the operation of the
EDAM contract.
As shown in the consolidated financial statements for the years ended
December 31, 2005 and 2004 the Company had stockholders' (deficit) equity of
($9,864,000) and ($9,328,000) respectively. The Company's net increase in
stockholders' deficit from December 31, 2004 to December 31, 2005 is primarily
due to the loss for the year ended December 31, 2005.
On April 11, 2005, Applied, through the issuance of the Series I
Preferred and the Amended and Restated Shaar Note, recorded an embedded
derivative liability due to the conversion feature of these financial
instruments pursuant to SFAS No. 133 and EITF 00-19. Applied recorded a non-cash
other expense of ($543,000) for the year ended December 31, 2005. The fair value
of the embedded derivatives consisting of conversion features included in a note
payable and in the Series I Convertible Preferred Stock is calculated using the
Black-Scholes options pricing model. Effective as of October 1, 2005, the
Company issued Series J Preferred in exchange for the Series I Preferred as well
as further amending the Amended and Restated Shaar Note, and the Company
reclassified the derivative liability into equity as a result of the changes.
Overall, the Company has experienced significantly greater revenues and has
improved its income/(loss) from operations from (988,000) to (2,000,000) for the
year ended December 31, 2005 compared to the year ended December 31, 2004.
On August 29, 2005, at the close of business, the Company effectuated
the previously approved reverse stock split with the established a ratio of
1-for 20. Applied common stock began trading on a reverse-split basis on August
30, 2005. As a result of the reverse stock split, every 20 shares of Applied
common stock were combined into one share of Applied common stock. As a result
of the reverse stock split, the issued and outstanding shares of Applied common
stock were reduced from approximately 156 million shares to approximately 7.8
million shares. The number of authorized shares is not reduced. The effects of
the reverse split have been presented retroactively.
56
The reverse stock split affected all shares of common stock, stock
options and warrants of Applied outstanding as of immediately prior to the
effective time of the reverse stock split. Fractional shares of common stock of
the Company were not issued as a result of the reverse stock split, but instead,
holders of pre-split shares of common stock who otherwise would have been
entitled to receive a fractional share as a result of the reverse split received
one whole share. Shares of Applied common stock trade on the Nasdaq Over the
Counter Bulletin Board Market under the symbol CXIA.
Certain prior-year amounts have been reclassified to conform to the
current year presentation.
For the Year ended December 31, 2005, the Company issued 291,707 shares
of the Company's common stock upon conversion of 5,500 shares of Series E
Preferred by the holders thereof. No shares of the Company's Series F Preferred
were converted for the year ended December 31, 2005. For the year ended December
31, 2005, the Company accrued all dividends payable on the Series E Preferred
and the Series F Preferred Stock.
On April 12, 2005, the Company entered into an exchange agreement with
The Shaar Fund, LTD (the "Shaar Exchange Agreement"). Under terms of the Shaar
Exchange Agreement, the Company agreed that Shaar will exchange all of its
right, title and interest in and to the remaining outstanding shares of the
Series E Preferred and Series F Preferred (including all other accrued and
unpaid dividends thereon) for 395,302 shares of the Company's Series I
Preferred. Effective October 1, 2005, 388,302 shares of Series I Preferred were
exchanged for 388,302 shares of Series J Preferred
For the Year ended December 31, 2005, the Company issued 439,206 shares
of the Company's common stock upon conversion of 7,000 shares of Series I
Preferred by the holders thereof. For the year ended December 31, 2005, the
Company paid no dividends on the Series I Preferred Stock. The Company accrued
dividends on the Series I Preferred for the year ended December 31, 2005 of
$183,696, which is included in Other Accrued Liabilities.
Effective October 1, 2005, the Company entered into an exchange
agreement with The Shaar Fund, LTD (the "New Shaar Exchange Agreement"). Under
terms of the Shaar Exchange Agreement, the Company agreed that Shaar will
exchange all of its right, title and interest in and to 388,302 shares of the
Series I Preferred (excluding all other accrued and unpaid dividends thereon)
for 388,302 shares of the Company's Series J Preferred.
For the year ended December 31 2005, the Company converted no shares of
Series H Preferred and issued no stock with respect to accrued dividends
pertaining to the Series H Preferred. For the year ended December 31, 2005, the
Company paid no dividends on the Series H Preferred Stock. The Company accrued
dividends on Series H Preferred for the year ended December 31, 2005 of $24,000,
which is included in Other Accrued Liabilities.
For the year ended December 31 2005, the Company converted no shares of
Series J Preferred and issued no stock with respect to accrued dividends
pertaining to the Series J Preferred. For the year ended December 31, 2005, the
Company paid no dividends on the Series J Preferred. The Company accrued
dividends on Series J Preferred for the year ended December 31, 2005 of $96,632,
which is included in Other Accrued Liabilities.
In November 2000, the Company completed $500,000 in financing in the
form of a loan (the "Weiss Group Note") from a group of four investors. The
Weiss Group Note bears interest at 12% per annum and was due and payable on
57
February 12, 2001. All holders of the Weiss Group Note have granted payment
extensions to the Company until January 15, 2005 in exchange for warrants for
125,000 shares of the Company's common stock at an exercise price of $0.57. The
current principal balance of the Weiss Group Note is $252,397 as of December 31,
2005 and remains unpaid as of April 15, 2006.
Effective February 14, 2004, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 75,000 shares at an
exercise price of $1.00 per share of the Company's common stock in connection
with the Weiss Group Note.
Effective February 15, 2004, the Company issued warrants to purchase
125,000 shares of its common stock at an exercise price of $0.57 per share to
all holders of the Weiss Group Note in consideration of the extension of the due
date of such loans by such persons from May 31, 2002 to January 15, 2005. The
Company believes that this transaction is exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as a transaction
not involving any public offering of securities.
Mr. Blum, a director of the Company, provided cash installments in the
form of a loan to the Company through February 2004 (the "Blum Demand Note").
The Blum Demand Note bears interest at 9% per annum and is payable on demand.
The current principal balance of the Blum Demand Note is $312,032 as of December
31, 2005 and remains unpaid as of April 15, 2006. See "MD&A - Recent Sales of
Unregistered Securities."
On November 19, 2003, the Company issued a warrant to purchase
1,367,790 shares of its common stock at an exercise price of $0.57 per share
(the closing price of our common stock on the OTCBB on such date) to the Blum
Asset Trust, a company controlled by Bentley Blum, a Director of the Company, in
consideration for the loans made to the Company and the usage of office space
and personnel of the Blum Asset Trust over the last five years. The Company
believes that this transaction is exempt from the registration requirements of
the Securities Act under Section 4(2) thereof as a transaction not involving any
public offering of securities. See "MD&A - Recent Sales of Unregistered
Securities."
On April 12, 2005, the Company authorized the issuance of 550,000
shares of Series I Convertible Preferred Stock ("Series I Preferred"), par value
$0.001 per share, each such share of Series I Preferred having a stated value of
$10.00 per share.
The Series I Preferred shall have the following rights, privileges, and
limitations:
a) The conversion feature shall be exercisable immediately.
b) The conversion price of the Series I Preferred shall be determined
by the average closing price of Company's common stock in the
previous 10 trading days, but in no event shall the conversion
price be more than $0.57 per share.
c) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
d) The Series I Preferred shall have a non-cumulative annual dividend
of 10%, payable in cash or shares of the Company's common stock at
the Company's election.
e) Dividend will be paid quarterly commencing May 15, 2005, to the
Holders of record of shares of the Series I Preferred Stock.
Dividends until February 14, 2006 shall accrue but shall not be
payable until February 15, 2006.
58
f) The Company will reserve 3,750,000 shares of its common stock for
the conversion of the Series I Preferred.
On April 12, 2005, the Company entered into an exchange agreement with
The Shaar Fund, LTD (the "Shaar Exchange Agreement"). Under terms of the Shaar
Exchange Agreement, the Company agreed that Shaar will exchange all of its
right, title and interest in and to the remaining outstanding shares of the
Series E Preferred and Series F Preferred (including all other accrued and
unpaid dividends thereon) for 395,302 shares of the Company's Series I
Preferred. Effective October 1, 2005, 388,302 shares of Series I Preferred were
exchanged for 388,302 shares of Series J Preferred See "MD&A - Recent Sales of
Unregistered Securities."
Additionally, under the Shaar Exchange Agreement, the Company issued an
Amended and Restated Secured Promissory Note of the Company, amending and
restating a note originally issued June 13, 2001, which such Note has an
outstanding principal balance as of April 12, 2005 of $3,251,585.35 ("Old Shaar
Note").
On April 11, 2005 The Shaar Fund, LTD ("Shaar") executed a purchase
agreement ("Milford Capital Purchase Agreement") to Milford Capital & Management
("Milford"). In accordance with the terms of the Milford Capital Purchase
Agreement, Shaar purchased a secured promissory note of the Company, initially
issued to Milford on June 13, 2001, in the original principal amount of
$500,000, which had an outstanding principal balance on March 22, 2005 of
$188,149 ("Old Milford Note"), together with (i) all interest, additional
obligations, forbearance fees, exit fees, penalties and other amounts due and
payable from time to time under or in connection with the Old Milford Note, and
(ii) the Forbearance Amount in connection with the Forbearance Agreement, dated
January 30, 2004, between Milford and the Company, and Shaar in which Shaar
agreed to forgive payment from the Company to Shaar of $300,000 of accrued and
unpaid dividends on shares of the Company's Series E Preferred held by Shaar
("Forgiven Dividends") and consented to the transfer of the dollar value of the
Forgiven Dividends to Milford as part of the forbearance fee payable to Milford
under the Forbearance Agreement of 2004.
Shaar and the Company have agreed that Shaar will exchange the
outstanding principal amount of the Old Shaar Note and the Old Milford Note
(including all accrued and unpaid interest, unpaid fees and Forgiven Dividends)
for the Company's newly issued 10% convertible secured promissory note (the "New
Shaar Convertible Note"). As described below, the New Shaar Convertible Note was
amended on October 1, 2005.
The New Shaar Convertible Note shall have the following rights,
privileges, and limitations:
a) The New Shaar Convertible Note bears an interest rate of 10% per
annum, which is payable in cash or shares of the Company's common
stock at the Company's election.
b) Interest shall accrue on the principal amount for a one year
period ("Deferral Period"). On March 22, 2006, the Company will
make a single lump sum payment to the holder in an amount equal to
all interest that accrued during the Deferral Period
c) Beginning April 15, 2006, and monthly thereafter on the 15th day
of each month until March 22, 2009 ("Maturity Date"), the Company
shall pay to Shaar all accrued and unpaid interest ("Interest
Payments")on the principal balance of the note accruing during the
prior month.
59
d) On the Maturity Date, the Company shall make a single lump sum
payment to Shaar equal to the outstanding principal balance of the
New Shaar Convertible Note ("Principal Balance"), together with
all accrued and unpaid interest.
e) At the option of Shaar, the outstanding Principal Balance may be
converted, either in whole or in part, into shares of the
Company's common stock.
f) The conversion price of the payment of the Principal Balance, the
Deferral Period, and the Interest Payments shall be determined by
the average closing price of Company's common stock in the 10
trading days preceding the conversion date,, but in no event shall
the conversion price be more than $0.57 per share ("Conversion
Price").
g) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
h) The New Shaar Convertible Note may not be prepaid by the Company
prior to the Maturity Date.
On April 11, 2005, through the issuance of the Series I Preferred and
the Amended and Restated Shaar Note, the Company recorded an embedded derivative
liability due to the conversion feature of these financial instruments pursuant
to ETIF 00-19. Applied recorded a loss of $543,000 of non-cash expense for the
year ended December 31, 2005.
On April 27, 2005, a private investor purchased $100,000 of the
Company's unregistered common stock at the market price. The Company issued the
private investor 500,000 shares of unregistered 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 3-year
warrant for 200,000 shares of the Company's common stock at an exercise price of
$0.20 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.
Effective as of October 1, 2005, the Company authorized the issuance of
550,000 shares of Series J Convertible Preferred Stock ("Series J Preferred"),
par value $0.001 per share, each such share of Series I Preferred having a
stated value of $10.00 per share.
The Series J Preferred shall have the following rights, privileges, and
limitations:
a) The conversion feature shall be exercisable immediately.
b) The conversion price of the Series J Preferred shall be determined
by the average closing price of Company's common stock in the
previous 10 trading days, but in no event shall the conversion
price be more than $0.50 per share or less than $0.05 per share.
c) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
d) The Series J Preferred shall have a non-cumulative annual dividend
of 10%, payable in cash or shares of the Company's common stock at
the Company's election.
e) Dividend will be paid quarterly commencing March 31, 2006, to the
Holders of record of shares of the Series J Preferred Stock.
f) The Company has reserved 40,000,000 shares of its common stock for
the conversion of the Series J Preferred and the Amended New Shaar
Convertible Note.
60
Effective as of October 1, 2005, the Company entered into an exchange
agreement with The Shaar Fund, LTD (the "New Shaar Exchange Agreement"). Under
terms of the New Shaar Exchange Agreement, the Company agreed that Shaar will
exchange all of its right, title and interest in and to the remaining
outstanding shares of the Series I Preferred (excluding all other accrued and
unpaid dividends thereon) for 388,302 shares of the Company's Series J
Preferred.
Effective as of October 1, 2005, Shaar and the Company have agreed to
amend the New Shaar Convertible Note (the "Amended New Shaar Convertible Note").
The Amended New Shaar Convertible Note shall have the following rights,
privileges, and limitations:
a) The Amended New Shaar Convertible Note bears an interest rate of
10% per annum, which is payable in cash or shares of the Company's
common stock at the Company's election.
b) Interest shall accrue on the principal amount for a one year
period ("Deferral Period"). On March 22, 2006, the Company will
make a single lump sum payment to the holder in an amount equal to
all interest that accrued during the Deferral Period
c) Beginning April 15, 2006, and monthly thereafter on the 15th day
of each month until March 22, 2009 ("Maturity Date"), the Company
shall pay to Shaar all accrued and unpaid interest ("Interest
Payments")on the principal balance of the note accruing during the
prior month.
d) On the Maturity Date, the Company shall make a single lump sum
payment to Shaar equal to the outstanding principal balance of the
Amended New Shaar Convertible Note ("Principal Balance"), together
with all accrued and unpaid interest.
e) At the option of Shaar, the outstanding Principal Balance may be
converted, either in whole or in part, into shares of the
Company's common stock.
f) The conversion price of the payment of the Principal Balance, the
Deferral Period, and the Interest Payments shall be determined by
the average closing price of Company's common stock in the 10
trading days preceding the conversion date, but in no event shall
the conversion price be more than $0.50 per share or less than
$0.05 per share ("Conversion Price").
g) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
h) The Amended New Shaar Convertible Note may not be prepaid by the
Company prior to the Maturity Date.
i) The Company has reserved 40,000,000 shares of its common stock for
the conversion of the Amended New Shaar Convertible Note and the
Series J Preferred.
The current principal balance of the New Shaar Note is $5,426,233 as of
December 31, 2005 and remains unpaid as of April 15, 2006.
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 exchanging and/or purchasing any securities, to ask
61
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. See "MD&A - Recent Sales of Unregistered
Securities."
The following table summarizes the Company's contractual obligations,
maturities and commitments. See Notes 7 and 13 of the Notes to Consolidated
Financial Statements for additional information regarding long-term debt and
operating leases.
----------------------------- --------------- ----------------- ---------------- --------------- ---------------
(amounts in thousands $) Less than More than 5
1 year 1-3 Years 3-5 Years years Total
----------------------------- --------------- ----------------- ---------------- --------------- ---------------
Long-term debt and related
party notes payable 888 - 5,426 - 6,314
----------------------------- --------------- ----------------- ---------------- --------------- ---------------
Operating leases 93 84 14 - 191
----------------------------- --------------- ----------------- ---------------- --------------- ---------------
Purchase obligations - - - - -
----------------------------- --------------- ----------------- ---------------- --------------- ---------------
Other long-term liabilities - - - - -
----------------------------- --------------- ----------------- ---------------- --------------- ---------------
981 84 5,440 - 6,505
----------------------------- --------------- ----------------- ---------------- --------------- ---------------
The Company hopes to meet its short-term capital requirements
(including its $80,000 monthly cash shortfall) through continued loans from The
Shaar Fund, Ltd., although this lender is under no obligation to continue to
make advances to the Company. The Company intends to negotiate a forbearance
arrangement with other lenders on loans that are currently due. Ultimately, the
Company intends to reduce its cash shortfall and 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 $39,000,000 as of December 31, 2005, which expire in the years
2010 through 2024. The amount of NOLs that can be used in any one year will be
limited by the applicable tax laws that are in effect at the time such NOLs can
be utilized. The unused NOLs balances may be accumulated and used in subsequent
years. A full valuation allowance has been established to offset any benefit
from the net operating loss carryforwards. It cannot be determined when or if
the Company will be able to utilize the NOLs.
NEW ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 155, Accounting for Certain Hybrid Instruments ("SFAS 155").
SFAS 155 amends SFAS 133 and SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140").
SFAS 155 allows financial instruments that have embedded derivatives to be
accounted for as a whole, eliminating the need to bifurcate the derivative from
its host, if the holder elects to account for the whole instrument on a fair
value basis. In addition, among other changes, SFAS 155 (i) clarifies which
62
interest-only strips and principal-only strips are not subject to the
requirements of SFAS 133; (ii) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation; (iii) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives; and (iv)
eliminates the prohibition on a qualifying special-purpose entity ("QSPE") from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial interest. SFAS 155 will be applied
prospectively and is effective for all financial instruments acquired or issued
for fiscal years beginning after September 15, 2006. SFAS 155 is not expected to
have a material impact on the Company's consolidated financial statements. The
FASB has issued additional guidance relating to derivative financial instruments
as follows:
In June 2005, the FASB cleared SFAS 133 Implementation Issue No. B38,
Embedded Derivatives: Evaluation of Net Settlement with Respect to the
Settlement of a Debt Instrument through Exercise of an Embedded Put Option or
Call Option ("Issue B38") and SFAS 133 Implementation Issue No. B39, Embedded
Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable
Only by the Debtor ("Issue B39"). Issue B38 clarified that the potential
settlement of a debtor's obligation to a creditor occurring upon exercise of a
put or call option meets the net settlement criteria of SFAS No. 133.
