10-K 1 cst.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 Commission file number 0-22291 Commodore Separation Technologies, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 11-3299195 (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: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Title of Each Class ------------------- Common Stock, par value $0.001 per share 10% Senior Convertible Redeemable Preferred Stock, par value $0.001 per share Redeemable Common Stock Purchase Warrants 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. [ ] Non-affiliates of the registrant held shares of Common Stock as of March 22, 2001 with an aggregate market value of approximately $96,000 (based upon the average bid and asked prices of the Common Stock on March 22, 2001 as quoted by the Nasdaq Small Cap Market). As of March 22, 2001, 11,596,908 shares of the registrant's Common Stock were outstanding. ---------------------------------- DOCUMENTS INCORPORATED BY REFERENCE None COMMODORE SEPARATION TECHNOLOGIES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 TABLE OF CONTENTS

ii PART I ------ ITEM 1. BUSINESS. ------- --------- GENERAL Commodore Separation Technologies, Inc., a Delaware corporation (the "Company"), has developed its separation technology and recovery system known as SLiM(TM) (supported liquid membrane). Based on its historical research and development program, the Company believes that SLiM can separate and recover solubilized metals, radionuclides, biochemicals and other targeted elements from aqueous and possibly gaseous waste streams in degrees of concentration and purity which permit both the reuse of such elements and the ability for the waste water or gas to be disposed of as non-toxic effluent with little or no further treatment. SLiM utilizes a process whereby a contaminated aqueous or gaseous feedstream is introduced into a fibrous membrane unit or module containing a proprietary chemical solution, the composition of which is customized depending on the types and concentrations of compounds in the feedstream. As the feedstream enters the membrane, the targeted substance reacts with SLiM's proprietary chemical solution and is extracted through the membrane into a strip solution where it is then stored. The remaining feedstream is either recycled or discharged free of the extractant(s). In some instances, additional treatment may be required prior to discharge. In December 1997 and February 1998, the Company was awarded its first two commercial contracts from Maryland Environmental Service ("MES") to use its SLiM technology in connection with the removal of chromium in water leaching from waste sites at Baltimore Harbor and potentially polluting the Chesapeake Bay. The Company installed the SLiM based processing systems as per contract but was unable to remove the chromium due to third party technology failures. The Company removed the SLiM based processing systems in June of 1999 at the request of MES. Prior to these awards, the Company had performed a series of on-site demonstrations of SLiM, in which a SLiM unit, in a single feedstream passthrough, reduced the contamination level of chromium from more than 630 parts per million (ppm) to less than one ppm. Under a license agreement with Lockheed Martin Energy Research Corporation, the Company also has received the exclusive worldwide license (subject to a government use license) to use and develop its SLiM technology for separating the radionuclides, technetium and rhenium, from mixed wastes containing radioactive materials. The Company's business strategy is to pursue these and other opportunities for SLiM and to seek marketing arrangements with established engineering and environmental services firms to use SLiM. To finance the significant growth experienced by the Company, the Company raised a net amount equal to approximately $11,100,000 from an initial public offering of its preferred stock, common stock and warrants in April and May 1997 (the "IPO"). As of March 22, 2001 approximately 86% of the Company's common stock was owned by Commodore Environmental Services, LLC ("LLC"), a wholly owned subsidiary of Commodore Environmental Services, Inc., a Delaware corporation ("Environmental"). Effective as of September 28, 1998, Commodore Applied Technologies, Inc., a Delaware Corporation ("Applied"), transferred its 87% interest in the Company to Environmental as part of a debt restructuring agreement consummated between the two companies following the completion of fairness opinions. In April 2000, the Company was notified by Maryland Environmental Services ("MES") requesting the removal of the SliM equipment from the Port of Baltimore Dundalk Marine Terminal and Hawkins Point facilities. MES cited the fact that the Company had removed Chromium VI as per the requirements in the contract, however there remained trace amounts of Chromium III in the leachate, which resulted in the total chromium concentrations to exceed contract specified amounts. The Company has made several attempts to remove trace amounts of Chromium III, including the use of alternative technologies, however was unable to satisfy MES requirements. It should be noted that the original samples tested from the leachate solution did not have Chromium III present and therefore this problem was not foreseen. As a result, the Company has withdrawn its equipment from the Port of Baltimore and transferred it, along with its inventory, to a storage facility in Albuquerque, New Mexico. In June 2000, the Company closed its Kennesaw, Georgia facility. As a result, the Company transferred approximately $227,000 of lab equipment and furniture and fixtures to Commodore Environmental Services, Inc. "Environmental", the owner of 87% of the issued and outstanding common stock of 1 the Company, in exchange for $227,000 of intercompany indebtedness. The remainder of equipment and inventory was transferred to a storage facility in Albuquerque, New Mexico. As a result of the closure, all of the employees in the Georgia facility have found other employment or have been released. As a result of the closure, the Company has recorded a reserve for inventory obsolescence of $519,000, an impairment reserve on long-lived assets of $428,000 and a write off of leasehold improvements of $85,000 in the year ended December 31, 2000. The Company plans to continue to search for applications for its technology. The Company has no ongoing operations as of December 31, 2000. The Company was incorporated in Delaware in November 1995. 