Issue B39 clarified that an embedded call option, in which the
underlying is an interest rate or interest rate index, that can accelerate the
settlement of a debt host financial instrument should not be bifurcated and fair
valued if the right to accelerate the settlement can be exercised only by the
debtor (issuer/borrower) and the investor will recover substantially all of its
initial net investment. Issues B38 and B39, which must be adopted as of the
first day of the first fiscal quarter beginning after December 15, 2005, are not
anticipate to have a material impact on the Company's consolidated financial
statements.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations", or "FIN 47," which clarifies that the
term "conditional asset retirement obligation" as used in FASB statement No.
143, "Accounting for Asset Retirement Obligations". Conditional asset retirement
obligation refers to a legal obligation to perform an asset retirement activity
in which the timing and/or method of settlement are conditional on a future
event that may or may not be within the control of the entity. An entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated. FIN 47 is effective for fiscal years ending after December 15, 2005.
The Company does not expect the adoption of FIN 47 to have a material impact on
our consolidated balance sheet or consolidated statement of cash flows.
In May 2005, the Financial Accounting Standards Board, or "FASB,"
issued SFAS No. 154, Accounting Changes and Error Corrections. This statement
replaces APB No. 20 and SFAS No. 3, and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS No. 154
requires retrospective application to prior periods' financial statements of
changes in accounting principle. The statement defines retrospective application
as the application of a different accounting principle to prior accounting
periods as if that principle had always been used or as the adjustment of
previously issued financial statements to reflect a change in the reporting
entity. This statement shall be effective for accounting changes and correction
of errors made in years beginning after December 15, 2005. Accordingly, we will
adopt the provisions of SFAS No. 154 at the beginning of our 2006 fiscal year.
63
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment,
which requires companies to measure and recognize compensation expense for all
stock-based payments at fair value. SFAS 123R is effective for fiscal years
beginning after June 15, 2005 and, thus, will be effective for the Company
beginning with the fiscal year of 2006, as deferred. Early adoption is
encouraged and retroactive application of the provisions of SFAS 123R to the
beginning of the fiscal year that includes the effective date is permitted, but
not required. The Company is currently evaluating the impact of SFAS 123R and
the adoption may have a material impact on the Company's financial position and
results of operations. See Stock Compensation in Note 1 for more information
related to the pro forma effects on reported net loss and net loss per share of
applying the fair value recognition provisions of the previous SFAS 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
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
uncertainties that would affect any such forward-looking statements. These risks
and uncertainties include, but are not limited to:
o the Company's critical need for additional cash to sustain
existing operations and meet existing obligations and capital
requirements (the Company's auditor's opinion on our fiscal 2002,
2003, 2004 and 2005 financial statements contains a "going
concern" qualification in which they express doubt about the
Company's ability to continue in business, absent additional
financing);
64
o the ability to generate profitable operations from a large scale
remediation project;
o the ability of the Company to renew its nationwide permit to treat
PCBs;
o the ability of the Company to implement its waste processing
operations, including obtaining commercial waste processing
contracts and processing waste under such contracts in a timely
and cost effective manner; the timing and award of contracts by
the U.S. Department of Energy for the cleanup of waste sites
administered by it;
o the timing and award of contracts by the U.S. Department of Energy
for the cleanup of waste sites administered by it;
o the acceptance and implementation of the Company's waste treatment
technologies in the government and commercial sectors;
o the Company's ability to obtain and perform under other large
technical support services projects; developments in environmental
legislation and regulation;
o the ability of the Company to obtain future financing on favorable
terms; and
o other circumstances affecting anticipated revenues and costs.
These risks and uncertainties could cause actual results of the Company
to differ materially from those projected or implied by such forward-looking
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
------- -----------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
------- --------------------------------------------
The consolidated financial statements of the Company are included on
pages F-1 through F-36 of this Annual Report and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
65
ITEM 9A. CONTROLS AND PROCEDURES
------- -----------------------
(a) Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
summarized, and reported within the required time periods, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we conducted an
evaluation, under the supervision of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of December 31, 2005. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer, solely for the reason below,
concluded that our disclosure controls and procedures were not effective as of
December 31, 2005 in alerting them in a timely manner to material information
required to be included in our reports filed under the Exchange Act. This
evaluation identified a material weakness in our disclosure controls and
procedures with respect to analyzing debt and equity instruments to identify
potential embedded derivatives and any required accounting entries and
disclosures pertaining to embedded derivatives. Management is taking steps to
implement appropriate corrective action in this regard.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls
over financial reporting or in other factors that could significantly affect
these internal controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
ITEM 9B. OTHER INFORMATION
-------- -----------------
None.
66
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------- ---------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the executive officers and directors of the
Company, and their positions with the Company as of March 31, 2006 are as
follows:
Name Age Position
----------------------------------------- ------------ ------------------------------------------------------
Dr. Shelby T. Brewer 69 Chairman of the Board and Chief Executive Officer
----------------------------------------- ------------ ------------------------------------------------------
O. Mack Jones 65 President & Chief Operating Officer
----------------------------------------- ------------ ------------------------------------------------------
James M. DeAngelis 45 Chief Financial and Administrative Officer, Treasurer
----------------------------------------- ------------ ------------------------------------------------------
Bentley J. Blum 64 Director
----------------------------------------- ------------ ------------------------------------------------------
Dr. Frank E. Coffman 64 Director
----------------------------------------- ------------ ------------------------------------------------------
Paul E. Hannesson 65 Director
----------------------------------------- ------------ ------------------------------------------------------
VADM Michael P. Kalleres 65 Director
----------------------------------------- ------------ ------------------------------------------------------
Robert A. Maczewski 58 Director
----------------------------------------- ------------ ------------------------------------------------------
Ambassador William A. Wilson 90 Director
----------------------------------------- ------------ ------------------------------------------------------
DR. SHELBY T. BREWER, 69, Director since January 2001
o Chairman and CEO of the Company since April 2003.
o President of the Company from January 2001 to April 2003.
o Since April 2000, Mr. Brewer served as Chairman and CEO of
Solutions, a wholly owned subsidiary of the Company.
o From 1996 to March 2000, Dr. Brewer was President of S. Brewer
Enterprises, a privately held consulting firm he founded that is
engaged in supporting mergers and acquisitions, arranging private
and public financing, and forming joint ventures abroad.
o Served as President and CEO of the nuclear power businesses of ABB
Combustion Engineering, a public company, from 1985 to 1995.
o From 1981 to 1984, he served as Assistant Secretary of Energy in
the Reagan administration, holding the top nuclear post in the US
government.
o Dr. Brewer holds Ph.D. and M.S. degrees in nuclear engineering
from Massachusetts Institute of Technology; he holds a B.S. degree
in mechanical engineering and a B.A. in humanities from Columbia
University.
67
BENTLEY J. BLUM, 64, Director since March 1996
o Served as director of Environmental since 1984, Chairman of the
Board of Environmental, a public company, from 1984 to November
1996 and is its principal stockholder.
o Currently serves as a director of Separation, a wholly owned
subsidiary of Environmental. Currently serves as a director of
Solution, a wholly owned subsidiary of the Company.
o Sole stockholder and director of a number of corporations that
hold real estate interests, oil drilling and other corporate
interests that are privately held companies.
o Mr. Blum is the brother-in-law of Paul E. Hannesson, a director of
the Company.
DR. FRANK E. COFFMAN 64, Director since June 2002
o Mr. Coffman also currently serves as Senior Vice President, of
Metcalf & Eddy, a public company, involved in construction and
engineering (August 1997 - Present).
o Mr. Coffman served as Senior Vice President, Government &
Commercial Programs, IT Corporation, a public company, from
January 1995 to May 1997 and as Vice President, Government &
Commercial Programs, IT Corporation from 1984 to 1995.
o Mr. Coffman served as Deputy Assistant Secretary for Waste
Management for the Department of Energy ("DOE") from 1981 to 1984,
Director of the Office of Advanced Nuclear Systems, DOE from 1980
to 1981 and as a Director of the Division of Fusion Development
and Technology, DOE from 1978 to 1980.
o Mr. Coffman served as Chief of the Energy Research Development
Agency, Fusion Systems and Applications Studies Branch from 1970
to 1975.
o Mr. Coffman serves on the Board of Directors of Holmes and Narver,
a public company.
o Mr. Coffman holds a Ph.D. in nuclear physics and a MA degree in
plasma physics from Vanderbilt University. Mr. Coffman holds a BS
degree in physics from Western Kentucky University.
JAMES M. DEANGELIS, 45, Director since June 2002
o Mr. DeAngelis was appointed Vice President-Finance and Treasurer
of the Company in 1998 and promoted to Chief Financial and
Administrative Officer and Secretary in December 1998.
o Mr. DeAngelis also served as Senior Vice President-Sales &
Marketing of Separation, a public company, since July 1996.
o He also served as the President of CFC Technologies, formerly a
wholly owned subsidiary of the Company, since September 1994.
o He holds a MBA from the American Graduate School of International
Management. He holds B.S. degrees in Biology and Physiology from
the University of Connecticut.
68
PAUL E. HANNESSON, 65, Director since March 1996
o Mr. Hannesson served as Chairman, CEO and President of the Company
from 1996 to January 2001.
o He served as Director and Officer of Environmental, a public
company, from 1996 to July 1998.
o He serve4 as Chairman of the Board and CEO of Separation, a wholly
owned subsidiary of the Company from May 1997 to December 2004.
o Mr. Hannesson is the brother-in-law of Bentley Blum, a director of
the Company.
O. MACK JONES, 65, Director since October 2003
o President and C.O.O. of the Company since April 2003.
o Since February 2001, Mr. Jones served as Acting President of
Advanced Sciences, a wholly owned subsidiary of the Company.
o From April 1998 to February 2001, Mr. Jones also has served as
Vice President of Field Operations of the Company since April
1998, managing its field treatability studies and commercial
projects.
o From June 1996 to April 1998, Mr. Jones served as a consultant to
the Company assisting in the commercialization of the solvated
electron technology.
o From 1991 to February 1998, Mr. Jones served as the founder and
principal executive officer of a privately held environmental
consulting company, Florida Vector Services, which provided both
consulting and hands-on remediation services primarily in
TSCA-related areas.
o From 1986 to 1991, Mr. Jones was Vice President-Operations with
Quadrex Environmental Company, a public company, managing the
company's field remediation businesses.
o Mr. Jones held several managerial operating positions in power
generation and distribution arenas during his twenty-six years of
service to General Electric Company, a public company.
o Mr. Jones holds a degree in mechanical engineering from
Mississippi State University and is registered as a professional
mechanical engineer.
VADM MICHAEL P. KALLERES, 65, Director since June 2002
o VADM Kalleres currently serves as President of Dare to Excel Inc.,
a privately held financial management and consulting firm (1998 to
present). He also served as President and Chief Executive Officer
of Global Associates, Ltd., Technology Services Group, a privately
held financial and corporate consulting firm, from 1994 to 1998.
o VADM Kalleres retired from active duty in September 1994 after 32
years as a naval officer.
o VADM Kalleres was awarded 18 personal/unit military/combat
decorations including the Defense Distinguished Service Medal (2
awards) and the U.S. Navy Distinguished Service Medal. He is also
a recipient of the Congressional, Ellis Island Medal of Honor.
69
o VADM Kalleres is a former member (1994-1998) of the Defense
Science Board, the Naval Studies Board of the National Academy of
Science. He is also a board member of the Dean's Advisory Council
at the Krannert School of Management-Purdue University, and the
National Board of the Salvation Army.
o VADM Admiral Kalleres was awarded a BS degree in Industrial
Management and Engineering from the Krannert School of
Management-Purdue University, and a MS degree in Political and
International Affairs from George Washington University.
ROBERT A. MACZEWSKI, 58, Director since February 2006
o Mr. Maczewski currently serves as a Sarbanes-Oxley Section 404
Independent Contractor to Weever and Tidwell, CPA, SOAProjects,
Inc. and Kforce, Inc. for a variety of publicly traded companies
(May 2004 to present).
o Mr. Maczewski served as Chief Financial Officer for Republic
Resources, Inc., a public company, from July 2003 to July 2004.
o Mr. Maczewski served as President of Neptune Communications, a
private company engaged in the design and installation of
telecommunications cabling systems, from March 2001 to June 2003.
o Mr. Maczewski served as a marketing executive of Riviera Finance,
a private company marketing asset based lending products, from
June 1997 to March 2001.
o Mr. Maczewski served as Vice President of Commercial Capital
Holding Corp., a private company engaged in factoring receivables
for a variety of industries, from January 1995 to June 1997.
o Mr. Maczewski served as President and Partner of Inter-American
Funding Corp., a private company engaged in providing receivable
insurance and factoring receivables through Export-Import Bank and
American Credit Indemnity, from December 1989 to December 1995.
o Mr. Maczewski served as President and Partner of Inter-American
Holding Corp., a private company engaged in providing investor
groups pre-acquisition analysis of assets acquired by Resolution
Trust Corp., from December 1989 to December 1995.
o Mr. Maczewski served as Senior Vice President of Louisiana
Guaranty National Bank, a de-novo commercial bank, and was
responsible for its formation, charter application and operation,
from March 1985 to December 1989.
o Mr. Maczewski served as Senior Vice President and Chief Financial
Officer of First National Bank, a public company, from September
1982 to March 1985.
o Mr. Maczewski served as a Banking Officer of First National Bank
of Commerce, a public company, from February 1979 to September
1982.
o Mr. Maczewski served as the Assistant Treasurer of The Chase
Manhattan Bank, a public company, from January 1970 to January
1979.
o Mr. Maczewski was awarded a BBA degree in Accounting from the
College of The City of New York.
AMBASSADOR WILLIAM A. WILSON, 90, Director since June 2002
o Mr. Wilson has been active in ranching and farming in California
and Mexico from 1980 to 1997.
o Mr. Wilson was active in real estate development in California
from 1961 through 1985.
70
o Mr. Wilson served as Chief Engineer of Wilson Oil Tools, a
privately held company, from 1938 through 1955 and as Chairman
from 1955 to 1961.
o Mr. Wilson served as the Presidential Envoy to the Holy See from
1980 to 1984 and as Ambassador to the Holy See from 1984 to 1986.
o Mr. Wilson served on the Board of Directors of Jorgensen Steel
Co., a public company, from 1973 to 1984 and again from 1986 to
1991. Mr. Wilson also served on the Board of Directors of Pennzoil
Company, a public company, from 1983 to 1987.
o Mr. Wilson holds a BA in Mechanical Engineering from Stanford
University and a Doctor of Laws, Honoris Causa from Assumption
College, Barry University, and Pepperdine University.
Each director is elected to serve for a term of one year or until his
or her successor is duly elected and qualified. The Company's officers are
elected by, and serve at the pleasure of, the Board of Directors, subject to the
terms of any employment agreements. Messrs. Hannesson and Blum are
brothers-in-law. No family relationship exists among any other directors or
executive officers of the Company.
KEY EMPLOYEES
The names and ages of the key employees of the Company not listed
above, and their positions with the Company as of March 31, 2006, are as
follows:
Name Age Position
---- --- --------
Walter L. Foutz 52 Vice President of Operations, Advanced Sciences
Mr. Foutz was appointed Vice President of Operations of Advanced
Sciences in April 2005. Previously, Mr. Foutz served as Advanced Sciences'
Western Regional Manager from January of 2002. Previously, Mr. Foutz has been a
Sr. Project Manager with corporate and management responsibilities for Advanced
Sciences from December 2000 to January 2002. From 1991 to 2000 Mr. Foutz was the
Environmental Program Manager for MDM Services Corporation, managing
environmental task-order contracts with numerous government clients. From
1986-1991 Mr. Foutz was the lead Senior Environmental Geologist on RFI/CMS and
RI/FS projects at Dyess Air Force Base, Texas; Fallon Naval Air Station,
Nevada;' Kansas City DOE Plant, Arizona Air National Guard Base, Tucson; US Army
Kwajelein Atoll, Marshall Islands.
Mr. Foutz received his B.S. in Geology in 1981. He has 24 years of
progressive professional experience in geological, hydro-geological, and
environmental consulting and contract management as a Department of Energy
contractor.
BOARD COMMITTEES
The Company's Board of Directors has (i) an Audit Committee and (ii) a
Compensation, Stock Option and Benefits Committee. The Company no longer
maintains an Executive and Finance Committee (the "Finance Committee"). On
August 30, 2000, the Board of Directors unanimously voted to abolish the Finance
Committee and determined that the entire Board of Directors would perform its
function.
71
As of December 31, 2005, the Compensation, Stock Option and Benefits
Committee, was composed of Dr. Frank E. Coffman, as Chairman, Michael P.
Kalleres, Ambassador William A. Wilson and Dr. Shelby T. Brewer. The
Compensation, Stock Option, and Benefits Committee has responsibility for
establishing and reviewing employee and consultant/advisor compensation, bonuses
and incentive compensation awards, administering and interpreting the Company's
1998 Stock Option Plan, as amended (the "1998 Plan"), and determining the
recipients, amounts and other terms (subject to the requirements of the 1998
Plan) of options which may be granted under the 1998 Plan and outside the 1998
Plan, from time to time and providing guidance to management in connection with
establishing additional benefit plans.
As of December 31, 2005, the Audit Committee was composed of Michael P.
Kalleres as Chairman, Dr. Frank E. Coffman, Ambassador William A. Wilson and
James M. DeAngelis. The responsibilities of the Audit Committee include
selecting, engaging and determining the compensation of the firm of independent
accountants to be retained by the Company, reviewing with the Company's
independent accountants the scope and results of their audits, reviewing with
the independent accountants and management the Company's accounting and
reporting principles, policies and practices, as well as the Company's
accounting, financial and operating controls and staff, supervising the
Company's policies relating to business conduct and dealing with conflicts of
interest relating to officers and directors of the Company.
AUDIT COMMITTEE AND FINANCIAL EXPERT
Michael P. Kalleres currently serves as the Chairman of the Audit
Committee and the Board of Directors has determined him to be an audit committee
financial expert for the Company. Mr. DeAngelis qualifies as an audit committee
financial expert but is not independent of management.
COMPENSATION OF DIRECTORS
The Company pays non-management directors a director's fee in the
amount of $375 per meeting for attendance at the meetings of the Board of
Directors, and the Company reimburses the directors for actual expenses incurred
in respect of such attendance. The Company does not separately compensate
employees for serving as directors.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of the outstanding shares
of the Company's common stock, to file initial reports of beneficial ownership
and reports of changes in beneficial ownership of shares of common stock with
the Commission. Such persons are required by regulations promulgated under the
Exchange Act to furnish the Company with copies of all Section 16(a) forms filed
with the Commission.
Based on representations from the officers and directors, 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, 2005.
72
CODE OF ETHICS
The Company's board of directors has established and adopted a code of
ethics in 2004 applicable to its senior executives, financial officers and
directors. See Exhibit 14.01 - "Code of Ethics of Commodore Applied
Technologies, Inc."
73
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 2005, 2004 and 2003 to all persons serving as
the Company's Chief Executive Officer during 2005, 2004, and 2003 to each of the
Company's four most highly compensated executive officers other than the Chief
Executive Officer whose total salary and bonus compensation exceeded $100,000
during any such year.
Summary Compensation Table
------------------------------------------------ Long-Term Compensation
Annual Compensation
Other Securities
-------------------------------- Annual Restricted Under- All Other
Compen- Stock Lying LTIP Compen-
Name and Principal Salary Bonus sation Award(s) Options Pay-outs sation
Position Year ($) ($) ($) ($) (#) ($) ($)
-------------------------------- -------- ------------------- ------------------------ ----------------- -------- -----------
(a) (b) (c) (d) (e) (g) (g) (h) (i)
Dr. Shelby T. Brewer (1) 2005 245,769(2) -0- -0- -0- -0-(3) -0- -0-(4)
Chief Executive Officer 2004 13,274(2) -0- -0- -0- -0-(3) -0- 30,000(4)
CXIA 2003 5,250(2) -0- -0- -0- 1,972,542(3) -0- 30,000(4)
O. Mack Jones(5) 2005 222,769(6) -0- -0- -0- -0-(7) -0- -0-
President & Chief 2004 132,000(6) -0- -0- -0- -0-(7) -0- -0-
Operating Officer 2003 103,938(6) -0- -0- -0- 512,031(7) -0- -0-
CXIA
James M. DeAngelis(8) 2005 203,065(9) -0- -0- -0- -0-(10) -0- -0-
Senior Vice President & Chief 2004 103,938(9) -0- -0- -0- -0-(10) -0- -0-
Financial Officer 2003 12,480(9) -0- -0- -0- 1,032,091(10) -0- -0-
CXIA
Walter Foutz(11) 2005 114,166(12) -0- -0- -0- -0- -0- -0-
Vice President of Operations 2004 97,880(12) -0- -0- -0- -0- -0- -0-
CASI 2003 97,880(12) -0- -0- -0- -0- -0- -0-
(1) Mr. Brewer served as Chief Executive Officer and President of
Solutions and a director of the Company since April 2000. Mr.
Brewer assumed the positions of Chairman, Chief Executive Officer
and President of the Company from January 2001 through October
2003 and continues to serves as Chief Executive Officer and a
director since October 2003 to present.
(2) Represents the amount of Mr. Brewer's base salary paid by the
Company. Mr. Brewer's base salary for 2005 was $285,000, of which
$39,231 was originally deferred until December 31, 2005, and
remains unpaid as of April 15, 2006. Mr. Brewer's base salary for
2004 was $285,000, of which $271,726 was originally deferred until
December 31, 2004, and remains unpaid as of April 15, 2006. Mr.
Brewer's base salary for 2003 from January through April was
$250,000, and from May through December was $285,000 of which
$271,000 was originally deferred until December 31, 2003, and
remains unpaid as of April 15, 2006. Mr. Brewer's base salary for
2002 was $250,000 of which $190,385 was originally deferred until
December 31, 2002, and remains unpaid as of April 15, 2006. Mr.
Brewer's base salary for 2001was $250,000 of which $144,615
annually originally deferred until December 31, 2001, and remains
unpaid as of April 15, 2006. Mr. Brewer's base salary for 2000 was
$90,000.
74
(3) Represents shares of common stock underlying stock options granted
to Mr. Brewer by the Company in his capacity as an officer and
director of the Company. Mr. Brewer canceled prior options for
42,000 shares of common stock voluntarily on October 2, 2002. All
amounts adjusted for the 1 for 20 reverse split of the Company's
common stock on August 29, 2005.
(4) Represents a $1,000,000 Life Insurance Policy in the name of Dr.
Shelby T. Brewer paid on behalf of Mr. Brewer by the Company. Mr.
Brewer's family was the beneficiary of the Life Insurance Policy.
(5) Mr. Jones served as Vice President and Field Operations Manager of
Solutions from April 1998 to January 2001 and as President of
Advanced Sciences from February 2001 to present, and President and
Chief Operating Officer of the Company from April 2003 to present.
Mr. Jones has served as a director of the Company since October
2003.
(6) Represents the amount of Mr. Jones' base salary paid by the
Company. Mr. Jones' total base salary for 2005 was $250,000 of
which $27,231 originally deferred until December 31, 2005, and
remains unpaid as of April 15, 2006. Mr. Jones' total base salary
for 2004 was $250,000 of which $118,000 originally deferred until
December 31, 2004, and remains unpaid as of April 15, 2006. Mr.
Jones' total base salary for 2003 from January through April was
$165,000, and from May through December was $250,000 of which
$115,485 originally deferred until December 31, 2003, and remains
unpaid as of April 15, 2006. Mr. Jones' total base salary for 2002
was $165,000 of which $44,268 originally deferred until December
31, 2002, and remains unpaid as of April 15, 2006. Mr. Jones'
total base salary for 2001 was $165,000 of which $30,461
originally deferred until December 31, 2001, and remains unpaid as
of April 15, 2006. Mr. Jones' base salary for 2000 and 1999 was
$150,000.
(7) Represents shares of common stock underlying stock options granted
to Mr. Jones the Company in his capacity as an officer of the
Company. Mr. Jones canceled prior options for 21,875 shares of
common stock voluntarily on October 2, 2002. All amounts adjusted
for the 1 for 20 reverse split of the Company's common stock on
August 29, 2005.
(8) Mr. DeAngelis served as Vice President and Treasurer of the
Company from July 1998 to December 1999 and as Sr. Vice President,
Chief Financial and Administrative Officer, Treasurer and
Secretary from December 1999 to present. Mr. DeAngelis has served
as a director of the Company since June 2002.
(9) Represents the amount of Mr. DeAngelis' base salary paid by the
Company. Mr. DeAngelis' total base salary for 2005 was $225,000 of
which $21,935 was originally deferred until December 31, 2004, and
remains unpaid as of April 15, 2006. Mr. DeAngelis' total base
salary for 2004 was $225,000 of which $121,062 was originally
deferred until December 31, 2004, and remains unpaid as of April
15, 2006. Mr. DeAngelis' total base salary for 2003 from January
through April was $165,000, and from May through December was
$225,000 of which $194,520 was originally deferred until December
31, 2003, and remains unpaid as of April 15, 2006. Mr. DeAngelis'
total base salary for 2002 was $165,000 of which $42,659 was
originally deferred until December 31, 2002, and remains unpaid as
of March 31, 2006. Mr. DeAngelis' total base salary for 2001 was
$165,000 of which $30,461 was originally deferred until December
31, 2001, and remains unpaid as of April 15, 2006. Mr. DeAngelis'
base salary for 2000 and 1999 was $165,000 and $145,000
respectively.
(10) Represents shares of common stock underlying stock options granted
to Mr. DeAngelis by the Company in his capacity as an officer of
the Company. Mr. DeAngelis canceled prior options for 84,063
shares of common stock voluntarily on October 2, 2002. All amounts
adjusted for the 1 for 20 reverse split of the Company's common
stock on August 29, 2005.
(11) Mr. Walter L. Foutz served as a Sr. Project Manager with corporate
and management responsibilities for Advanced Sciences from
December 2000 to January 2002. Mr. Foutz served as the Western
Regional Manager of Advanced Sciences from January 2002 to March
2005. Mr. Foutz serves as Vice President of Operations of Advanced
Sciences, Inc. since April 2005 to present.
(12) Represents the amount of Mr. Foutz's base salary paid by the
Company. Mr. Foutz's total base salary for 2005 from April January
through February was $97,880, from March through April was
$100,000, and from May through December was $118,000. Mr. Foutz's
total base salary for 2004 was $97,880. Mr. Foutz's total base
salary for 2003 was $97,880.
75
STOCK OPTIONS
No options were granted during the year ended December 31, 2005 to any
individuals listed in the Summary Compensation Table pursuant to the Company's
1998 Stock Option Plan, as amended, (the "1998 Plan") and no options were
granted to any individuals outside of the 1998 Plan. The Company has no
outstanding stock appreciation rights and granted no stock appreciation rights
during the year ended December 31, 2005.
The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the 1998
Plan and outside of the 1998 Plan at December 31, 2005 by the individuals listed
in the Summary Compensation Table.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares Value at Fiscal Year-End(#) at Fiscal Year-End($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($)(1) Un-exercisable Un-exercisable(2)
----------------------------------- ------------------ --------------- ------------------------------ --------------------------
(a) (b) (c) (d) (e)
Dr. Shelby T. Brewer............ -0- -0- 2,115,802 / 2,115,802 -0- / -0-
James M. DeAngelis.............. -0- -0- 1,244,175 / 1,244,175 -0- / -0-
O. Mack Jones................... -0- -0- 600,000 / 600,000 -0- / -0-
(1) Represents the difference between the last reported sale price of
the Common Stock on December 31, 2005 ($0.017), and the exercise
prices of the options (ranging from $0.57 to $1.40) multiplied by
the applicable number of options exercised.
(2) Represents the difference between the exercise price and the
closing price on December 31, 2005, multiplied by the applicable
number of securities.
76
EMPLOYMENT AGREEMENTS
The Company has no employment contracts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The individuals who served as members of the Compensation, Stock Option
and Benefits Committee (the "Compensation Committee") during the year ended
December 31, 2005 were Dr. Frank E. Coffman (Chairman), VADM Michael P.
Kalleres, Ambassador William A. Wilson and Dr. Shelby T. Brewer.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee was established in November 1996 and is
responsible for, among other things, establishing the compensation policies
applicable to executive officers of the Company. The Compensation Committee was
composed of Dr. Frank E. Coffman (Chairman), VADM Michael P. Kalleres,
Ambassador William A. Wilson and Dr. Shelby T. Brewer at December 31, 2005, all
of whom, with the exception of Dr. Shelby T. Brewer, were non-employee Directors
of the Company. All decisions of the Compensation Committee relating to the
compensation of the Company's executive officers are reviewed by, and are
subject to the final approval of, the full Board of Directors of the Company.
Set forth below is a report prepared by Mr. Coffman, Mr. Kalleres and Mr. Wilson
in their capacities as members of the Compensation Committee at December 31,
2005, addressing the Company's compensation policies for 2005 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.
77
o 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
2005 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 2005, total compensation was paid to executives primarily based upon
individual performance and the extent to which the business plans for their
areas of responsibility were achieved or exceeded. On balance, performance goals
were substantially met or exceeded and therefore compensation was paid
accordingly.
Mr. Brewer, the Chairman of the Board, and Chief Executive Officer of
the Company received annual compensation based upon, among other things,
individual performance and the extent to which the business plans for his areas
of responsibility were achieved or exceeded. Mr. Brewer received a base salary
at an annual rate of $285,000 in 2005, of which $39,231 annually was deferred
until December 31, 2005, and remains unpaid as of March 31, 2006.
78
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 2005,
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 2004
goals and his individual contributions to the Company and its affiliates. The
Compensation Committee concluded that he had achieved his 2004 goals and had
provided a leadership role in achieving the Company's and its affiliates'
strategic priorities for 2004. The Compensation Committee also considered Mr.
Brewer's decisive management of operational and strategic issues, his drive to
reinforce a culture of innovation and his ability and dedication to enhance the
long-term value of the Company and its affiliates for their respective
stockholders. In making its salary decisions with respect to Mr. Brewer, the
Compensation Committee exercised its discretion and judgment based on the above
factors, and no specific formula was applied to determine the weight of each
factor.
Mr. Brewer's base salary was not increased in 2005 and remains $285,000
per year.
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 2005, no annual incentive
bonuses were paid to the individuals named in the Summary Compensation Table.
Stock Options. The Compensation Committee has the power to grant stock
options under the 1998 Plan and outside of the 1998 Plan. With respect to
executive officers, it has been the Compensation Committee's practice to grant,
on an annual basis, stock options that vest at the rate of 20% upon grant and
20% in each calendar year thereafter for four years, and that are exercisable
over a ten-year period at exercise prices per share set at the fair market value
per share on the date of grant. Generally, the executives must be employed by
the Company at the time the options vest in order to exercise the options and,
upon announcement of a Change in Control (pursuant to and as defined in the 1998
Plan), such options become immediately exercisable. The Compensation Committee
believes that stock option grants provide an incentive that focuses the
executives' attention on managing the Company from the perspective of an owner
with an equity stake in the business. The Company's stock options are tied to
the future performance of the Company's stock and will provide value to the
recipient only when the price of the Company's stock increases above the option
grant price.
A total of 0, 0, and 3,854,068 stock options were granted pursuant to
the 1998 Plan and outside the 1998 Plan in 2005, 2004, and 2003 respectively. A
total of 0, 0 and 1,972,542 of such options were granted to Mr. Brewer in 2005,
2004 and 2003 respectively, and 0, 0, and 1,881,526 of such options were granted
(in the aggregate) to other individuals named in the Summary Compensation Table
in 2005, 2004 and 2003 respectively. The number of stock options granted in
2005, 2004 and 2003 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.
79
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 2005 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 2005, 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
Ambassador William A. Wilson (Chairman)
Dr. Frank E. Coffman
Paul E. Hannesson
Michael P. Kalleres
The Report of the Compensation Committee on Executive Compensation
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Annual Report into any filing under the
Securities Act, or under the Exchange Act, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------- --------------------------------------------------------------
EQUITY COMPENSATION PLAN INFORMATION
The following table reflects the number of shares of our common stock
that, as of December 31, 2005, were outstanding and available for issuance under
compensation plans that have previously been approved by our stockholders as
well as compensation plans that have not previously been approved by our
stockholders.
Remaining Available for
Number of Securities to be Weighted-Average Future Issuance Under
Issued Upon Exercise of Exercise Price of Equity Compensation
Outstanding Options, Outstanding Options, Plans (Excluding
Warrants and Rights Warrants and Rights ($) Securities Reflected in Column (a))
Plan Category (a) (b) (c)
Equity Compensation Plans
Approved by Security
Holders 568,272 4.27 265,384
(1)(2)..................
Equity Compensation Plans not
Approved by Security 5,125,358 0.57 -0-
Holders (3)(4) ............
Total.......................... 5,698,630 0.94 265,384
------------------------------ -------------------------- ------------------------------------
1. Consists of options issuable under the 1998 Stock Option Plan, as
amended, as approved by the stockholders on September 12, 2003.
2. Consists of options issuable outside of the 1998 Stock Option
Plan, as amended as approved by the stockholders on September 12,
2003.
3. Includes options to purchase a total of 3,757,568 shares issued to
Mr. Brewer, Mr. DeAngelis, Mr. Jones, and Mr. Hannesson in
November 2003 outside of the 1998 Stock Option Plan, as amended.
4. Includes warrant to purchase a total of 1,367,790 shares issued to
Mr. Blum in November 2003.
81
The following is a brief description of the material features of the
equity compensation plans not approved by our stockholders that are reflected in
the chart above.
On November 19, 2003, our Board of Directors approved the issuance of
stock options outside of the Company's 1998 Stock Option Plan, as amended, and
warrants for the Company's common stock to executive officers and directors of
the Company. A total of 3,757,568 fully vested, non-qualified stock options were
issued with an exercise price of $0.57 and an expiration date of December 14,
2008 (as described in footnote 3 above). A warrant for a total of 1,367,790
shares of the Company's common stock was issued to a director with an exercise
price of $0.57 and an expiration date of November 18, 2008 (as described in
footnote 4 above). The purpose of these options and warrant is to advance the
interests of our stockholders by enhancing our ability to attract, retain and
motivate persons who make important contributions to the Company by providing
them with equity ownership opportunities that better align their interests with
those of our stockholders.
Ten Year Option Repricings
The following table sets forth information regarding options held by
the Commodore Named Executive Officers and Directors that were voluntarily
surrendered by such persons, after which the Company issued new options to such
persons at current fair market value. The Compensation Committee approved these
transactions in order to restore the incentive value of such options.