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. THE SLiM TECHNOLOGY Although SLiM uses the same basic principles as other membrane separation technologies, the Company believes that SLiM represents a significant advance in membrane separation technology in the treatment of solubilized feedstreams. SLiM acts by separating and extracting the targeted materials from the feedstream, rather than trapping the target material as the entire feedstream passes through the filter mechanism. As a result, for the first time, a single process is capable of treating a variety of elements and compounds in a variety of industrial settings, and doing so at great speed and with a high degree of effectiveness regardless of particle size and volume requirements. The Company also believes that SLiM is the first membrane separation technology which is capable, in a single process application, of selectively extracting multiple elements or compounds from a mixed process stream. The SLiM membrane modules can also be configured in various sizes and numbers and for varying capacities, and operate at ambient temperatures and pressures. SLiM involves passing a contaminated aqueous or gaseous feedstream through a porous, hollow fiber membrane unit or module. This module is previously loaded with chemicals whose composition varies depending on the targeted substance in the feedstream. As the feedstream enters the module, the metal or other substance to be extracted reacts with the proprietary chemical combination in the module, and the metallic or other ions are extracted through the membrane into a strip solution that is concentrated and gathered in a separate storage container. The balance of the feedstream is either recycled or simply discharged as normal effluent. In some instances, additional treatment may be required prior to discharge, or discharge may need to be made in a regulated manner. The Company believes that SLiM can be utilized in many instances for the separation and recovery of solubilized metals (e.g., chromium, cobalt, copper, zinc, strontium, calcium, nickel, cadmium, silver, mercury, platinum and lead) and, with refinement, radionuclides, gas, organics and biochemicals. The typical SLiM module is cylindrical in shape. The module casing is typically constructed of plastic and contains the fibers through which the targeted element or compound is separated from the contaminated feedstream. Pumps and pipes feed the contaminated feedstock from its point of origin (such as a metal plating tank or bath) into the module. Additional pumps and pipes recycle the strip solution that concentrates the contaminant that is being deposited continuously by the Company's proprietary chemicals resident in the membrane. The Company formulates the chemical mixture for the process in each customer application, and performs the initial installation of the equipment at the customer site. The customer will either operate the equipment itself using computer data links to the Company, which will monitor the equipment and process while in operation, or the Company will enter into service contracts with the customer to operate the equipment at the customer's site. Operational Characteristics The most common alternative methods for metals separation from solubilized process streams presently include ion exchange, reverse osmosis, precipitation, ultrafiltration, nanofiltration and chromatography. The Company believes that most of these methods have certain drawbacks, including lack of selectivity in the separation process, inability to handle certain metals in the process streams and the creation of sludges and other harmful by-products that require further post-treatment prior to disposal. For example, reverse osmosis and ultrafiltration are incapable of separating chrome and chromium materials from wastewater streams, and precipitation results in the production of sludge that requires dewatering, drying and disposal in a landfill. Certain of these other technologies also entail long process times and are relatively expensive. The Company believes that SLiM may be a cost-effective alternative to other existing forms of membrane filtration technology in that it: o requires lower initial capital costs and lower operating costs; 2 o has the capability of treating a variety of elements and compounds in laboratory and selected industrial settings at greater speed and with a higher degree of effectiveness; o is environmentally safe, in most instances producing no sludges or other harmful by-products which would require additional post-treatment prior to disposal; o can selectively extract target substances while extracting substantially fewer unwanted substances; o can extract metals, organic chemicals and other elements and compounds in degrees of concentration and purity which may permit their reuse; and o has the capability of selectively removing more than one element from a mixed process stream by incorporating SLiM systems in series. Test Results In more than 100 laboratory and field tests to date, SLiM has demonstrated the ability to successfully separate a variety of metals and other substances from aqueous and possibly gaseous process streams. In each instance, the process stream was reduced to levels meeting federal guidelines under the Federal Clean Water Act for the disposal of the reacted process stream as normal wastewater effluent, and the recovered materials were of sufficient quantity and purity as to economically permit the reuse thereof in most commercial applications. Test results included the following:

Some of these tests were performed on limited quantities of process streams, and there can be no assurance that the same or similar results would or could be obtained on a large-scale commercial basis or on any specific project. Other than with respect to the Company's tests involving the separation and recovery of zinc, nickel, chromium and strontium, no other tests conducted by the Company have been independently verified. CONTRACTS Port of Baltimore Contracts. In November 1997, the Company was awarded its first commercial project by the State of Maryland and entered into a multi-year, sole-source contract with MES for the removal of chromium-contaminated leachate at the Hawkins Point Hazardous Waste Treatment Facility at the Port of Baltimore. The contract, dated as of November 25, 1997 (the "Hawkins Point Contract"), provides that the Company will lease a SLiM unit to MES for a one-time, lump-sum lease payment of $250,000, and will license its 3 proprietary SLiM technology to MES in exchange for a royalty equal to one-half of any savings which MES realizes by using the SLiM technology as opposed to conventional non-proprietary remediation technology. The Company also reserved the right to market any residual chromium captured by its SLiM technology and receive 50% of the revenues generated from any commercial sales of such residual chromium. The SLiM equipment was installed in 1998. Throughout 1999, the SLiM equipment installed at the Hawkins Point site experienced several operation difficulties due to SLiM's inability to remove "total chromium" to the specified limits on an ongoing commercial basis. The SliM equipment removed the Chromium VI to the specified limits but was unable to remove the Chromium III, solely or in conjunction with third party technology designed for Chromium III removal, to the specified limits of the Hawkins Point Contract. The Company was unable to remove the chromium III due to third party technology failures. The Company removed the SLiM based processing systems in June of 1999 at the request of MES as it was unable to to effectively meet the "total chromium" removal