Number of Exercise Length of
Securities Price of Original
Underlying Market Price of Option at Option Term
Options Stock at Time of Time of New At Date of
Repriced or Repricing or Repricing or Exercise Repricing
Date Amended (#) Amendment ($)(1) Amendment ($) Price($)(2) or Amendment
----- ----------- ----------------- ------------- ----------- ------------
Dr. Shelby T. Brewer 10/02/02 10,000 $0.57 $5.76 $0.57 12/14/08
10/02/02 25,000 $0.57 $20.00 $0.57 12/14/08
10/02/02 7,000 $0.57 $21.20 $0.57 12/14/08
James M. DeAngelis 10/02/02 9,063 $0.57 $8.75 $0.57 12/14/08
10/02/02 15,000 $0.57 $5.76 $0.57 12/14/08
10/02/02 10,000 $0.57 $13.78 $0.57 12/14/08
O. Mack Jones 10/02/02 9,375 $0.57 $8.75 $0.57 12/14/08
10/02/02 5,000 $0.57 $5.76 $0.57 12/14/08
10/02/02 7,500 $0.57 $13.78 $0.57 12/14/08
Paul E. Hannesson 10/02/02 7,375 $0.57 $8.75 $0.57 12/14/08
10/02/02 50,000 $0.57 $10.00 $0.57 12/14/08
Bentley J. Blum 10/02/02 3,500 $0.57 $8.75 $0.57 12/14/08
10/02/02 3,500 $0.57 $10.00 $0.57 12/14/08
_________________________
(1) Represents the closing price of our common stock on October 2,
2002 as reported by the AMEX Stock Market adjusted for the 1 for
20 reverse split of the Company's common stock on August 29, 2005
($0.57).
(2) In October 2002, Mr. Brewer, the Company's Chairman of the Board
and Chief Executive Officer, voluntarily surrendered options to
purchase 42,000 shares of our common stock, after which the
Company issued to him options to purchase 43,260 shares of our
common stock so long as Mr. Brewer continues to be an eligible
participant under the 1998 Stock Option Plan, as amended. The
exercise price of the new options is equal to 100% of the fair
market value of our common stock on the date of grant of the new
options, as determined by the last reported sales price of our
common stock as reported by the AMEX Stock Market on the date we
granted the new options. All amounts adjusted for the 1 for 20
reverse split of the Company's common stock on August 29, 2005.
82
(3) In October 2002, Mr. DeAngelis, the Company's Chief Financial and
Administrative Officer, Treasurer and Secretary, voluntarily
surrendered options to purchase 34,063 shares of our common stock,
after which the Company issued to him options to purchase 35,084
shares of our common stock so long as Mr. DeAngelis continues to
be an eligible participant under the 1998 Stock Option Plan, as
amended. The exercise price of the new options is equal to 100% of
the fair market value of our common stock on the date of grant of
the new options, as determined by the last reported sales price of
our common stock as reported by the AMEX Stock Market on the date
we granted the new options. All amounts adjusted for the 1 for 20
reverse split of the Company's common stock on August 29, 2005.
(4) In October 2002, Mr. Jones, the Company's President and Chief
Operating Officer, voluntarily surrendered options to purchase
21,875 shares of our common stock, after which the Company issued
to him options to purchase 22,969 shares of our common stock so
long as Mr. Jones continues to be an eligible participant under
the 1998 Stock Option Plan, as amended. The exercise price of the
new options is equal to 100% of the fair market value of our
common stock on the date of grant of the new options, as
determined by the last reported sales price of our common stock as
reported by the AMEX Stock Market on the date we granted the new
options. All amounts adjusted for the 1 for 20 reverse split of
the Company's common stock on August 29, 2005.
(5) In October 2002, Mr. Hannesson, the Company's former Chairman of
the Board and Chief Executive Officer, voluntarily surrendered
options to purchase 57,375 shares of our common stock, after which
the Company issued to him options to purchase 59,096 shares of our
common stock so long as Mr. Hannesson continues to be an eligible
participant under the 1998 Stock Option Plan, as amended. The
exercise price of the new options is equal to 100% of the fair
market value of our common stock on the date of grant of the new
options, as determined by the last reported sales price of our
common stock as reported by the AMEX Stock Market on the date we
granted the new options. All amounts adjusted for the 1 for 20
reverse split of the Company's common stock on August 29, 2005.
(6) In October 2002, Mr. Blum voluntarily surrendered options to
purchase 7,000 shares of our common stock, after which the Company
issued to him options to purchase 7,210 shares of our common stock
so long as Mr. Blum continues to be an eligible participant under
the 1998 Stock Option Plan, as amended. The exercise price of the
new options is equal to 100% of the fair market value of our
common stock on the date of grant of the new options, as
determined by the last reported sales price of our common stock as
reported by the AMEX Stock Market on the date we granted the new
options. All amounts adjusted for the 1 for 20 reverse split of
the Company's common stock on August 29, 2005.
83
SHAREHOLDER RETURN PERFORMANCE
This graph compares our total stockholder returns, the Standard and
Poor's 500 Composite Stock Index, the Standard and Poor's 1500 Composite
Environmental Services and Facilities Stock Index, the Standard and Poor's 600
Composite Environmental Services and Facilities Stock Index, the Standard and
Poor's 500 Composite Environmental Services and Facilities Stock Index, and the
Standard and Poor's 400 Composite Environmental Services and Facilities Stock
Index. The graph assumes $100 invested at the per share closing price of the
common stock of Commodore Applied Technologies, Inc. on the American Stock
Exchange, from January 1, 2003 through March 6, 2003, and then on the Over the
Counter Bulletin Board from that point forward.
[GRAPHIC OMITTED]
Comparison of initial $100 investment in various indices
versus the common stock of the Company.
-------------------------------------------------------------------- -----------
12/31/2002 12/31/2003 12/31/2004 12/30/2005
-------------------------------------------------------------------- -----------
CXIA 133.33 21.67 21.67 14.17
-------------------------------------------------------------------- -----------
S&P 500 103.32 126.38 137.75 141.88
-------------------------------------------------------------------- -----------
S&P 1500 Environmental
Services & Facilities 102.60 127.09 129.73 134.86
-------------------------------------------------------------------- -----------
S&P 600 Environmental
Services & Facilities 101.85 109.08 148.91 154.20
-------------------------------------------------------------------- -----------
S&P 500 Environmental
Services & Facilities 103.22 130.72 123.06 123.24
-------------------------------------------------------------------- -----------
S&P 400 Environmental
Services & Facilities 100.05 121.00 144.86 167.64
-------------------------------------------------------------------- -----------
84
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information, as of April 15,
2006, with respect to the beneficial ownership of common stock by each person
known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock of the Company. Unless otherwise indicated,
the owners have sole voting and investment power with respect to their
respective shares.
Number of Shares Percentage of Outstanding
Name and Address of of Common Stock Shares of Common Stock
Beneficial Owner Beneficially Owned(4) Beneficially Owned
------------------- --------------------- ------------------------
Dr. Shelby T. Brewer (1)........ 2,970,837(5) 29.52%
Bentley J. Blum(2).............. 1,645,154(6) 17.65%
James M. DeAngelis (2).......... 1,127,490(7) 12.43%
O. Mack Jones (3)............... 600,000(8) 7.01%
(1) The address of Dr. Shelby T. Brewer is 2151 Jamieson Street,
Carlyle Towers, Suite 308, Alexandria, Virginia 22314.
(2) The address of Commodore Environmental Services, Inc., Bentley J.
Blum, Paul E. Hannesson, and James M. DeAngelis is 150 East 58th
Street, Suite 3238, New York, New York 10155.
(3) The address of O. Mack Jones is 507 Knight Street, Suite B,
Richland, Washington 99352.
(4) As used herein, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Exchange Act as
consisting of sole or shared voting power (including the power to
vote or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise, including a right to acquire such power(s) during the
next 60 days. Unless otherwise noted, beneficial ownership
consists of sole ownership, voting and investment rights.
(5) Consists of: (i) 172 shares of common stock (ii) 24,535 shares of
our common stock representing the balance held of the common stock
issued pursuant to the Restated Brewer Note, dated as of March 15,
2001, between the Company and SB Enterprises and a subsequent
conversion notice for 50% of the outstanding principal dated as of
April 9, 2001; (iii) 650,570 shares of our common stock
representing the balance held of the common stock issued pursuant
to the Restated Brewer Note, dated as of March 15, 2001, between
the Company and SB Enterprises and a subsequent conversion notice
for the remaining 50% of the outstanding principal dated as of
March 14, 2003; (iv) 43,260 shares of the Company common stock
underlying currently exercisable options granted to Mr. Brewer by
the Company under the 1998 Plan; (v) 100,000 shares of the Company
common stock underlying currently exercisable options granted to
Mr. Brewer by the Company outside of the Company's 1998 Plan; and
(vi) 1,972,542 shares of our common stock underlying currently
exercisable stock options granted to Mr. Brewer by the Company
outside of the Company's 1998 Plan. All amounts adjusted for the 1
for 20 reverse split of the Company's common stock on August 29,
2005.
(6) Consists of: (i) 125,000 shares of our common stock issued to
Bentley J. Blum in exchange for $125,000 of debt owed to Mr. Blum
from the Company; (ii) 7,210 shares of the Company common stock
underlying currently exercisable options granted to Mr. Blum by
the Company under the Company's 1998 Plan; (iii) 1,367,790 shares
of our common stock underlying a currently exercisable five year
warrant at an exercise price of $0.57 per share granted to the
Blum Asset Trust by the Company in connection with the Blum Loan
and services provided by the Blum Asset Trust over the last five
years; and (iv) Mr. Blum's indirect beneficial ownership of common
stock based upon his beneficial ownership of 28,479,737 shares and
his spouse's ownership of 2,000,000 shares of Environmental common
85
stock, representing together 37.74% of the outstanding shares of
Environmental common stock at March 31, 2006, 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 785,400 shares of
Environmental common stock owned by Simone Blum, the mother of Mr.
Blum. Mr. Blum disclaims any beneficial interest in the shares of
Environmental common stock owned by his spouse and mother. All
amounts adjusted for the 1 for 20 reverse split of the Company's
common stock on August 29, 2005.
(7) Consists of (i) 900 shares of common stock; (ii) 42,084 shares of
common stock underlying currently exercisable stock options
granted to Mr. James M. DeAngelis by the Company under the
Company's 1998 Plan; (iii) 50,000 shares of common stock
underlying currently exercisable stock options granted to Mr.
DeAngelis by the Company outside of the Company's 1998 Plan; (iv)
Mr. DeAngelis' indirect beneficial ownership of common stock based
upon his ownership of 580,000 shares of Environmental; and (vi)
1,032,091 shares of our common stock underlying currently
exercisable stock options granted to Mr. DeAngelis by the Company
outside of the 1998 Plan. All amounts adjusted for the 1 for 20
reverse split of the Company's common stock on August 29, 2005.
(8) Consists of (i) 87,969 shares of common stock underlying currently
exercisable stock options granted to Mr. O. Mack Jones by the
Company under the Company's 1998 Plan; and (ii) 512,031 shares of
our common stock underlying currently exercisable stock options
granted to Mr. Jones by the Company outside of the 1998 Plan. All
amounts adjusted for the 1 for 20 reverse split of the Company's
common stock on August 29, 2005.
86
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of common stock as of March 31, 2006 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.
Number of Shares Percentage of Outstanding
Name and Address of of Common Stock Shares of Common Stock
Beneficial Owner Beneficially Owned(4) Beneficially Owned
-------------------- --------------------- ---------------------------
Dr. Shelby T. Brewer (1)............ 2,970,837(5) 29.52%
Bentley J. Blum(2).................. 1,645,154(6) 17.65%
James M. DeAngelis (2).............. 1,127,490(7) 12.43%
O. Mack Jones (3)................... 600,000(8) 7.01%
Paul E. Hannesson (2) 322,578(9) 3.91%
Dr. Frank E. Coffman, PhD (2)....... 22,500(10) *
VADM Michael P. Kalleres (2)........ 22,500(11) *
Ambassador William A. Wilson (2).... 22,500(12) *
All executive officers and Directors 6,733,558 41.88%
as a group (8 persons)
* Percentage ownership is less than 1%.
(1) The address of Dr. Shelby T. Brewer is 2151 Jamieson Street,
Carlyle Towers, Suite 308, Alexandria, Virginia 22314.
(2) The address of Bentley J. Blum, Paul E. Hannesson, James M.
DeAngelis, Frank E. Coffman, Michael P. Kalleres, and William A.
Wilson is 150 East 58th Street, Suite 3238, New York, New York
10155.
(3) The address of O. Mack Jones is 507 Knight Street, Suite B,
Richland, Washington 99352.
(4) As used herein, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Exchange Act as
consisting of sole or shared voting power (including the power to
vote or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise, including a right to acquire such power(s) during the
next 60 days. Unless otherwise noted, beneficial ownership
consists of sole ownership, voting and investment rights.
87
(5) Consists of: (i) 172 shares of common stock (ii) 24,535 shares of
our common stock representing the balance held of the common stock
issued pursuant to the Restated Brewer Note, dated as of March 15,
2001, between the Company and SB Enterprises and a subsequent
conversion notice for 50% of the outstanding principal dated as of
April 9, 2001; (iii) 650,570 shares of our common stock
representing the balance held of the common stock issued pursuant
to the Restated Brewer Note, dated as of March 15, 2001, between
the Company and SB Enterprises and a subsequent conversion notice
for the remaining 50% of the outstanding principal dated as of
March 14, 2003; (iv) 43,260 shares of the Company common stock
underlying currently exercisable options granted to Mr. Brewer by
the Company under the 1998 Plan; (v) 100,000 shares of the Company
common stock underlying currently exercisable options granted to
Mr. Brewer by the Company outside of the Company's 1998 Plan; and
(vi) 1,972,542 shares of our common stock underlying currently
exercisable stock options granted to Mr. Brewer by the Company
outside of the Company's 1998 Plan. All amounts adjusted for the 1
for 20 reverse split of the Company's common stock on August 29,
2005.
(6) Consists of: (i) 125,000 shares of our common stock issued to
Bentley J. Blum in exchange for $125,000 of debt owed to Mr. Blum
from the Company; (ii) 7,210 shares of the Company common stock
underlying currently exercisable options granted to Mr. Blum by
the Company under the Company's 1998 Plan; (iii) 1,367,790 shares
of our common stock underlying a currently exercisable five year
warrant at an exercise price of $0.57 per share granted to the
Blum Asset Trust by the Company in connection with the Blum Loan
and services provided by the Blum Asset Trust over the last five
years; and (iv) Mr. Blum's indirect beneficial ownership of common
stock based upon his beneficial ownership of 28,479,737 shares and
his spouse's ownership of 2,000,000 shares of Environmental common
stock, representing together 37.74% of the outstanding shares of
Environmental common stock at March 31, 2006, 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 785,400 shares of
Environmental common stock owned by Simone Blum, the mother of Mr.
Blum. Mr. Blum disclaims any beneficial interest in the shares of
Environmental common stock owned by his spouse and mother. All
amounts adjusted for the 1 for 20 reverse split of the Company's
common stock on August 29, 2005.
(7) Consists of (i) 900 shares of common stock; (ii) 42,084 shares of
common stock underlying currently exercisable stock options
granted to Mr. James M. DeAngelis by the Company under the
Company's 1998 Plan; (iii) 50,000 shares of common stock
underlying currently exercisable stock options granted to Mr.
DeAngelis by the Company outside of the Company's 1998 Plan; (iv)
Mr. DeAngelis' indirect beneficial ownership of common stock based
upon his ownership of 580,000 shares of Environmental; and (vi)
1,032,091 shares of our common stock underlying currently
exercisable stock options granted to Mr. DeAngelis by the Company
outside of the 1998 Plan. All amounts adjusted for the 1 for 20
reverse split of the Company's common stock on August 29, 2005.
(8) Consists of (i) 87,969 shares of common stock underlying currently
exercisable stock options granted to Mr. O. Mack Jones by the
Company under the Company's 1998 Plan; and (ii) 512,031 shares of
our common stock underlying currently exercisable stock options
granted to Mr. Jones by the Company outside of the 1998 Plan. All
amounts adjusted for the 1 for 20 reverse split of the Company's
common stock on August 29, 2005.
(9) Consists of: (i) 59,096 shares of common stock underlying
currently exercisable stock options granted to Mr. Paul E.
Hannesson by the Company under the 1998 Plan; (ii) 240,904 shares
of our common stock underlying currently exercisable options
granted to Mr. Hannesson by the Company outside of the Company's
1998 Plan; and (iii) Mr. Hannesson's indirect beneficial ownership
of common stock based upon his ownership of an aggregate of (a)
2,650,000 shares of Environmental common stock owned by Suzanne
Hannesson, the spouse of Mr. Hannesson, (b) 2,650,000 shares of
Environmental common stock owned by the Hannesson Family Trust
(Suzanne Hannesson and John D. Hannesson, trustees) for the
benefit of Mr. Hannesson's spouse and (c) 500,000 shares of
Environmental common stock in exchange for options to purchase
950,000 shares of Environmental common stock, issued to Hannesson
Family Trust, representing together 7.18% of the outstanding
shares of Environmental common stock as of March 31, 2006, and (d)
currently exercisable options to purchase 525,705 shares of
88
Environmental common stock, representing together 7.78% of the
outstanding shares of Environmental common stock. Does not include
(i) 2,000 shares of the Company's common stock owned by each of
Jon Paul and Krista Hannesson, the adult children of Mr.
Hannesson; and (ii) 1,000,000 shares of Environmental common stock
owned by each of Jon Paul and Krista Hannesson. Mr. Hannesson
disclaims any beneficial interest in the shares of Environmental
common stock owned by or for the benefit of his spouse and
children. It also does not include 50,000 shares of common stock
underlying stock options granted to Mr. Hannesson by the Company
that are not currently exercisable. All amounts adjusted for the 1
for 20 reverse split of the Company's common stock on August 29,
2005.
(10) Consists of 22,500 shares of common stock underlying currently
exercisable stock options granted to Mr. Dr. Frank E. Coffman by
the Company under the Company's 1998 Plan.
(11) Consists of 22,500 shares of common stock underlying currently
exercisable stock options granted to Mr. Michael P. Kalleres VADM
by the Company under the Company's 1998 Plan.
(12) Consists of 22,500 shares of common stock underlying currently
exercisable stock options granted to Mr. Ambassador William A.
Wilson by the Company under the Company's 1998 Plan.
Messrs. Blum and Hannesson are brothers-in-law.
Executive Officers and Key Employees
------------------------------------
The executive officers of the Company are Dr. Shelby T. Brewer, who
serves as Chairman of the Board and Chief Executive Officer, O. Mack Jones, who
serves as President and Chief Operating Officer, and James M. DeAngelis, who
serves as Chief Financial and Administrative Officer and Secretary and
Treasurer.
89
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-------- ----------------------------------------------
On October 2, 2002, Mr. Bentley Blum, a Director of the Company, had
previously loaned the Company with $125,000 of cash installments over the period
of one year (the "Blum Loan"). The Company elected to convert the Blum Loan to
the Company's common stock using the conversion feature of the 5-day average
closing price of the Company's common stock prior to October 2, 2002. On October
2, 2002, Blum issued a conversion notice for $125,000 of the outstanding
principal of the Blum Loan into 125,000 shares. Mr. Blum continued to provide
cash installments in the form of a loan to the Company through February 2004
(the "Blum Demand Note"). The Blum Demand Note bears interest at 9% per annum
and is due on demand. The current principal balance of the Blum Demand Note is
$312,032 as of December 31, 2005 and remains unpaid as of April 15, 2006. See
"MD&A - Liquidity and Capital Resources."
On November 19, 2003, the Company issued a warrant to purchase
1,367,790 shares of its common stock at an exercise price of $0.57 per share
(the closing price of our common stock on the OTCBB on such date) to the Blum
Asset Trust, a company controlled by Bentley Blum, a Director of the Company, in
consideration for the loans made to the Company and the usage of office space
and personnel of the Blum Asset Trust over the last five years.
In November 2000, the Company completed $500,000 in financing in the
form of a loan (the "Weiss Group Note") from a group of four investors. The
Weiss Group Note bears interest at 12% per annum and was due and payable on
February 12, 2001. All holders of the Weiss Group Note have granted payment
extensions to the Company until January 15, 2005 in exchange for warrants for
125,000 shares of the Company's common stock at an exercise price of $0.57. The
current principal balance of the Weiss Group Note is $252,397 as of December 31,
2005 and remains unpaid as of April 15, 2006. See "MD&A - Liquidity and Capital
Resources."
Effective February 14, 2004, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 75,000 shares at an
exercise price of $1.00 per share of the Company's common stock in connection
with the Weiss Group Note.
Effective February 15, 2004, the Company issued warrants to purchase
125,000 shares of its common stock at an exercise price of $0.57 per share to
all holders of the Weiss Group Note in consideration of the extension of the due
date of such loans by such persons from May 31, 2002 to January 15, 2005.
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
90
Company and the Affiliated Parties to one another are charged on the basis of
time actually worked as a percentage of salary (including cost of benefits)
attributable to that professional. In addition, charges for rent, utilities,
office services and other routine charges regularly incurred in the normal
course of business are apportioned to the professionals working in the office on
the basis of salary, and then charged to any party in respect of whom the
professional devoted such time based upon time actually worked. Furthermore,
charges from third parties, including, without limitation, consultants,
attorneys and accountants, are levied against the party actually receiving the
benefit of such services. Pursuant to the Services Agreement, the Company acts
as the coordinator of billings and payments for Services on behalf of itself and
the other Affiliated Parties.
There was no sharing of services in 2001, 2002, 2003, 2004, and 2005
although, insurance costs were allocated between Affiliated Parties when it was
beneficial to insure the family of companies under one policy.
91
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-------- --------------------------------------
The following is a summary of the fees billed to the Company by its
principal accountants during the years ended December 31, 2005 and December 31,
2004:
----------------------- ------------------- --------------------
2005 2004
----------------------- ------------------- --------------------
Audit Fees $83,000 $34,840
----------------------- ------------------- --------------------
Audit Related Fees 4,600 3,200
----------------------- ------------------- --------------------
Tax Fees 8,000 8,000
----------------------- ------------------- --------------------
All Other Fees -0- -0-
----------------------- ------------------- --------------------
Total $95,600 $46,040
----------------------- ------------------- --------------------
Fees for audit services include fees associated with the annual audit,
the reviews of our quarterly reports on Form 10-Q, assistance with and review of
documents filed with the SEC and comfort letters. Audit related fees consist of
fees related to the edgarization and filing of SEC forms.
Tax fees include tax compliance and tax consultations.
The board of directors has adopted a policy that requires advance
approval of all audit, audit-related, tax services, and other services performed
by our independent registered public accountants. The policy provides for
pre-approval by the board of directors of specifically defined audit and
non-audit services. Unless the specific service has been previously pre-approved
with respect to that year, the board of directors must approve the permitted
service before the independent registered public accountants are engaged to
perform it.
Financial Information Systems Design and Implementation Fees
There were no fees billed by Tanner LC. for services rendered in
connection with financial information systems design and implementation services
described in Paragraph (c)(4)(ii) of Rule 2-01 of Regulation S-X. during the
fiscal year ended December 31, 2005.
Principal Accountant Independence
The Audit Committee has determined that the provision of all non-audit
services performed by the principal accountant were compatible with maintaining
their independence.
92
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
------- ---------------------------------------------------------------
The following documents are filed as part of this Annual Report:
Page No.
--------
Financial Statements.
---------------------
Commodore Applied Technologies, Inc.
Report of Independent Registered Public Accounting Firm....... F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004... F-2
Consolidated Statements of Operations for the years
ended December 31, 2005, 2004 and 2003........................ F-3
Consolidated Statements of Stockholders' Deficit for the
years ended December 31, 2005, 2004 and 2003.................. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003.............................. F-6
Notes to Consolidated Financial Statements.................... F-9
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.
93
Exhibits.
---------
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of the Company. (1)
3.2 By-Laws of the Company. (1)
4.1 Specimen common stock Certificate. (3)
4.11 Common Stock Purchase Agreements, dated as of September 26,
1997, by and between the Company and each of certain
private investors listed therein. (9)
4.19 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)
4.22 Warrant to purchase shares of common stock of Commodore
Applied Technologies, Inc. issued to The Shaar Fund Ltd.
(20)
4.22 Certificate of Designation of Series F Preferred Stock.
(20)
4.23 Warrant to purchase shares of common stock of Commodore
Applied Technologies, Inc. issued to Avalon Research Group,
Inc. (20)
4.24 Certificate of Designation of Series H Preferred Stock.
(24)
4.25 Certificate of Designation of Series I Preferred Stock.
(26)
*4.26 Certificate of Designation of Series J Preferred Stock.
10.15 Non-Competition, Non-Disclosure and Intellectual Property
Agreement, dated March 29, 1996, between the Company and
Gerry D. Getman. (1)
10.7 1996 Stock Option Plan of the Company. (1)
10.9 Nationwide Permit for PCB Disposal issued by the EPA to
Commodore Remediation Technologies, Inc. (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)
10.32 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)
94
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)
10.43 Specimen Form of Common Stock Certificate. (1)
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)
10.55 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)
10.71 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)
95
10.77 Memorandum of Understanding for Amendment of $500,000 CXI
Bridge Loan Documents, dated April 16, 2001, by and among
the Company, Commodore Environmental Services, Inc.,
Mathers Associates, Klass Partners, Jon Paul Hannesson and
Stephen A. Weiss. (23)
10.78 Warrant to purchase 222,222 shares of common stock of the
Company issued to Klass Partners. (23)
10.79 Warrant to purchase 166,667 shares of common stock of the
Company issued to Mathers Associates. (23)
10.80 Warrant to purchase 41,666 shares of common stock of the
Company issued to Jon Paul Hannesson. (23)
10.81 Warrant to purchase 41,666 shares of common stock of the
Company issued to Krista S. Hannesson. (23)
10.82 Warrant to purchase 27,778 shares of common stock of the
Company issued to Stephen A. Weiss. (23)
10.84 Registration Rights Agreement dated May 22, 2001, between
Commodore Applied Technologies, Inc., and Dr. Marion Danna.
(23)
10.85 Warrant to purchase 500,000 shares of common stock of the
Company issued to Dr. Marion Danna. (23)
10.89 Registration Rights Agreement dated June 13, 2001, between
Commodore Applied Technologies, Inc., and the Shaar Fund,
Ltd. (23)
10.91 Warrant to purchase 166,667 shares of common stock of the
Company issued to the Shaar Fund, Ltd. (23)
10.102 Forbearance Agreement dated April 1, 2002, between
Commodore Applied Technologies, Inc., and Milford Capital &
Management. (24)
10.103 Memorandum of Understanding for Amendment of $500,000 CXI
Bridge Loan Documents, dated April 29, 2002, by and among
the Company, Commodore Environmental Services, Inc.,
Mathers Associates, Klass Partners, Jon Paul Hannesson and
Stephen A. Weiss. (24)
10.108 Settlement Agreement dated August 19, 2002 by and among
Commodore Applied Technologies, Inc., Dispute Resolution
Management, Inc., William J. Russell and Tamie P. Speciale.
(24)
10.109 Liability Release Agreement dated August 19, 2002 by
Dispute Resolution Management, Inc., William J. Russell and
Tamie P. Speciale to Commodore Applied Technologies, Inc.
(24)
10.110 Liability Release Agreement dated August 19, 2002 by
Commodore Applied Technologies, Inc. to Dispute Resolution
Management, Inc., William J. Russell and Tamie P. Speciale.
(24)
10.114 Memorandum of Understanding for Amendment of $500,000 CXI
Bridge Loan Documents, dated November 18, 2002, by and
among the Company, Commodore Environmental Services, Inc.,
Mathers Associates, Klass Partners, Jon Paul Hannesson and
Stephen A. Weiss. (24)
96
10.127 Warrant to purchase 27,355,800 shares of common stock
issued to Blum Asset Trust. (25)
10.130 Memorandum of Understanding for Amendment of $500,000 CXI
Bridge Loan Documents, dated February 15, 2004, by and
among the Company, Mathers Associates, Klass Partners, Jon
Paul Hannesson and Stephen A. Weiss. (25)
10.131 Warrant to purchase 222,222 shares of common stock of the
Company issued to Klass Partners. (25)
10.132 Warrant to purchase 166,667 shares of common stock of the
Company issued to Mathers Associates. (25)
10.133 Warrant to purchase 41,667 shares of common stock of the
Company issued to Jon Paul Hannesson. (25)
10.134 Warrant to purchase 41,667 shares of common stock of the
Company issued to Krista S. Hannesson. (25)
10.135 Warrant to purchase 27,778 shares of common stock of the
Company issued to Stephen A. Weiss. (25)
10.136 Warrant to purchase 500,000 shares of common stock of the
Company issued to Klass Partners. (25)
10.137 Warrant to purchase 300,000 shares of common stock of the
Company issued to Mathers Associates. (25)
10.138 Warrant to purchase 75,000 shares of common stock of the
Company issued to Jon Paul Hannesson. (25)
10.139 Warrant to purchase 75,000 shares of common stock of the
Company issued to Krista S. Hannesson. (25)
10.140 Warrant to purchase 50,000 shares of common stock of the
Company issued to Stephen A. Weiss. (25)
10.141 Warrant to purchase 444,444 shares of common stock of the
Company issued to Klass Partners. (25)
10.142 Warrant to purchase 333,334 shares of common stock of the
Company issued to Mathers Associates. (25)
10.143 Warrant to purchase 83,332 shares of common stock of the
Company issued to Jon Paul Hannesson. (25)
10.144 Warrant to purchase 83,332 shares of common stock of the
Company issued to Krista S. Hannesson. (25)
10.145 Warrant to purchase 55,556 shares of common stock of the
Company issued to Stephen A. Weiss. (25)
10.146 Series E Convertible Preferred automatic conversion date
extension dated March 10, 2004, between the Company and The
Shaar Fund, Ltd. (25)
10.147 Series F Convertible Preferred automatic conversion date
extension dated April 9, 2004, between the Company and The
Shaar Fund, Ltd. (25)
10.148 Dividend Forgiveness letter dated April 9, 2004, between
the Company and The Shaar Fund, Ltd. (25)
97
10.149 Promissory Note dated April 12, 2005, between the Company
and The Shaar Fund, Ltd. (26)
10.150 Amended and Restated Security Agreement dated April 12,
2005, between the Company and The Shaar Fund, Ltd. (26)
10.151 Patent Collateral Assignment dated April 12, 2005, between
the Company and The Shaar Fund, Ltd. (26)
10.152 Amended and Restated Guaranty and Suretyship Agreement
dated April 12, 2005, between the Company and The Shaar
Fund, Ltd. (26)
10.153 Exchange Agreement dated April 12, 2005, between the
Company and The Shaar Fund, Ltd. (26)
*10.154 Warrant to purchase 4,000,000 shares of common stock of the
Company issued to Dr. Marion Danna.
*10.155 Securities Purchase Agreement dated April 27, 2005, between
Commodore Applied Technologies, Inc., and Dr. Marion Danna.
*10.156 Registration Rights Agreement dated April 27, 2005, between
Commodore Applied Technologies, Inc., and Dr. Marion Danna.
*10.157 Amended Promissory Note effective October 1, 2005, between
the Company and The Shaar Fund, Ltd.
*10.158 Amended Exchange Agreement effective October 1, 2005,
between the Company and The Shaar Fund, Ltd.
14.01 Code of Ethics of Commodore Applied Technologies, Inc. (26)
16.1 Letter regarding change in certifying accountant. (12)
16.2 Letter regarding change in certifying accountant. (17)
*22.1 Subsidiaries of the Company.
*31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
*31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
*32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
*32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.1 Debt Repayment Agreement, dated September 28, 1998, between
the Company and Environmental. (15)
99.2 Registration Rights Agreement, dated September 28, 1998,
between the Company and Environmental. (15)
* Filed herewith.
(1) Incorporated by reference and filed as Exhibit to Registrant's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on May 2, 1996 (File No. 333-4396).
(2) Incorporated by reference and filed as Exhibit to Registrant's
Amendment No. 1 to Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on June 11, 1996 (File No.
333-4396).
(3) Incorporated by reference and filed as Exhibit to Registrant's
Amendment No. 2 to Registration Amendment No.2 to Registration
Statement on Form S-1 filed with the Securities and Exchange Commission
on June 25, 1996 (File No. 333-4396).
98
(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).
99
(20) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K/A for the fiscal year ended December 31,
2000 filed with the Securities and Exchange Commission on May 04, 2001
(File No. 1-11871).
(21) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 26, 2001 (File No. 1-11871).
(22) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 31, 2001 (File No. 1-11871).
(23) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001
filed with the Securities and Exchange Commission on April 15, 2002
(File No. 1-11871).
(24) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2002
filed with the Securities and Exchange Commission on April 15, 2003
(File No. 1-11871).
(25) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2003
filed with the Securities and Exchange Commission on April 15, 2004
(File No. 1-11871).
(26) Incorporated by reference and filed as an Exhibit to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2004
filed with the Securities and Exchange Commission on April 15, 2005
(File No. 1-11871).
Reports on Form 8-K:
-------------------
1. The Company filed a Current Report on Form 8-K, dated April 19,
2005, regarding a press release issued by the Company announcing
its 2004 year end earnings.
2. The Company filed a Current Report on Form 8-K, dated March 16,
2005, regarding a press release issued by the Company announcing
the Company's subsidiary, CASI, progress on the eDAM contract in
Oak Ridge, TN, CASI was awarded a one year contract from WESKEM of
Oak Ridge to support their sampling efforts with the Waste
Disposition Services Project, and the protest of the award of the
FFTF contract is ongoing.
3. The Company filed a Current Report on Form 8-K, dated May 15,
2005, announcing its March 31, 2005 Quarterly earnings.
100
4. The Company filed a Current Report on Form 8-K, dated July 27,
2005, announcing it entered into a stock purchase agreement (the
"Agreement") and a warrant agreement (the "Warrant") with a
private investor, Dr. Marion Danna (the "Investor") on April 27,
2005. The closing of the transactions contemplated by the
Agreement took place on July 10, 2005. Under the terms of the
Agreement the Investor purchased, for a purchase price of
$100,000.00, 10,000,000 shares of the Company's common stock
bearing a restrictive legend and a warrant for 4,000,000 shares of
the Company's common stock with an exercise price of $0.01,
exercisable immediately with a three year life.
5. The Company filed a Current Report on Form 8-K, dated August 23,
2005, announcing its June 30, 2005 Quarterly earnings. The Company
also announced that the ongoing months of execution of the EDAM
contract at Oak Ridge, TN by its wholly owned subsidiary Commodore
Advanced Sciences, Inc. (CASI) have been successful, and that the
Company plans to market these services at other DOE sites.
6. The Company filed a Current Report on Form 8-K, dated August 31,
2005, announcing that the previously approved reverse stock split
with the established a ratio of 1-for 20 became effective at the
close of business on August 29, 2005. Applied common stock will
begin trading on a reverse-split basis on August 30, 2005. As a
result of the reverse stock split, every 20 shares of Applied's
common stock will be combined into one share of Applied common
stock. As a result of the reverse stock split, the issued and
outstanding shares of Applied's common stock will be reduced from
approximately 156 million shares to approximately 7.8 million
shares. The number of authorized shares will not be reduced.