limits specified by the Hawkins Point Contract. In 1999, the Company had generated revenues of approximately $250,000 relating to this contract. In February 1998, the Company was awarded its second commercial project by the State of Maryland and entered into another multi-year, sole-source contract with MES for the removal of chromium-contaminated leachate at Dundalk Marine Terminal at the Port of Baltimore. The contract, dated as of February 5, 1998 (the "Dundalk Contract"), provides that the Company will lease a SLiM unit to MES for a one-time, lump-sum lease payment of $350,000, and will license its proprietary SLiM technology to MES in exchange for a royalty equal to one-half of any savings which MES realizes by using the SLiM technology as opposed to conventional non-proprietary remediation technology. The Company had satisfied approximately 25% of the terms of the contract and therefore recorded $87,500 in revenues for 1999. As in the case of the Hawkins Point Contract, the Dundalk Contract provided that the Company shall have the right to market any residual chromium captured by its SLiM technology and receive 50% of the revenues generated from any commercial sales of such residual chromium. The SLiM equipment had been delivered to the site. Throughout the initial startup trials at the Dundalk Marine Terminal, the SLiM equipment had been unable to consistently meet the "total chromium" removal limits. The SliM equipment removed the Chromium VI to the specified limits but was unable to remove trace amounts of Chromium III to the specified limits of the Dundalk Contract. The Company was unable to remove the chromium III due to third party technology failures. The Company removed the SLiM based processing systems in June of 1999 at the request of MES as it was unable to effectively meet the "total chromium" removal limits specified by the Dundalk Contract. Lockheed License Agreement. In January 1997, the Company entered into a license agreement (the "Lockheed License Agreement") with Lockheed Martin Energy Research Corporation ("Lockheed Martin"), manager of the Oak Ridge National Laboratory, a United States Department of Energy national laboratory ("Oak Ridge"). Under the terms of the Lockheed License Agreement, the Company received the exclusive worldwide license, subject to a government use license, to use and develop the technology related to the separation of the radionuclides technetium and rhenium from mixed wastes containing radioactive materials. The Company also received under the Lockheed License Agreement the right to exploit the technology for other commercial applications. Pursuant to the Lockheed License Agreement, the Company made an initial cash payment of $50,000 upon the execution of the agreement and is obligated to pay a royalty to Lockheed Martin of 2% of net sales (less allowances for returns, discounts, commissions, freight, and excise or other taxes) up to total net sales of $4,000,000 and 1% of net sales thereafter. In addition, the Company has agreed to guarantee Lockheed Martin, during the term of the Lockheed License Agreement, an annual minimum royalty of $15,000 commencing in the third year of the Lockheed License Agreement. The Lockheed License Agreement, which may be terminated at any time solely by the Company, has a term which will last until the end of the life of all patents or patentable claims described in or ultimately arising out of the patent application filed jointly by the Company and three colleagues of Srinivas Kilambi, Ph.D., the Company's former Senior Vice President--Technology, who worked with him at Oak Ridge, covering their inventions related to radionuclides. Based on tests conducted at Oak Ridge since May 1994, the Company believes that this technology is capable of selectively extracting and recovering technetium, rhenium and other radioactive isotopes as a concentrated aqueous solution that can be reused in various scientific or medical applications or disposed of by government-approved techniques including long-term storage. The Company believes that this technology may remediate nuclear wastewater stored at the Department of Energy's (the " DOE") atomic energy plants in Rocky Flats, Colorado; Idaho Falls, Idaho; Paducah, Kentucky; Weldon Springs, Missouri; Frenchman Flat, Nevada; Los Alamos, New Mexico; Aiken, South Carolina; Oak Ridge, Tennessee; Pantex, Texas; and Hanford, Washington, and intends to pursue such opportunities. According to DOE sources, there are approximately 100 million gallons of mixed radioactive and hazardous chemical waste stored at these plants. MARKETS AND CUSTOMERS Overview 4 Based on market data compiled by the Company, the Company estimates that, as of December 31, 2000, there were approximately 7,000 companies operating metal plating and metal finishing facilities in the United that may be potential users of the SliM technology. Additionally, there were more than 1,000 biochemical, bulk drug manufacturing and pharmaceutical companies operating in the United States and Canada that may be potential users of the SLiM technology. The Company believes that the potential international market for the above applications may be equal to the North American market. Federal, state and local government entities are also a potential market for the Company, particularly in the area of environmental remediation and clean-up. Commercialization and Marketing Strategy Currently, the Company does not have an active commercialization program. Historically, the Company intended to lease its equipment to customers, with the lease payments being due and payable after installation and successful start-up of the equipment. When replacement modules are required, the Company will supply these modules at a reasonable mark-up over their cost. As new patents are filed and issued, the Company may, for certain applications, determine to make a direct sale of the equipment with additional long-term royalty payment provisions. The Company might obtain additional revenues through servicing the SLiM equipment, including periodic replacement of the membrane component. In addition to leasing and selling its equipment, the Company may charge its customers based on a percentage of the customer's actual cost savings derived from reduced disposal costs and recovered reusable materials. In applications in which reusable materials are not recovered, the Company's ongoing charges may be based on the volume of materials processed. There are no current marketing efforts for the Company's SliM technology. Metals Separation and Recovery. The Company's initial marketing efforts were in this industrial sector, in which the separation and recovery of metal-bearing aqueous solutions present a substantial market. Primary among the potential customers in this area are metal plating and metal finishing operations, which generate substantial volumes of mixed metals process streams for which a limited number of potentially effective technologies are available to effect proper separation. Based on historical management studies and discussions with metals industry