The reverse stock split affects all shares of common stock, stock
options and warrants of Applied outstanding as of immediately
prior to the effective time of the reverse stock split. Fractional
shares of common stock of the Company will not be issued as a
result of the reverse stock split, but instead, holders of
pre-split shares of common stock who otherwise would have been
entitled to receive a fractional share as a result of the reverse
split will receive one whole share. Shares of Applied common stock
will trade on the Nasdaq Over the Counter Bulletin Board Market
under the symbol CXIA after the reverse split goes into effect on
August 30, 2005.
The Company also announced that Bechtel Jacobs has recently
doubled its two year [2005 & 2006] valuation of the EDAM contract
with Commodore/SAIC, from about $7 Million to about $14 million.
The contract calls for a duration of two years with an option to
extend another two years.
101
7. The Company filed a Current Report on Form 8-K, dated November 22,
2005, announcing its September 30, 2005 Quarterly earnings. The
Company also announced that that it recognized an accrual
accounting issue that our independent auditors brought to its
attention within the last two weeks. After further research and
discussion with the Company's independent auditors, the Company
determined that the embedded conversion features associated with
the New Shaar Convertible Note and the Series I Convertible
Preferred Stock issued April 12, 2005, qualified as derivatives in
accordance with EITF 00-19 and SFAS No. 133, thus requiring
liability recognition and marking the derivative to its fair value
as of each reporting date (each quarter). The Company further
stated that its management has taken immediate steps to accurately
record and disclose this liability and is in the process of
eliminating the liability from the Company in the future.
8. The Company filed a Current Report on Form 8-K, dated November 23,
2005, announcing its restated June 30, 2005 Quarterly earnings.
The restatement arose from the Company's determination that it had
not accounted for the embedded conversion option of the
Convertible Secured Note and the Series I Convertible Preferred
Stock entered into on April 12, 2005 as embedded derivatives. The
Company has determined that the fair value of the embedded
derivatives should be recorded as a liability, with any changes in
the fair value of the embedded derivatives between reporting dates
as a derivative loss or gain, as appropriate. The Company has also
shown the effects of the reverse stock split effective August 29,
2005, and has also shown separately the effect of dividends
accrued to preferred stockholders on loss per share, due to the
reduced number of common shares outstanding. Subsequent to the
reverse stock split, the effect of dividends accrued to preferred
stockholders affected loss per share.
9. The Company filed a Current Report on Form 8-K, dated December 14,
2005, regarding a press release announcing that that Advanced
Sciences received special recognition from Bechtel Jacobs for
compiling a multi-year safety record for on job performance
without an accident or work loss safety related incident on the
environmental sampling and data management contract (EDAM).
10. The Company filed a Current Report on Form 8-K, dated February 8,
2006, regarding a press release announcing that Chairman and CEO,
Shelby T. Brewer, issued the Company's 2006 Chairman's Letter to
address the current and future business opportunities for the
Company.
102
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 17, 2006 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 April 17, 2006
-------------------- and Chief Executive Officer
Dr. Shelby T. Brewer (principal executive officer)
/s/ James M. DeAngelis Senior Vice President and April 17, 2006
---------------------- Chief Financial Officer
James M. DeAngelis (principal financial officer)
/s/ Bentley J. Blum Director April 17, 2006
-------------------
Bentley J. Blum
/s/ Frank E. Coffman Director April 17, 2006
--------------------
Dr. Frank E. Coffman
Paul E. Hannesson Director April 17, 2006
-----------------
Paul E. Hannesson
/s/ O. Mack Jones Director April 17, 2006
-----------------
O. Mack Jones
/s/ Michael P. Kalleres Director April 17, 2006
-----------------------
VADM Michael P. Kalleres
/s/ Robert A. Maczewski Director April 17, 2006
-----------------------
Robert A. Maczewski
/s/ William A. Wilson Director April 17, 2006
---------------------
Ambassador William A. Wilson
103
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
The Company sent to its security holders an annual report and proxy
material during the 2005 fiscal year.
104
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2005 and 2004
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Index
--------------------------------------------------------------------------------
Page
----
Commodore Applied Technologies, Inc.
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-2
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003 F-3
Consolidated Statements of Stockholders' Deficit for
the years ended December 31, 2005, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2005, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-9
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Commodore Applied Technologies, Inc. and subsidiaries
We have audited the consolidated balance sheets of Commodore Applied
Technologies, Inc. and subsidiaries (the Company) as of December 31, 2005 and
2004, and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years ended December 31, 2005, 2004, and 2003.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2005 and 2004, and the
results of their operations and their cash flows for the years ended December
31, 2005, 2004, and 2003, in conformity with U.S. generally accepted accounting
principles.
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. These factors that raise substantial doubt about
the Company's 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.
/s/ Tanner LC
Salt Lake City, Utah
April 6, 2006
F-1
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2004
(Amounts in thousands except shares)
--------------------------------------------------------------------------------
2005 2004
------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 65 $ 15
Accounts receivable, net 2,065 259
Prepaid assets and other current assets 139 -
------------------------
Total current assets 2,269 274
Property and equipment, net 148 95
------------------------
Total assets $ 2,417 $ 369
------------------------
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 1,376 $ 791
Related party payable 253 253
Line of credit 141 -
Notes payable 635 512
Other accrued liabilities 4,450 5,107
------------------------
Total current liabilities 6,855 6,663
Long-term debt, net of current portion 5,426 3,034
------------------------
Total liabilities 12,281 9,697
------------------------
Commitments and contingencies
Stockholders' deficit:
Convertible Preferred Stock, Series H
and J, par value $.001 per share,
aggregate liquidation value of $6,353
and $3,677 at December 31, 2005 and 2004,
respectively, 3% cumulative dividends
for Series H, 10% cumulative dividends
for Series J, 1,550,000 shares authorized,
1,188,302 shares and 1,001,200 shares
issued and outstanding at December 31,
2005 and 2004, respectively 1 1
Common Stock, par value $.001 per share,
300,000,000 shares authorized,
7,948,217 shares and 6,717,304 shares
issued and outstanding at December 31,
2005 and 2004, respectively 8 7
Additional paid-in capital 69,680 67,503
Accumulated deficit (79,290) (76,576)
------------------------
(9,601) (9,065)
Treasury stock, 171,875 shares (263) (263)
------------------------
Total stockholders' deficit (9,864) (9,328)
------------------------
Total liabilities and stockholders' deficit $ 2,417 $ 369
------------------------
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements. F-2
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
December 31, 2005 and 2004
(Amounts in thousands except shares)
--------------------------------------------------------------------------------------------
2005 2004 2003
-----------------------------------------
Revenues $ 10,275 $ 738 $ 660
Costs and expenses:
Cost of revenues 9,132 919 811
Research and development 5 9 70
General and administrative 2,072 1,674 1,700
Depreciation and amortization 54 136 267
-----------------------------------------
Total costs and expenses 11,263 2,738 2,848
-----------------------------------------
Loss from operations (988) (2,000) (2,188)
Other income (expense):
Derivative loss (543) - -
Interest expense (1,183) (404) (769)
-----------------------------------------
Loss before income taxes (2,714) (2,404) (2,957)
Income tax benefit - - -
-----------------------------------------
Net loss (2,714) (2,404) (2,957)
Deemed dividends and dividends accrued to
preferred stockholders (4,067) (291) (374)
-----------------------------------------
Net loss applicable to common
shareholders $ (6,781) $ (2,695) $ (3,331)
-----------------------------------------
Net loss per share - basic and diluted $ (0.93) $ (0.43) $ (0.72)
Number of weighted average shares outstanding -
basic and diluted 7,309 6,334 4,602
-----------------------------------------
--------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-3
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Years Ended December 31, 2005, 2004, and 2003
(Amounts in thousands except shares)
-------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
---------------------------------------- Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
-------------------------------------------------------------------------------------
Balance, January 1, 2003 1,213,700 $ 1 2,951,354 $ 3 $ 67,185 $ (71,215) $ (263) $ (4,289)
Conversion of series E and F
preferred stock into common
stock (180,000) - 2,168,333 2 (2) - - -
Issuance of common stock as
payment of preferred stock
dividends - - 105,928 - 182 - - 182
Conversion of debt to common
stock - - 659,492 1 283 - - 284
Issuance of warrants for:
Payment of accounts payable - - - - 3 - - 3
Services - - - - 198 - - 198
Extension of debt - - - - 301 - - 301
Preferred stock dividends - - - - (374) - - (374)
Net loss - - - - - (2,957) - (2,957)
------------------------------------------------------------------------------------
Balance, December 31, 2003 1,033,700 1 5,885,108 6 67,776 (74,172) (263) (6,652)
Conversion of series E
preferred stock into common
stock (32,500) - 807,196 1 (1) - - -
Exercise of warrants - - 25,000 - 19 - - 19
Preferred stock dividends - - - - (291) - - (291)
Net loss - - - - - (2,404) - (2,404)
------------------------------------------------------------------------------------
Balance, December 31, 2004 1,001,200 1 6,717,304 7 67,503 (76,576) (263) (9,328)
-------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-4
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Continued
-------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
---------------------------------------- Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
-------------------------------------------------------------------------------------
Conversion of series E and I
preferred stock into common
stock (12,500) - 730,913 1 (1) - - -
Conversion of accrued dividends
into series I preferred stock 199,602 - - - 1,400 - - 1,400
Preferred stock dividends - - - - (365) - - (365)
Sale of common stock for cash - - 500,000 - 100 - - 100
Deemed dividend from embedded
derivative - - - - (3,702) - - (3,702)
Reclassification of embedded
derivative from liabilities
to equity - - - - 4,745 - - 4,745
Net loss - - - - - (2,714) - (2,714)
------------------------------------------------------------------------------------
Balance, December 31, 2005 1,188,302 $ 1 7,948,217 $ 8 $ 69,680 $ (79,290) $ (263) $ (9,864)
------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-5
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004, and 2003
(Amounts in thousands, except shares and per share data)
----------------------------------------------------------------------------------------------------------
2005 2004 2003
-------------------------------------------
Cash flows from operating activities:
Net loss $ (2,714) $ (2,404) $ (2,957)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 54 136 267
Amortization of debt discount 500 31 35
Derivative loss 543 - -
Issuance of warrants for services - - 198
Issuance of warrants for extension of debt - - 301
Changes in assets and liabilities:
Accounts receivable, net (1,806) (188) 25
Prepaid assets (10) 13 150
Checks written in excess of cash - (13) 13
Accounts payable and accrued liabilities 2,096 893 1,013
--------------------------------------------
Net cash used in operating activities (1,337) (1,532) (955)
Cash flows from investing activities:
Equipment purchased or constructed (107) (61) -
Advances from (repayments to) related parties, net - (25) 198
Patents acquired - - (11)
--------------------------------------------
Net cash (used in) provided by investing activities (107) (86) 187
Cash flows from financing activities:
(Repayments)/borrowings under line of credit 141 (64) 64
Borrowings on debt and warrants 1,259 1,678 776
Payments on long-term debt and notes payable (6) - (131)
Proceeds from the sale of common stock 100 - -
Proceeds from exercise of warrants - 19 -
--------------------------------------------
Net cash provided by financing activities 1,494 1,633 709
--------------------------------------------
Net change in cash and cash equivalents 50 15 (59)
Cash and cash equivalents at beginning of year 15 - 59
--------------------------------------------
Cash and cash equivalents at end of year $ 65 $ 15 $ -
--------------------------------------------
----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-6
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Continued
--------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 32 $ 55 $ 10
---------------------------------
Income taxes $ - $ - $ -
---------------------------------
Non-Cash Investing and Financing Activities:
2005
----
o The Company recorded $365 of unpaid dividends to holders of
preferred stock.
o The Company recorded an embedded derivative liability of $8,063 at
its inception on April 12, 2005, $3,702 of which was recorded as a
deemed dividend to preferred stockholders, and $4,361 was recorded
as a debt discount. The Company reclassified the embedded
derivative liability to equity on October 1, 2005. The embedded
derivative liability was $8,606 and the remaining debt discount
was $3,861 at time of reclassification, which resulted in an
increase to equity of $4,745.
o On April 12, 2005, the Company entered into an exchange agreement
with The Shaar Fund, LTD (the "Shaar Exchange Agreement"). Under
terms of the Shaar Exchange Agreement, the Company agreed that
Shaar will exchange all of its right, title and interest in and to
the remaining outstanding shares of the Series E and Series F
Preferred Stock (including all other accrued and unpaid dividends
thereon of $1,400) for 395,302 shares of the Company's Series I
Convertible Preferred Stock. The Shaar note was also amended, in
which $833 of accrued interest and fees were added to the
principal balance of the note.
o Effective October 1, 2005, the Company entered into an exchange
agreement with The Shaar Fund, LTD (the "Shaar Exchange
Agreement"). Under terms of the Shaar Exchange Agreement, the
Company agreed that Shaar will exchange all of its right, title
and interest in and to 388,302 shares of the Series I Preferred
Stock (not including all other accrued and unpaid dividends
thereon) for 388,302 shares of the Company's Series J Convertible
Preferred Stock. The Shaar note was also amended effective October
1, 2005, in which the conversion feature was amended to include a
minimum and maximum conversion rate.
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements. F-7
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
--------------------------------------------------------------------------------
o On August 29, 2005, the Company effected the previously approved
1-for-20 reverse common stock split. As a result of the reverse
stock split, the issued and outstanding shares of the Company's
common stock were reduced from approximately 156 million shares to
approximately 7.8 million shares. The reverse stock split,
including the effect on loss per share, has been presented
retroactively as if it had occurred on January 1, 2003.
2004
----
o The Company recorded $291 of unpaid dividends to holders of
preferred stock.
o The Company purchased equipment in the amount of $8 with a note
payable.
2003
----
o The Company recorded $374 of unpaid dividends to holders of
preferred stock, and paid $182 of the unpaid dividends by issuance
of 105,928 shares of common stock.
o The Company converted debt of $250 and accrued interest of $34 by
issuance of 659,492 shares of common stock.
o The Company issued 50,000 warrants valued at $3 as payment of
accounts payable.
o The Company issued to a member of the board of directors
1,367,790 warrants valued at $470 for forbearance of debt ($272)
and services ($198).
o The Company issued 50,000 new warrants and re-priced and extended
75,000 warrants to forbear payments on and extend notes payable,
resulting in a debt discount of $30.
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements. F-8
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(In thousands except share and per share data)
--------------------------------------------------------------------------------
1. Summary of Background
Significant Commodore Applied Technologies, Inc. and subsidiaries
Accounting ("Applied" or "the Company"), is engaged in the
Policies destruction and 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.
Principles of Consolidation
The consolidated financial statements include the
accounts of Applied and its majority-owned subsidiaries.
All significant intercompany balances and transactions
have been eliminated.
--------------------------------------------------------------------------------
F-9
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Cash and Cash Equivalents
Significant Applied considers cash and highly liquid debt
Accounting instruments with original maturities of three months or
Policies less at the date of purchase to be cash equivalents.
Continued
Concentration of Credit Risk and Significant Customers
Applied maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits.
Applied has not experienced any losses in such accounts.
With respect to trade receivables, Applied generally
does not require collateral as the majority of Applied's
services are performed for the U.S. Government and prime
contractors that serve the U.S. Government. Applied
believes it is not exposed to any significant credit
risk on cash, cash equivalents and trade receivables.
Sales to major customers which exceeded 10 percent of
revenues are as follows:
Years Ended December 31,
---------- --------- ----------
2005 2004 2003
---------- --------- ----------
Customer A $ 9,350 $ 188 $ -
Customer B $ 229 $ 260 $ 97
Customer C $ 126 $ 128 $ 133
Customer D $ - $ 14 $ 160
Customer A accounts for 95% of the accounts receivable
balance as of December 31, 2005.
Risk and Uncertainty
Applied's operations involving the separation and
destruction of Polychlorinated Biphenyls (PCBs) requires
a permit from the Environmental Protection Agency EPA.
Applied had a valid nationwide permit related to the
treatment of PCBs in certain substances. The permit
expired September 15, 2001. Applied is currently in the
process of applying for a renewal of the permit. Until
the permit is reviewed and allowed, Applied, or its
client, must post a closure bond specific to the amount
of any contracts that utilize Applied's destruction
technology related to the treatment of PCB's.
--------------------------------------------------------------------------------
F-10
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Accounts receivable
Significant Trade receivables are carried at original invoice amount
Accounting less an estimate made for doubtful receivables based on
Policies a review of all outstanding amounts on a monthly basis.
Continued Management determines the allowance for doubtful
accounts by identifying troubled accounts and by using
historical experience applied to an aging of accounts.
Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables
previously written off are recorded when received.
A trade receivable is considered to be past due if any
portion of the receivable balance is outstanding for
more than 90 days. Interest is not charged on trade
receivables.
Property and Equipment
Property and equipment are recorded at cost, less
accumulated depreciation. Improvements which
substantially increase the useful lives of assets are
capitalized. Maintenance and repairs are expensed as
incurred. Upon retirement or disposal, the related cost
and accumulated depreciation are removed from the
respective accounts and any gain or loss is recorded in
the Statement of Operations. Depreciation is computed on
the straight-line method based on the estimated useful
lives of the assets which range from 3 to 5 years.
Intangible Assets
Patents and completed technology represents certain
technology and related patents acquired in connection
with the purchase of third-party interests in Commodore
Laboratories, Inc. ("Labs"). Patents and completed
technology were fully amortized as of December 31, 2005
and 2004.
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. The Company evaluates, at each balance
sheet date, whether events and circumstances have
occurred which indicate possible impairment. The
carrying value of a long-lived asset is considered
impaired when the estimated cumulative undiscounted cash
flows of the related asset or asset group is less than
the carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds
the estimated fair market value of the long-lived asset.
--------------------------------------------------------------------------------
F-11
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Revenue Recognition
Significant Substantially all of Applied's revenues are generated by
Accounting its subsidiary, CASI. CASI's 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 is recorded when a contract or arrangement
exists, the fees to be charged are fixed or
determinable, the services have been provided, and
collection of the billed amount is reasonably assured.
Most of the Company's historical 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 has 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 the
Company's contracts through 1999. An allowance for
potential disallowances is recorded as a reduction in
revenue based upon the portion of billed and unbilled
receivables that management believes may be disallowed
upon audit by the DCAA.
Research and Development
Research and development expenditures are charged to
operations as incurred.
Income Taxes
Income taxes are determined in accordance with Statement
of Financial Accounting Standards ("SFAS") 109, which
requires recognition of deferred income tax liabilities
and assets for the expected future tax consequences of
events that have been included in the financial
statements or tax returns. Under this method, deferred
income tax liabilities and assets are determined based
on the difference between financial statement and tax
bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are
expected to reverse. SFAS 109 also provides for the
recognition of deferred tax assets if it is more likely
than not that the assets will be realized in future
years.
--------------------------------------------------------------------------------
F-12
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Stock-Based Compensation
Significant At December 31, 2005, Applied has one stock-based
Accounting employee compensation plan, which is described more
Policies fully in Note 11. Applied accounts for its plans under
Continued the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based
employee compensation cost is reflected in net loss, as
all options granted under those plans had an exercise
price that equaled or exceeded the market value of the
underlying common stock on the date of grant. Inasmuch
as Applied cancelled certain options during 2002 and
reissued new options to the option holders, the options
are considered variable options and are revalued each
quarter to determine the effect on operations, if any.
The following table illustrates the effect on net loss
per share if Applied had applied the fair value
recognition provision of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee
compensation.
Years Ended December 31,
-------------------------------
2005 2004 2003
-------------------------------
Net loss, as reported $ (2,714) $ (2,404) $ (2,957)
Addback: Stock-based employee compensation
expense determined under instrinsic value based
method for all awards, net of related tax effects - - -
Deduct: Total stock- based employee
compen-sation expense determined under fair
value based method for all awards, net of
related tax effects - - (1,544)
-------------------------------
Pro forma net loss $ (2,714) $ (2,404) $ (4,501)
-------------------------------
Loss per share:
Basic and diluted - as reported $ (.93) $ (.43) $ (.72)
-------------------------------
Basic and diluted - pro forma $ (.93) $ (.43) $ (.72)
-------------------------------
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 237%, the
expected risk-free rate of return is 3.7 percent,
calculated as the rate offered on U.S. Government
securities with the same term as the expected life of
the options, and the expected term is the maximum
possible term under the option.
Stock options issued during the years ended December 31,
2003 had an average value of $.02, respectively. No
stock options were granted in 2005 and 2004.
--------------------------------------------------------------------------------
F-13
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of Fair Value of Financial Instruments
Significant The fair value of financial instruments is determined by
Accounting reference to various market data and other valuation
Policies techniques as appropriate. Accounts receivable, cash
Continued equivalents, long term debt and the line of credit are
financial instruments that are subject to possible
material market variations from the recorded book value.
Applied has reflected in the financial statements debt
discounts which are being amortized over the estimated
lives of the obligations. The debt discounts bring the
obligations to a market rate of interest. The fair value
of these financial instruments approximate the recorded
book value as of December 31, 2005 and 2004.
Use of Estimates
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from
those estimates.
Reclassifications
Certain amounts in prior years have been reclassified to
conform with the current year presentation.
2. Going The accompanying consolidated financial statements have
Concern been prepared under the assumption that Applied will
continue as a going concern. Such assumption
contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business. As shown in the consolidated financial
statements, Applied incurred losses and negative cash
flows from operating activities for the years ended
December 31, 2005, 2004 and 2003. Applied also has a
working capital deficit of $4,586 and an accumulated
deficit of $79,290 at December 31, 2005. These factors
raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial
statements do not include any adjustments that might be
necessary should Applied be unable to continue as a
going concern.
--------------------------------------------------------------------------------
F-14
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
2. Going Applied's continuation as a going concern is dependent
Concern upon its ability to generate sufficient cash flow to
Continued meet its obligations on a timely basis, to obtain
additional financing as may be required, and ultimately
to attain profitability. Potential sources of cash
include new contracts, external debt, the sale of new
shares of Company stock or alternative methods such as
mergers or sale transactions. No assurances can be
given, however, that Applied will be able to obtain any
of these potential sources of cash. Applied currently
requires additional cash funding from outside sources to
sustain existing operations and to meet current
obligations and ongoing capital requirements.
3. Accounts The components of Applied's trade receivables are as
Receivable follows as of December 31:
2005 2004
---------------------------------
Contract receivables $ 2,069 $ 268
Less: Allowance for doubtful
accounts (4) (9)
---------------------------------
Accounts receivable, net $ 2,065 $ 259
---------------------------------
Substantially all of CASI trade receivables are pledged
to collateralize its line of credit (see Note 6).
4. Property Property and equipment consist of the following as of
and December 31:
Equipment
Average
Useful Life 2005 2004
--------------------------------------
Machinery and equipment 3 $ 716 $ 633
Furniture and fixtures 5 58 58
Computer equipment 4 246 222
------------------------
1,020 913
Less: accumulated depreciation
and amortization (872) (818)
------------------------
Property and equipment, net $ 148 $ 95
------------------------
--------------------------------------------------------------------------------
F-15
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
5. Other Accrued
Liabilities Other accrued liabilities consist of the following as of
December 31:
2005 2004
-------------------------------
Compensation and employee
benefits $ 1,987 1,876
Subcontractors 724 -
Accrued interest 694 664
Loss reserve 376 376
Dividends payable 361 1,696
Related party advances 185 185
Other 123 91
Forbearance and exit fees - 219
-------------------------------
$ 4,450 $ 5,107
-------------------------------
6. Line of Credit At December 31, 2005 and 2004, CASI had $141 and $0
outstanding, respectively, on a revolving line of
credit. The line of credit is not to exceed 90% of
eligible receivables or $2,000 and is due April 2006
with interest payable monthly at prime plus 2.0 percent
(7% at December 31, 2005). The line of credit is
collateralized by the assets of CASI and is guaranteed
by Applied.
7. Notes Payable Notes payable and long-term debt consist of the
and following at December 31:
Long-Term
Debt
2005 2004
------------------------------
Convertible notes payable to individuals
with interest at 10%, interest only due
in aggregate monthly installments
beginning in March 2006, maturing in
March 2009, no prepayment option,
secured by property and equipment and
patents. The conversion price is the
average closing price of the ten days
preceding the conversion date, but shall
not be more than $0.50 per share or less
than $0.05 per share. See note 10. Also,
these notes payable restrict the Company's
ability to declare or pay dividends on and
repurchase common stock, materially change
the Company's business, enter a business
combination, or transfer or sell assets. $ 5,426 $ 3,034
Notes payable to individuals with interest at
12%, in default as of January 15, 2005,
secured by accounts receivable. 254 254
--------------------------------------------------------------------------------
F-16
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
7. Notes Payable
and
Long-Term
Debt
Continued
2005 2004
------------------------------
Note payable to a corporation with interest
at 9%, unsecured and in default as of June
30, 2003. 254 254
Note payable to a corporation financing
certain of the Company's insurance policies,
with interest at 6%. 127 -
Note payable to a bank with interest due at
17.5%, with monthly payments less than $1
secured by property and equipment. - 8
Unamortized discount for warrants - (4)
------------------------------
6,061 3,546
Less current maturities (635) (512)
------------------------------
$ 5,426 $ 3,034
------------------------------
Future maturities of notes payable and long-term debt
are as follows:
Year Ending December 31: Amount
------------------------ ------------------
2006 $ 635
2007 -
2008 -
2009 5,426
Thereafter -
------------------
$ 6,061
------------------
--------------------------------------------------------------------------------
F-17
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
8. Income Applied provides for deferred income taxes on temporary
Taxes differences which represent tax effects of transactions
reported for tax purposes in periods different than for
book purposes.
The provision for income taxes for the years ended
December 31 results in an effective tax rate which
differs from federal income tax rates as follows:
2005 2004 2003
-----------------------------------------
Expected tax benefit at federal
statutory rate $ (928) $ (777) $ (1,005)
State income tax benefit, net of
federal income tax benefit (90) (120) (177)
Other 211 64 180
Change in valuation allowance 807 833 1,002
-----------------------------------------
Income tax benefit $ - $ - $ -
-----------------------------------------
The components of the net deferred tax as of December
31, are as follows:
2005 2004
--------------------
Reserves and accruals $ 178 $ 168
Net operating loss carryforward 14,548 13,501
Depreciation, amortization, and
impairment charges 1,444 1,694
---------------------
16,170 15,363
Valuation allowance (16,170) (15,363)
---------------------
Net deferred taxes $ - $ -
---------------------
Applied conducts a periodic examination of its valuation
allowance. Factors considered in the evaluation include
recent and expected future earnings and Applied's
liquidity and equity positions. As of December 31, 2005
and 2004, Applied has established a valuation allowance
for the entire amount of net deferred tax assets.
--------------------------------------------------------------------------------
F-18
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
8. Income Applied has net operating loss ("NOL") carryforwards at
Taxes December 31, 2005 of approximately $39,000 which expire
Continued in years 2010 through 2025. The NOL carryforwards are
limited to use against future taxable income due to
changes in ownership and control.
9. Stockholders' Reverse Stock Split
Equity On August 29, 2005, the Company effected the previously
approved 1-for-20 reverse common stock split. As a
result of the reverse stock split, the issued and
outstanding shares of the Company's common stock were
reduced from approximately 156 million shares to
approximately 7.8 million shares. The reverse stock
split, including the effect on loss per share, has been
presented retroactively as if it had occurred on January
1, 2003.
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.
This stock had a dividend rate of 12% per annum through
April 30, 2000 and thereafter 5% per annum paid
quarterly. In addition the stock has a special dividend
at the rate of 7.5% per annum which began to accrue on
May 1, 2000 and continued to accrue until paid, payable
on May 1, 2001. The Company accrued $28, $124 and $207
of dividends in 2005, 2004 and 2003, respectively, and
issued 78,349 shares common stock to pay $142 of accrued
dividends in 2003.
The Series E Convertible Preferred Stock had a
liquidation preference of $10 per share. In connection
with the issuance of the Series E Convertible Preferred
Stock, Applied issued warrants to purchase 28,625 shares
of common stock at a purchase price equal to 110% of the
market price on the date of closing ($24.00). These
warrants were valued at $60 and expired on November 4,
2004.
The Series E Convertible Preferred Stock was convertible
into common stock at any time on or after April 30, 2000
at a conversion price equal to the arithmetic mean of
the closing prices of common stock as reported in the
respective stock exchange for the ten trading days
immediately preceding the date of conversion.
--------------------------------------------------------------------------------
F-19
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Stockholders' Series E Convertible Preferred Stock - Continued
Equity During the years ended December 31, 2005, 2004 and 2003,
Continued 5500, 32,500 and 162,500 shares of Series E Convertible
Preferred Stock were converted into 291,629, 807,196 and
2,045,808 shares of common stock, respectively. As of
December 31, 2005 there are no shares of Series E
Convertible Preferred Stock outstanding.
On April 12, 2005, the Company entered into the Shaar
Exchange Agreement, in which the Company agreed that
Shaar would exchange all of its right, title and
interest in and to the remaining outstanding shares of
the Series E Preferred and Series F Preferred (including
all other accrued and unpaid dividends thereon) for
395,302 shares of the Company's Series I Preferred.
Series F Convertible Preferred Stock
In March 2000, Applied issued 266,700 shares of Series F
Convertible Preferred Stock with a stated value of $10
per share. Transaction costs on the issuance totaled
$230 resulting in net proceeds to Applied of $1,771.
The stock had a dividend rate of 12% per annum through
September 30, 2000 and thereafter 5% per annum paid
quarterly. In addition the stock had a special dividend
at the rate of 7.5% per annum which began to accrue
October 1, 2000 and continued to accrue until paid,
payable on October 1, 2001. The Company accrued $41,
$148 and $148 of dividends in 2005, 2004 and 2003,
respectively, and issued 27,579 shares of common stock
to pay $40 of accrued dividends in 2003.
The Series F Convertible Preferred Stock had a
liquidation preference of $10 per share. In connection
with the issuance of Series F Convertible Preferred
Stock, Applied issued warrants to purchase 18,174 shares
of common stock at $38.78 per share. These warrants
expired on March 16, 2005.
The Series F Convertible Preferred Stock was convertible
into common stock at any time on or after September 30,
2000. On conversion, the investor was to receive for
each converted preferred share the greater number of
common stock as determined by (1) the face value per
share ($10) plus accrued dividends divided by the
average of the closing prices over a ten consecutive
trading day period ending on the trading day immediately
preceding the conversion date, or (2) $7.50 (the cash
invested for each preferred share) divided by $1.93875.
--------------------------------------------------------------------------------
F-20
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Stockholders' Series F Convertible Preferred Stock - Continued
Equity During the year ended December 31, 2003, 17,500 shares
Continued of Series F Convertible Preferred Stock were converted
to 122,526 shares of common stock. Applied has no shares
of Series F convertible stock outstanding at December
31, 2005.
On April 12, 2005, the Company entered into the Shaar
Exchange Agreement, in which the Company agreed that
Shaar would exchange all of its right, title and
interest in and to the remaining outstanding shares of
the Series E Preferred and Series F Preferred (including
all other accrued and unpaid dividends thereon) for
395,302 shares of the Company's Series I Preferred.
Series H Convertible Preferred Stock
Applied issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per
share, each such share of Series H Preferred having a
stated value of $1 per share. The Series H Preferred
shall have the following rights, privileges, and
limitations:
a) The conversion feature shall be exercisable on or
after June 30, 2003.
b) No Series H Preferred may be converted prior to
June 30, 2003. Until July 31, 2005, only 80,000
shares of the Series H Preferred shall be
convertible in any calendar quarter. The balance
of any unconverted Series H Preferred Stock may
be converted at any time on or after August 1,
2005.
c) The conversion price of the Series H Preferred
shall be determined by the average closing price
of Company's common stock in the previous 30
trading days, but in no event shall the
conversion price be less than $4.00 per share.
d) The conversion price of the Series H Preferred
shall be determined by the average closing price
of Company's common stock in the previous 30
trading days, but in no event shall the
conversion price be less than $4.00 per share.
--------------------------------------------------------------------------------
F-21
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Stockholders' Series H Convertible Preferred Stock - Continued
Equity
Continued e) The Series H Preferred shall have a
non-cumulative annual dividend of 3%, payable in
cash or Series H Preferred within 30 days of the
end of Applied's fiscal year, at Applied's
election. Dividends of $24, $24 and $24 were
accrued during 2005, 2004, and 2003 respectively.
f) The Series H Preferred shall not be transferable.
As of December 31, 2005, there are 800,000 shares of
Series H Preferred outstanding.
Series I Convertible Preferred Stock
Effective as of April 12, 2005, the Company authorized
the issuance of 550,000 shares of Series I Convertible
Preferred Stock ("Series I Preferred"), par value $0.001
per share, each such share of Series I Preferred having
a stated value of $10.00 per share.
On April 12, 2005, the Company entered into the Shaar
Exchange Agreement, in which the Company agreed that
Shaar would exchange all of its right, title and
interest in and to the remaining outstanding shares of
the Series E Preferred and Series F Preferred (including
all other accrued and unpaid dividends thereon) for
395,302 shares of the Company's Series I Preferred.
The Series I Preferred shall have the following rights,
privileges, and limitations:
a) The conversion feature shall be exercisable
immediately.
b) The conversion price of the Series I Preferred
shall be determined by the average closing price
of Company's common stock in the previous 10
trading days, but in no event shall the
conversion price be more than $0.57 per share.
c) If the Company's common stock is not listed on an
exchange at the time of the conversion, then the
conversion price will be 50% of the market price
at that time.
--------------------------------------------------------------------------------
F-22
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Stockholders' Series I Convertible Preferred Stock - Continued
Equity
Continued d) The Series I Preferred shall have a
non-cumulative annual dividend of 10%, payable in
cash or shares of the Company's common stock at
the Company's election.
e) Dividend will be paid quarterly commencing May
15, 2005, to the Holders of record of shares of
the Series I Preferred Stock. Dividends until
February 14, 2006 shall accrue but shall not be
payable until February 15, 2006.
f) The Company has reserved 3,750,000 shares of its
common stock for the conversion of the Series I
Preferred.
g) The Company accrued $184 of dividends in 2005 on
the Series I Preferred.
During the year ended December 31, 2005, 7000 shares of
Series I Convertible Preferred Stock were converted to
439,206 shares of common stock. Applied has no shares of
Series I convertible stock outstanding at December 31,
2005.
Series J Convertible Preferred Stock
Effective as of October 1, 2005, the Company authorized
the issuance of 550,000 shares of Series J Convertible
Preferred Stock ("Series J Preferred"), par value $0.001
per share, each such share of Series I Preferred having
a stated value of $10.00 per share.
The Series J Preferred shall have the following rights,
privileges, and limitations:
a) The conversion feature shall be exercisable
immediately.
b) The conversion price of the Series J Preferred
shall be determined by the average closing price
of Company's common stock in the previous 10
trading days, but in no event shall the
conversion price be more than $0.50 per share or
less than $0.05 per share.
c) If the Company's common stock is not listed on an
exchange at the time of the conversion, then the
conversion price will be 50% of the market price
at that time.