executives, the Company believes that the major competitive technologies in this area are precipitation and ion exchange. To date the Company has been unsuccessful in placing SLiM equipment in this industrial sector. Environmental Remediation and Restoration. The Company believes that SLiM has the potential for application to environmental remediation and restoration. In the case of a project, it is expected that the remediation technology will be applied continuously over a period of many years, until the subject contamination has abated for a significant period of time. To date the SLiM technology has not performed profitability on a commercial scale. Radionuclide/Mixed Waste Separation. In the United States, there are numerous sites operated or maintained by the DOE and/or the DOD at which there are present "mixed wastes" containing radionuclides intermingled with other hazardous wastes. These sites are also contaminated with other compounds associated with nuclear weapons testing and energy. SLiM may have capabilities in the separation of radionuclides such as strontium, cesium, technetium and rhenium. The United States government estimates that potential government expenditures in this market could be between $234 billion and $389 billion over the course of the next 75 years. The Company anticipates pursuing this market area in collaboration with established engineering and environmental service organizations, which can provide technical and professional expertise, market presence and credibility. The Company has successfully demonstrated selective radionuclide capabilities on a limited basis. RAW MATERIALS The Company currently has a limited number of outside sources of supply for some strategic components used in the SLiM process, including chemicals, fibers and membrane casings. Business disruptions or financial difficulties of such suppliers, or raw material 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. In its development to date, the Company has been able to obtain adequate supplies of these strategic components. However, as it develops its commercial activities, the Company may experience a rapid and substantial increase in its requirements for these components. If the Company were unable to obtain a sufficient supply of required components, it could experience significant delays in the manufacture of SLiM equipment, 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 raw materials or finished components were to increase, there can be no assurance that the Company would be able to pass such increase to its customers. The use of outside suppliers also entails risks of quality control and disclosure of proprietary information. 5 BACKLOG At December 31, 2000, the Company had no backlog. 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 were $114,000, $338,000 and $1,299,000 for the years ended December 31, 2000, 1999 and 1998, respectively. INTELLECTUAL PROPERTY In September 1997, the Company filed two U.S. patent applications and one international patent application covering the principal features of its SLiM technology. One of the patent applications covers the joint inventions of Dr. Kilambi and Lockheed Martin. The other patent application and the international patent application cover the sole inventions of Dr. Kilambi. The U.S. Patent Office has decided to issue a patent for one of the two claims covering the joint inventions of Dr. Kilambi and Lockheed Martin. The other claim will be separated from the original application and filed as a separate patent application. Based on comments provided by the U.S. Patent Office, the Company has decided to abandon the two patent applications covering the sole inventions of Dr. Kilambi. In January 1999, the Company filed a U.S. patent application for chromium removal and recovery covering the sole invention of Dr. W.S. Winston Ho, former Senior Vice President - Technology. In February 2000, the Company filed three U.S. Patent Application for using a strip dispersion technique and interfacial polymerization with SLiM covering the sole inventions of Dr. W.S. Winston Ho. The Company's liquid membrane technology patent applications are based on the selective combination of different known solvents, supports, diluents, carriers and other components to separate a variety of metals, chemicals and other targeted substances. While the Company believes that its technology covers many separation applications, third parties may have developed, or may subsequently assert claims to, certain of these solvents, supports, diluents, carriers or other components for one or more specific applications. In such event, the Company may need to acquire licenses to, or to contest the validity of, issued or pending patents or claims of third parties. To protect its trade secrets and the unpatented 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 unpatented 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 which 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 The most common alternative methods for metals separation from solubilized process streams presently include ion exchange, reverse osmosis, precipitation, ultrafiltration, nanofiltration and chromatography. The Company believes that most of these methods have certain drawbacks, including lack of selectivity in the separation process, inability to handle certain metals in the process streams, and the creation of sludges and other harmful by-products that require further post-treatment prior to disposal. For example, reverse osmosis and ultrafiltration are incapable of separating chromium from wastewater streams, and precipitation results in the production of sludge that requires dewatering, drying and disposal in a landfill. Certain of these other technologies also entail long process times, and are relatively expensive. 6 By contrast, the Company believes SLiM may be capable of handling a broad range of compounds in a faster and cost effective manner. Furthermore, the expected by-products of the SLiM process consist primarily of wastewater, which can be discharged as normal wastewater effluent, and to a lesser extent and in only rare circumstances, materials requiring landfill disposal. Separation technologies are currently utilized by a wide variety of domestic and international companies, including several large companies having substantially greater financial and other resources than the Company. Although the Company believes that SLiM may have advantages over many other known separation technologies, any one or more of the Company's competitors, or other enterprises not presently known, may develop technologies which are superior to SLiM. To the extent the Company's competitors are able to offer comparable services at lower prices or of higher quality, or more cost-effective alternatives, the Company's ability to compete effectively could be materially adversely affected. The Company believes that its ability to compete in both the commercial and governmental sectors is dependent upon SLiM being a superior, more cost-effective method to achieve separation and/or recovery of a variety of materials in varying amounts and configurations. In the event that the Company is unable to demonstrate that SLiM is a technologically superior and cost-effective alternative to other separation technologies on a commercial scale, the Company may not be able to compete successfully. GOVERNMENT REGULATION The Company and its customers are required to comply with a number of federal, state and local laws and regulations in the areas of safety, health and environmental controls, including, without limitation, the Resource Conservation and Recovery Act, as amended, and the Occupational Safety and Health Act of 1970, which may require the Company, its prospective working partners or its customers to obtain permits or approvals to utilize SLiM and related equipment on certain job sites. In addition, if the Company begins to market SLiM internationally, the Company will be required to comply with laws and regulations and, when applicable, obtain permits or approvals in those other countries. There is no assurance that such required permits and approvals will be obtained. Furthermore, particularly in the environmental remediation market, the Company may be required to conduct performance and operating studies to assure government agencies that SLiM and its by-products do not pose environmental risks. There is no assurance that such studies, if successful, will not be more costly or time-consuming than anticipated. Further, if new environmental legislation or regulations are enacted or existing legislation or regulations are amended, or are interpreted or enforced differently, the Company, its prospective working partners and/or its customers may be required to meet stricter standards of operation and to obtain additional operating permits or approvals. ENVIRONMENTAL MATTERS The Company's operations, as well as the use of specialized technical equipment by its customers, are subject to numerous federal, state and local regulations relating to the storage, handling and transportation of certain regulated materials. Although the Company's role is generally limited to the leasing of its specialized technical equipment for use by its customers, there is always the risk of the mishandling of such materials or technological or equipment failures, which could result in significant claims against the Company. Any such claims against the Company could materially adversely affect the Company's business, financial condition and results of operations. The Company maintains environmental liability insurance with limits of $1.0 million per occurrence and $2.0 million in the aggregate. Applied maintains, on behalf of itself and its subsidiaries (including the Company), contractor's pollution liability insurance with limits of $5.0 million per occurrence and $5.0 million in the aggregate. There can be no assurance that such insurance will provide coverage against all claims, and claims may be made against the Company (even if covered by an insurance policy) for amounts substantially in excess of applicable policy limits. Any such event could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of March 22, 2001, the Company had no full-time employees. 7 ITEM 2. PROPERTIES. ------- ----------- The Company also maintains executive offices located in New York City in approximately 2,000 square feet of space leased by an affiliate of Bentley J. Blum, a director and principal stockholder of Environmental and a director of the Company. Such space also serves as the principal executive offices of Environmental, Applied and certain of their affiliates. ITEM 3. LEGAL PROCEEDINGS. ------- ----------------- During the year ended December 31, 2000, and as of March 22, 2001, the Company was not involved in any litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ------ --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2000. 8 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON ------- EQUITY AND RELATED STOCKHOLDER MATTERS. --------------------------------------- MARKET INFORMATION The Company's common stock, par value $0.001 per share ("Common Stock"), 10% Senior Convertible Preferred Stock, par value $0.001 per share ("Convertible Preferred Stock"), and Redeemable Common Stock Purchase Warrants ("Warrants") began trading publicly on April 3, 1997 at initial public offering prices of $5.00 and $10.00 per share, respectively, and $0.10 per Warrant and were traded and quoted on the Nasdaq SmallCap Market ("Nasdaq") under the symbols CXOT, CXOTP and CXOTW, respectively, until February 18, 1999. At the close of business on February 18, 1999, at which time the Company's securities were delisted from the Nasdaq Stock Market because of the Company's inability to satisfy the revised maintain standards for continued listing on the Nasdaq Market System. The Company is currently listed on the OTC Bulletin Board. On March 22, 2001, there were 177 holders of record of Common Stock, two holders of record of Convertible Preferred Stock and 16 holders of record of Warrants. The following table sets forth, for the periods shown, the high and low bid prices of the Common Stock, Convertible Preferred Stock and Warrants (rounded to the nearest cent) as quoted by Nasdaq. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

DIVIDEND INFORMATION The holders of the Company's Convertible Preferred Stock are entitled to receive if, when and as declared by the Board of Directors out of funds legally available therefore, cumulative dividends at the rate of $1.00 per share per annum, quarterly on the last business day of March, June, September and December of each year, before any dividends are declared or paid on the Common Stock or any capital stock ranking junior to the Convertible Preferred Stock. The Company ceased paying cash dividends to the Holders of the Convertible Preferred Stock commencing with the Dividend for the quarter ended September 30, 1998. The Company does not anticipate that it will continue to pay similar cash dividends on its Convertible Preferred Stock in the foreseeable future. The Company has never paid cash dividends on its Common Stock and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Any future determination as to the payment of cash dividends on the capital stock of the Company will depend on the ability of the Company to service its outstanding indebtedness and future earnings, capital requirements, the financial condition of the Company and such other factors as the Company's Board of Directors may consider. 9 ITEM 6. SELECTED FINANCIAL DATA. ------- ------------------------ The selected financial data included in the following table as of June 30, 1997, December 31, 1997, 1998, 1999 and 2000, for the year ended June 30, 1997, for the six-month period ended December 31, 1997 and for the years ended December 31, 1998, 1999 and 2000 are derived from the audited Financial Statements of the Company appearing elsewhere herein. The financial data for the six-month period ended December 31, 1996 is unaudited and, in the opinion of management, includes all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes thereto appearing elsewhere herein.