--------------------------------------------------------------------------------
F-23
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Stockholders' Series J Convertible Preferred Stock - Continued
Equity
Continued
d) The Series J Preferred shall have a
non-cumulative annual dividend of 10%, payable in
cash or shares of the Company's common stock at
the Company's election.
e) Dividend will be paid quarterly commencing March
31, 2006, to the Holders of record of shares of
the Series J Preferred Stock.
f) The Company has reserved 40,000,000 shares of its
common stock for the conversion of the Series J
Preferred and the Amended New Shaar Convertible
Note.
g) The Company accrued $97 of dividends in 2005 on
the Series J Preferred.
Effective October 1, 2005, the Company entered into the
New Shaar Exchange Agreement, in which the Company
agreed that Shaar will exchange all of its right, title
and interest in and to the remaining outstanding shares
of the Series I Preferred (excluding all other accrued
and unpaid dividends thereon) for 388,302 shares of the
Company's Series J Preferred.
During the year ended December 31, 2005, no shares of
Series J Convertible Preferred Stock were converted to
shares of common stock. Applied has 388,302 shares of
Series J convertible stock outstanding at December 31,
2005.
Cumulative unpaid dividends on Preferred Stock are $361
and $1,696 at December 31, 2005 and 2004, respectively.
The holders of all series of convertible preferred stock
have the right, voting as a class, to approve or
disapprove of the issuance of any class or series of
stock ranking senior to or on a parity with the
convertible preferred stock with respect to declaration
and payment of dividends or the distribution of assets
on liquidation, dissolution or winding-up. Upon
liquidation, dissolution or winding up of Applied,
holders of Series E and Series F Convertible Preferred
Stock are entitled to receive liquidation distributions
equivalent to $10.00 per share before any distribution
to holders of the Common Stock or any capital stock
ranking junior to the Series E Convertible Preferred
Stock. There have been no shares of Series H Preferred
stock converted into common shares as of December 31,
2005.
--------------------------------------------------------------------------------
F-24
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
10. Embedded On April 12, 2005, Applied, through the issuance of the
Derivative Series I Preferred and the Amended and Restated Shaar
Liability Note, recorded an embedded derivative liability due to
the conversion feature of these financial instruments
pursuant to SFAS No. 133 and EITF 00-19. The Company
recorded an embedded derivative liability of $8,063 at
its inception on April 12, 2005, $3,702 of which was
recorded as a deemed dividend to preferred stockholders,
and $4,361 was recorded as a debt discount. Effective
October 1, 2005, the Company issued Series J Preferred
in exchange for the Series I Preferred as well as
further amending the Amended and Restated Shaar Note.
These changes amended the terms of the conversion
features and removed the provisions requiring embedded
derivative accounting, and the Company reclassified the
embedded derivative liability to equity on October 1,
2005. Prior to the reclassification, the Company
revalued the embedded derivative which resulted in an
increase to the derivative liability and corresponding
derivative loss of $543. After the revaluation, the
embedded derivative liability was $8,606 and the
remaining debt discount was $3,861 at time of
reclassification, which resulted in an increase to
equity of $4,745.
11. Stock Options Stock Options
and Stock In December 1998, Applied adopted its 1998 Stock Option
Warrants 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 250,000 shares of Applied's Common Stock.
During 1999 and 2000 Applied increased the number of
shares authorized by 250,000 shares each year resulting
in 750,000 shares currently available under the 1998
stock option plan. Exercise prices applicable to stock
options issued under this Plan represent no less than
100% of the fair value of the underlying common stock as
of the date of grant. Stock options granted under the
plan may vest immediately or for any period up to five
years.
In as much as Applied rescinded certain options during
2002 and reissued new options to the option holders, the
options are considered variable options and are revalued
each quarter to determine the effect on operations, if
any. There is no variable option expense recognized
during 2005 and 2004 as the variable options' exercise
price exceeded the fair market value of the Company's
stock.
--------------------------------------------------------------------------------
F-25
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Options A summary of the status of options granted under and
and Stock outside of the Plan as of December 31, 2005, 2004 and
Warrants 2003, and changes during the years then ended is
Continued presented below:
2005 2004 2003
---------------------------------------------------------------------
Shares Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Shares Price Shares Price
---------------------------------------------------------------------
Options outstanding, beginning
of year 4,325,841 $ 1.06 4,364,298 $ 1.08 510,230 $ 4.80
Granted - - - - 3,854,068 0.57
Exercised - - - - - -
Rescinded - - - - - -
Forfeited - - 38,457 1.40 - -
---------------------------------------------------------------------
Options outstanding, end of year 4,325,841 $ 1.06 4,325,841 $ 1.06 4,364,298 $ 1.06
---------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------------------------------------------------------------------------------
$ 0.57 - 0.57 3,854,068 2.96 years $ 0.57 3,854,068 $ 0.57
1.40 - 1.40 453,904 2.96 years 1.40 453,904 1.40
40 - 120 17,869 0.98 years 97.17 17,869 97.17
----------------------------------------------------------------------------------
4,325,841 2.95 years $ 1.06 4,325,841 $ 1.06
----------------------------------------------------------------------------------
Stock Warrants
A summary of the warrants granted as of December 31,
2005, 2004 and 2003 and changes during the periods then
ended is presented below:
2005 2004 2003
---------------------------------------------------------------------
Shares Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Shares Price Shares Price
---------------------------------------------------------------------
Warrants outstanding, beginning of 1,593,880 $ 3.60 1,789,718 $ 3.60 1,203,516 $ 70.00
year
Granted 200,000 .20 - - 1,532,790 0.57
Exercised - - (25,000) .57 - -
Repriced - - - - (75,000) 1.00
Rescinded - - - - (5,651) 38.80
Expired (90,257) 1.49 (170,838) 1.00 (865,937) 70.00
---------------------------------------------------------------------
Warrants outstanding, end of year 1,703,623 $ 0.55 1,593,880 $ 3.60 1,789,718 $ 3.60
---------------------------------------------------------------------
--------------------------------------------------------------------------------
F-26
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Options Outstanding warrants at December 31, 2005 are as
and Stock follows:
Warrants
Continued
Number of Current
Granted Granted Granted Granted Granted Warrants Exercise
2001 2002 2003 2004 2005 Outstanding Price Expiration Date
-----------------------------------------------------------------------------------------------------------
8,333 - - - - 8,333 4.40 June 2006
- - 25,000 - - 25,000 0.57 October 2006
- - 50,000 - - 50,000 0.57 February 2007
- - 50,000 - - 50,000 0.57 April 2006
- - 1,367,790 - - 1,367,790 0.57 November 2008
- - 2,500 - - 2,500 0.57 November 2008
- - - - 200,000 200,000 0.20 April 2008
-----------------------------------------------------------------------------
8,333 - 1,495,290 - 200,000 1,703,623
-----------------------------------------------------------------------------
In 2003, 75,000 warrants originally issued with debt
were repriced and extended, and 50,000 warrants were
newly issued, both to extend the related debt. The
Company recorded a debt discount of $30 at December 31,
2003. Also in 2003, 12,500 warrants were issued to
extend the related debt. A debt discount of $5 was
recorded, with $3 of the debt discount amortized during
2004. As of December 31, 2005 all warrants are
exercisable.
12. Loss Basic loss per share is computed by dividing net loss
Per Share available to common shareholders by the weighted average
number of shares outstanding during the period. Diluted
loss per share is 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. Options and warrants to purchase 6,029,463,
5,919,721 and 6,154,016 shares of common stock as of
December 31, 2005, 2004 and 2003, respectively, were
excluded from the calculation of diluted loss per share
as the effect would have been anti-dilutive as the
Company experienced net losses.
--------------------------------------------------------------------------------
F-27
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
13. Related Party Applied had the following related party transactions not
Transactions fully disclosed elsewhere:
Applied has non-interest bearing payables to related
parties of $185 and $185 at December 31, 2005 and 2004,
recorded in other accrued liabilities.
During 2003, 1,367,790 warrants valued at $470 were
issued to a member of the board of directors for
services, and rent of facilities, and forbearance on
payment of a note that is due on demand.
Applied has a note payable to a member of the board of
directors that is due on demand and carries interest at
9%. The balance due at December 31, 2005 and 2004 is
$312 and $312, respectively, and is included in the
related party payable. Related party receivables are
offset against these related party notes payable.
Applied has long-term debt to shareholders of Applied.
See Note 7.
14. 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:
2006 $ 93
2007 42
2008 42
2009 14
--------
$ 191
--------
Rent expense approximated $156, $126, and $325 in 2005,
2004 and 2003, respectively. Rent expense in 2003
includes $198 from the issuance of warrants to a member
of the board of directors for office rent expense.
Executive Bonus Plan
Applied has a five-year Executive Bonus Plan (the "Bonus
Plan") under which a number of executives and employees
of Applied are entitled to formula bonuses. No bonuses
are accrued at December 31, 2005 and 2004.
--------------------------------------------------------------------------------
F-28
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
14. Commitments Litigation
and Applied has matters of litigation arising in the
Contingencies ordinary course of business which in the opinion of
Continued management will not have a material adverse effect on
its financial condition or results of operations.
Guarantee
Applied, along with several other entities, in a prior
year, guaranteed a performance bond of Commodore
Separation Technologies, Inc. relating to a contract
with the Port of Baltimore. Applied was notified on June
28, 2000 that the performance bond is being called. It
is not known at this time the amount, if any, Applied's
share will be. No amount has been reflected in these
consolidated financial statements as the amount is not
determinable.
15. 401(K) Applied has adopted a 401(K) savings plan for all
Savings Plan employees who qualify as to age and service.
Contributions by Applied are discretionary. Applied made
no annual contributions to the plan during the years
ended December 31, 2005, 2004 and 2003.
16. Segment Using the guidelines set forth in SFAS No. 131,
Information "Disclosures About Segments of an Enterprise and Related
Information," Applied has identified two reportable
segments as follows:
1. CASI, which primarily provides various
engineering, legal, sampling and public relations
services to government agencies on a cost plus
basis.
2. Solution, which, through CASI, has equipment to
treat mixed and hazardous waste through a
patented process using sodium and anhydrous
ammonia.
Common overhead costs are allocated between segments
based on a record of time spent by executives.
--------------------------------------------------------------------------------
F-29
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
16. Segment Applied evaluates segment performance based on the
Information segment's net income (loss). The accounting policies of
Continued 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.
Corporate
Overhead
2005 Total CASI Solution & Other
---- ----------------------------------------------------
Revenues $ 10,275 $ 10,189 $ 86 $ -
Costs and expenses:
Cost of revenues 9,132 9,078 54 -
Research and development 5 5 - -
General and administrative 2,072 618 16 1,438
Depreciation and amortization 54 54 - -
----------------------------------------------------
Total costs and expenses 11,263 9,755 70 1,438
----------------------------------------------------
Income (loss) from operations (988) 434 16 (1,438)
Derivative loss (543) - - (543)
Interest expense (1,183) (32) - (1,151)
----------------------------------------------------
Loss from operations before income taxes (2,714) 402 16 (3,132)
Income taxes - - - -
----------------------------------------------------
Net income (loss) $ (2,714) $ 402 $ 16 $ (3,132)
----------------------------------------------------
Total assets $ 2,417 $ 2,402 $ - $ 15
----------------------------------------------------
Expenditures for long-lived assets $ 107 $ 87 $ - $ 20
----------------------------------------------------
--------------------------------------------------------------------------------
F-30
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
16. Segment
Information
Continued
Corporate
Overhead
2004 Total CASI Solution & Other
---- -----------------------------------------------------
Revenues $ 738 $ 698 $ 40 $ -
Costs and expenses:
Cost of revenues 919 548 371 -
Research and development 9 - 9 -
General and administrative 1,674 308 120 1,246
Depreciation and amortization 136 - - 136
-----------------------------------------------------
Total costs and expenses 2,738 856 500 1,382
-----------------------------------------------------
Income (loss) from operations (2,000) (158) (460) (1,382)
Interest expense (404) (1) - (403)
-----------------------------------------------------
Loss from operations before income taxes (2,404) (159) (460) (1,785)
Income taxes - - - -
-----------------------------------------------------
Net income (loss) $ (2,404) $ (159) $ (460) $ (1,785)
-----------------------------------------------------
Total assets $ 369 $ 354 $ - $ 15
-----------------------------------------------------
Expenditures for long-lived assets $ 61 $ 61 $ - $ -
-----------------------------------------------------
--------------------------------------------------------------------------------
F-31
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
16. Segment
Information
Continued
Corporate
Overhead
2003 Total CASI Solution & Other
---- -----------------------------------------------------
Revenues $ 660 $ 568 $ 92 $ -
Costs and expenses:
Cost of revenues 811 721 90 -
Research and development 70 - 70 -
General and administrative 1,700 570 73 1,057
Depreciation and amortization 267 - - 267
-----------------------------------------------------
Total costs and expenses 2,848 1,291 233 1,324
-----------------------------------------------------
Income (loss) from operations (2,188) (723) (141) (1,324)
Interest expense (769) (1) - (768)
-----------------------------------------------------
Loss from operations before income taxes (2,957) (724) (141) (2,092)
Income taxes - - - -
-----------------------------------------------------
Net (loss) income $ (2,957) $ (724) $ (141) (2,092)
-----------------------------------------------------
Total assets $ 246 $ 84 $ - $ 162
-----------------------------------------------------
Expenditures for long-lived assets $ 11 $ - $ - $ 11
-----------------------------------------------------
--------------------------------------------------------------------------------
F-32
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
17. Recent In February 2006, the Financial Accounting Standards
Accounting Board ("FASB") issued SFAS No. 155, Accounting for
Pronounce- Certain Hybrid Instruments ("SFAS 155"). SFAS 155 amends
ments SFAS 133 and SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities ("SFAS 140"). SFAS 155 allows financial
instruments that have embedded derivatives to be
accounted for as a whole, eliminating the need to
bifurcate the derivative from its host, if the holder
elects to account for the whole instrument on a fair
value basis. In addition, among other changes, SFAS 155
(i) clarifies which interest-only strips and
principal-only strips are not subject to the
requirements of SFAS 133; (ii) establishes a requirement
to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or
that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation; (iii)
clarifies that concentrations of credit risk in the form
of subordination are not embedded derivatives; and (iv)
eliminates the prohibition on a qualifying
special-purpose entity ("QSPE") from holding a
derivative financial instrument that pertains to a
beneficial interest other than another derivative
financial interest. SFAS 155 will be applied
prospectively and is effective for all financial
instruments acquired or issued for fiscal years
beginning after September 15, 2006. SFAS 155 is not
expected to have a material impact on the Company's
consolidated financial statements. The FASB has issued
additional guidance relating to derivative financial
instruments as follows:
In June 2005, the FASB cleared SFAS 133 Implementation
Issue No. B38, Embedded Derivatives: Evaluation of Net
Settlement with Respect to the Settlement of a Debt
Instrument through Exercise of an Embedded Put Option or
Call Option ("Issue B38") and SFAS 133 Implementation
Issue No. B39, Embedded Derivatives: Application of
Paragraph 13(b) to Call Options That Are Exercisable
Only by the Debtor ("Issue B39"). Issue B38 clarified
that the potential settlement of a debtor's obligation
to a creditor occurring upon exercise of a put or call
option meets the net settlement criteria of SFAS No.
133.
--------------------------------------------------------------------------------
F-33
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
17. Recent Issue B39 clarified that an embedded call option, in
Accounting which the underlying is an interest rate or interest
Pronounce- rate index, that can accelerate the settlement of a debt
ments host financial instrument should not be bifurcated and
Continued fair valued if the right to accelerate the settlement
can be exercised only by the debtor (issuer/borrower)
and the investor will recover substantially all of its
initial net investment. Issues B38 and B39, which must
be adopted as of the first day of the first fiscal
quarter beginning after December 15, 2005, are not
anticipate to have a material impact on the Company's
consolidated financial statements.
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations,
or "FIN 47," which clarifies that the term "conditional
asset retirement obligation" as used in FASB statement
No. 143, "Accounting for Asset Retirement Obligations".
Conditional asset retirement obligation refers to a
legal obligation to perform an asset retirement activity
in which the timing and/or method of settlement are
conditional on a future event that may or may not be
within the control of the entity. An entity is required
to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. FIN
47 is effective for fiscal years ending after December
15, 2005. The Company does not expect the adoption of
FIN 47 to have a material impact on its consolidated
balance sheet or consolidated statement of cash flows.
In May 2005, the Financial Accounting Standards Board,
or "FASB," issued SFAS No. 154, Accounting Changes and
Error Corrections. This statement replaces APB No. 20
and SFAS No. 3, and changes the requirements for the
accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective
application to prior periods' financial statements of
changes in accounting principle. The statement defines
retrospective application as the application of a
different accounting principle to prior accounting
periods as if that principle had always been used or as
the adjustment of previously issued financial statements
to reflect a change in the reporting entity. This
statement shall be effective for accounting changes and
correction of errors made in years beginning after
December 15, 2005. Accordingly, we will adopt the
provisions of SFAS No. 154 at the beginning of our 2006
fiscal year.
--------------------------------------------------------------------------------
F-34
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
17. Recent In December 2004, the FASB issued SFAS No. 123R,
Accounting Share-Based Payment, which requires companies to measure
Pronounce- and recognize compensation expense for all stock-based
ments payments at fair value. SFAS 123R is effective for
Continued fiscal years beginning after June 15, 2005 and, thus,
will be effective for the Company beginning with the
fiscal year of 2006, as deferred. Early adoption is
encouraged and retroactive application of the provisions
of SFAS 123R to the beginning of the fiscal year that
includes the effective date is permitted, but not
required. The Company is currently evaluating the impact
of SFAS 123R, and the adoption may have a material
impact on the Company's financial position and results
of operations. See Stock Compensation in Note 1 for more
information related to the pro forma effects on reported
net loss and net loss per share of applying the fair
value recognition provisions of the previous SFAS 123,
Accounting for Stock-Based Compensation, to stock-based
employee compensation.
--------------------------------------------------------------------------------
F-34