(1) The Company is a development stage company and has had limited commercial operations to date. See Note 1 of Notes to Financial Statements. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS ------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ------------------------------------------------ GENERAL The Company was organized in November 1995, and has not generated material revenues or any profits through December 31, 2000. Since its inception, the Company has been engaged principally in organizational activities, including research and development, developing a strategic operating plan, entering into contracts, hiring personnel, developing and manufacturing commercial-scale units and installing and operating units on an extended basis for demonstration or test purposes. Accordingly, the Company has a limited operating history upon which an evaluation of its performance and prospects can be made. The Company is subject to all of the business risks associated with a new enterprise, including, but not limited to, risks of unforeseen capital requirements, failure of market acceptance, failure to establish business relationships, and competitive disadvantages as against larger and more established companies. The Company has generated nominal revenues to date. During the period from November 15, 1995 (date of inception) to December 31, 2000, the Company incurred a net loss of $13,328,000. For the year ended December 31, 2000, the Company incurred a loss of $1,915,000 and anticipates that it may continue to incur significant losses for the foreseeable future. There can be no assurance as to whether or when the Company will generate material revenues or achieve profitable operations. See "Business" and the Financial Statements and Notes thereto included elsewhere in this Annual Report. In April 2000, the Company was notified by Maryland Environmental Services ("MES") requesting the removal of the SliM equipment from the Port of Baltimore Dundalk Marine Terminal and Hawkins Point facilities. MES cited the fact that the Company had removed Chromium VI as per the requirements in the contract, however there remained trace amounts of Chromium III in the leachate, which resulted in the total chromium concentrations to exceed contract specified amounts. The Company has made several attempts to remove trace amounts of Chromium III, including the use of alternative technologies, however was unable to satisfy MES requirements. It should be noted that the original samples tested from the leachate solution did not have Chromium III present and therefore this problem was not foreseen. As a result, the Company has withdrawn its equipment from the Port of Baltimore and transferred it, along with its inventory, to a storage facility in Albuquerque, New Mexico. In June 2000, the Company closed its Kennesaw, Georgia facility. As a result, the Company transferred approximately $227,000 of lab equipment and furniture and fixtures to Commodore Environmental Services, Inc. "Environmental", the owner of 87% of the issued and outstanding common stock of the Company, in exchange for $227,000 of intercompany indebtedness. The remainder of equipment and inventory was transferred to a storage facility in Albuquerque, New Mexico. As a result of the closure, all of the employees in the Georgia facility have found other employment or have been released. As a result of the closure, the Company has recorded a reserve for inventory obsolescence of $519,000, an impairment reserve on long-lived assets of $428,000 and a write off of leasehold improvements of $85,000 in the year ended December 31, 2000. The Company plans to continue to search for applications for its technology. RESULTS OF OPERATIONS Year ended December 31, 2000 compared to year ended December 31, 1999 The Company obtained a contract from a customer in March 2000 ad recorded revenues of $66,000 for the year ended December 31, 2000. The Company commenced its contracts with the Port of Baltimore in February 1999 and generated revenues of $337,000 for the year ended December 31, 1999. Cost of sales amounted to $107,000 and $541,000 for the years ended December 31, 2000 and 1999. Cost of sales primarily include the cost of equipment, shipping and set up costs. Research and development costs were $114,000 for the year ended December 31, 2000 as compared to $338,000 for the year ended December 31, 1999. Since 1998, the Company began to shift its focus to commercializing the technology, thereby reducing its efforts in the research and development area 11 and focusing on getting the technology out to potential customers. Research and development costs include salaries, wages and other related costs of personnel engaged in research and development activities, as well as contract services and equipment used in research and development activities. Research and development costs are expensed when incurred. General and administrative expenses were $313,000 for the year ended December 31, 2000 as compared to $743,000 for the year ended December 31, 1999. In 1998, the Company began an effort to reduce its overhead expenses and placed more of a focus on developing its technology and getting it out to customers. In October 1998, the Company reduced the number of employees from twenty-three down to eight and has reduced its reliance on corporate infrastructure. In 2000, the company closed its Kennesaw facility. In June 2000, the Company closed its Kennesaw, Georgia facility. As a result, the Company transferred approximately $227,000 of lab equipment and furniture and fixtures to Commodore Environmental Services, Inc. "Environmental", the owner of 87% of the issued and outstanding common stock of the Company, in exchange for $227,000 of intercompany indebtedness. The remainder of equipment and inventory was transferred to a storage facility in Albuquerque, New Mexico. As a result of the closure, all of the employees in the Georgia facility have found other employment or have been released. As a result of the closure, the Company has recorded a reserve for inventory obsolescence of $519,000, an impairment reserve on long-lived assets of $428,000 and a write off of leasehold improvements of $85,000 in the year ended December 31, 2000. The Company also recorded an impairment of intangible assets of $175,000 in the year ended December 31, 2000. The Company plans to continue to search for applications for its technology. The Company has no ongoing operations as of December 31, 2000. Depreciation and amortization decreased to $235,000 in 2000 from $507,000 in 1999 as a result of the write down of fixed assets in June of 2000. These fixed assets include SLiM units and modules used in the Company's technology process. Sales and marketing expense increased to $18,000 in 2000 from $12,000 in 1999 as a result of the Company focusing on trying to identify new markets for applications of its technology. Interest income was $13,000 in 2000 as compared to $18,000 in 1999. Interest was earned on the restricted cash which was invested in certificates of deposit. These certificates of deposit collateralized outstanding letters of credit relating to the Port of Baltimore projects. RESULTS OF OPERATIONS Year ended December 31, 1999 compared to year ended December 31, 1998 The Company commenced its contracts with the Port of Baltimore in February 1999 and generated revenues of $337,000 for the year then ended as compared to $0 for the year ended December 31, 1998. These revenues were generated primarily from the contract with Maryland Environmental Services at the Port of Baltimore. Cost of sales amounted to $541,000 for the year ended December 31, 1999. Cost of sales primarily include the cost of equipment, shipping and set up costs. Research and development costs were $338,000 for the year ended December 31, 1999 as compared to $1,299,000 for the year ended December 31, 1998. Since 1998, the Company began to shift its focus to commercializing the technology, thereby reducing its efforts in the research and development area and focusing on getting the technology out to potential customers. Research and development costs include salaries, wages and other related costs of personnel engaged in research and development activities, as well as contract services and equipment used in research and development activities. Research and development costs are expensed when incurred. General and administrative expenses were $743,000 for the year ended December 31, 1999 as compared to $1,096,000 for the year ended December 31, 1998. In 1998, the Company began an effort to reduce its overhead expenses and placed more of a focus on developing its technology and getting it out to customers. In October 1998, the Company reduced the number of employees from twenty-three down to eight and has reduced its reliance on corporate infrastructure. 12 Depreciation and amortization increased to $507,000 in 1999 from $408,000 in 1998 as a result of the purchase and related depreciation of fixed assets. These fixed assets include SLiM units and modules used in the Company's technology process. Corporate overhead expenses decreased to $0 in 1999 from $529,000 in 1998 as a result of reduced reliance on corporate personnel and elimination of administrative expenses charged by its parent. Sales and marketing expense decreased to $12,000 in 1999 from $417,000 in 1998 as a result of the Company's focus on the commencing of operations. The Company is trying to identify new markets for applications of its technology, however its main focus is on commencing its operations. Interest income was $18,000 in 1999 as compared to $101,000 in 1998. The Company successfully completed an initial public offering in April 1997 and through 1998 had generated interest income from the proceeds of the offering. Year ended December 31, 1998 compared to year ended December 31, 1997 Research and development costs were $1,299,000 for the year ended December 31, 1998 as compared to $1,390,000 for the year ended December 31, 1997. During 1998, the Company began to shift its focus to commercializing the technology, thereby reducing its efforts in the research and development area and focusing on getting the technology out to potential customers. Research and development costs are expensed when incurred. General and administrative expenses were $1,096,000 for the year ended December 31, 1998 as compared to $1,800,000 for the year ended December 31, 1997. In 1998, the Company began an effort to reduce its overhead expenses and placed more of a focus on developing its technology and getting it out to customers. In October 1998, the Company reduced the number of employees from twenty-three down to eight and has reduced its reliance on corporate infrastructure. Depreciation and amortization increased from $234,000 in 1997 to $408,000 in 1998 as a result of the purchase and related depreciation of fixed assets. These fixed assets include SLiM units and modules used in the Company's technology process. Corporate overhead expenses decreased from $1,616,000 in 1997 to $529,000 in 1998 as a result of reduced reliance on corporate personnel and a decrease in other administrative expenses charged by its parent. Sales and marketing expense increased from $281,000 in 1997 to $417,000 in 1998 as a result of the Company's focus on getting the technology out to potential customers. In addition, the Company is trying to identify new markets for applications of its technology. Interest income was $101,000 in 1998 as compared to $294,000 in 1997. The Company successfully completed an initial public offering in April 1997 and through 1998 has generated interest income from the proceeds of the Company's IPO. LIQUIDITY AND CAPITAL RESOURCES Through April 1997, the Company financed its development efforts through direct equity investments and loans from Commodore Environmental Services, Inc. ("Environmental") and Applied. From November 15, 1995 (date of inception) to December 31, 2000, the Company purchased or constructed equipment totaling $1,894,000 and has incurred patent filing and maintenance costs of $213,000. In December 1996, as part of a corporate restructuring to consolidate all of its current environmental technology businesses within Applied, Environmental transferred to Applied all of the then outstanding shares of capital stock of the Company and another Environmental subsidiary. In addition, Environmental assigned to Applied, outstanding Company notes aggregating $976,200 at December 2, 1996, representing advances previously made by Environmental to the Company. Such advances have been capitalized by Applied as its capital contribution to the Company. In consideration for such transfers, Applied paid Environmental $3,000,000 in cash and issued to Environmental a warrant to purchase 7,500,000 shares of Applied's common stock. See "Certain Relationships and Related Transactions--Organization and Capitalization of the Company." Effective as of September 28, 1998 Commodore Environmental Services LLC, a Delaware limited liability company wholly owned by Environmental acquired 13 10,000,000 shares of common stock, par value $.001 per share (the "Company Stock"), of the Company, representing approximately 87% of the issued and outstanding shares of capital stock of the Company, from Applied, as part of a debt repayment plan between Environmental and Applied. In addition, Environmental received 3,570 shares of the Company's Series B Preferred Stock which converts into 2,380,000 shares of the Company's common stock in exchange for indebtedness to the Company of $357,000. The transaction was consummated on December 25, 1998. Environmental, as of March 15, 2001, owns approximately 30% of the outstanding shares of Applied common stock. Bentley J. Blum, a director of Environmental and the beneficial owner of approximately 52% of the outstanding shares of Environmental common stock, is also a director of Applied and the Company. By virtue of the foregoing transaction, the Company has become the direct, 86%-owned subsidiary of Environmental. Paul E. Hannesson, the Chairman of the Board, President and Chief Executive Officer of Applied and the Chairman of the Board and Chief Executive Officer of the Company, and James M. DeAngelis, the Vice President--Finance and Treasurer of Applied and the Vice President--Sales & Marketing of the Company, will maintain their current management positions in the Company. The acquisition of the Company by Environmental will be accounted for under the purchase method of accounting. The Company has sustained losses of $1,915,000, $1,786,000 and $3,629,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company had no significant revenues during the period from November 15, 1995 (date of inception) to December 31, 2000. Substantially all of the Company's losses are attributable to the expenses detailed above. At December 31, 2000 the Company had a working capital deficit of $3,111,000 and a stockholders' deficit of $3,111,000. The Company's decrease in working capital is principally due to the net loss for the period and dividends paid or accrued on the Company's Convertible Preferred Stock. The net loss includes impairments and write-offs of the Company's assets. The Company has been obtaining financing from Commodore Environmental Services, Inc., the owner of 86% of the outstanding shares of Common Stock, however there can be no assurance that the Company will continue to be able to obtain additional financing from Environmental. The Company is continuing to pursue external financing. NET OPERATING LOSSES At December 31, 2000, the Company had tax loss carryforwards of approximately $13,300,000. The amount of and ultimate realization of benefit from the net operating loss for income tax purposes is dependent, in part, upon the tax laws in effect, future earnings of the Company, and other future events, the effects of which cannot be determined. A change in ownership of the Company may reduce the amount of loss allowable. These net operating carryforwards begin to expire in 2011. A full valuation allowance has been established because of the uncertainty about whether the Company will realize the benefit of net operating losses. YEAR 2000 CONSIDERATIONS Prior to January 1, 2000, there was a great deal of concern regarding the ability of computers to adequately recognize 21st century dates from 20th century dates due to the two-digit date fields used by many systems. Most reports to date, however, are that computer systems are functioning normally and the compliance and remediation work accomplished during the years leading up to 2000 was effective to prevent any problems. As of the date of this prospectus, the Company has not experienced any such computer difficulty; however, computer experts have warned that there may still be residual consequences of the change in centuries and any such difficulties may, depending upon their pervasiveness and severity, have a material adverse effect on the Company's business, financial condition and results of operations. Any of the following could have a material adverse effect on the Company's business, financial condition and results of operations: o a failure to fully identify all year 2000 dependencies in the Company's systems; o a failure to fully identify all year 2000 dependencies in the systems of third parties with whom the Company does business; o a failure of any third party with whom the Company does business to adequately address their year 2000 issues; o the failure of any contingency plans develop to protect the Company's business and operations from year 2000-related interruptions; and 14 o delays in the implementation of new systems resulting from year 2000 problems. 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 that would affect any such forward-looking statements. These risks and uncertainties include, but are not limited to, the ability of the Company to commercialize its technology; product demand and industry pricing; the ability of the Company to obtain patent protection for its technology; developments in environmental legislation and regulation; the ability of the company to obtain future financing on favorable terms; and other circumstances affecting anticipated revenues and costs. These risks and uncertainties could cause actual results of the Company to differ materially from those projected or implied by such forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. -------- ----------------------------------------------------------- Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------- -------------------------------------------- The financial statements of the Company are included on pages F-1 through F-24 of this Annual Report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ------ ON ACCOUNTING AND FINANCIAL DISCLOSURE. --------------------------------------------- On August 17, 1999, the Company dismissed its former auditors, PricewaterhouseCoopers LLP ("PwC"). Additionally as of August 17, 1999, the Company retained Tanner + Co. ("Tanner") to serve as their independent auditors. The decision to terminate its relationship with PwC was approved by the Board of Directors of the Company. For the year ended December 31, 1998, for the six-month period ended December 31, 1997 and for the year ended June 30, 1997, PwC reports on the Company's financial statements (a development stage company) neither contained any adverse opinions or disclaimers of opinions nor were qualified or modified as to uncertainty, audit scope or accounting principle, except that PwC's auditors report on the Company's consolidated financial statements for the year ended December 31, 1998 contained an additional paragraph relating to the Registrant continuing as a going concern due to the Company's recurring losses from operations and net cash outflows from operations. 15 In connection with the audits for the year ended December 31, 1998, for the six month period ended December 31, 1997 and for the year ended June 30, 1997 and through August 17, 1999, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused it to make reference to the subject matter of the disagreements in connection with its report. No "reportable events" as described under Item 304(a)(1)(v) of Regulation S-K occurred during the year ended December 31, 1998, during the six-month period ended December 31, 1997 and during the year ended June 30, 1997. Prior to engaging Tanner, the Company did not consult Tanner regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K. 16 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 28, 2001, are as follows:

Paul E. Hannesson has been a director of the Company since its inception, served as its Chairman of the Board from November 1995 to January 1997, and was re-appointed Chairman of the Board and appointed Chief Executive Officer in May 1997. Mr. Hannesson has been a director of Applied since March 1996 and served as Chairman of the Board from November 1996 through January 2001. Mr. Hannesson also served as Chief Executive Officer of Applied from March to October 1996 and as President of Applied from March to September 1996, and was re-appointed Chief Executive Officer of Applied in November 1996 and President in May 1997, positions he served until January 2001. Mr. Hannesson has been a director of Environmental since February 1993 and was appointed its Chairman of the Board and Chief Executive Officer in November 1996. Mr. Hannesson also served as President of Environmental from February 1993 to July 1996 and was re-appointed President in May 1997. Mr. Hannesson was a private investor and business consultant, from 1990 to 1993. Mr. Hannesson is the brother-in-law of Bentley J. Blum, a director of the Company. Carl O. Magnell, P.E. has served as President of the Company since May 1998, succeeding Kenneth J. Houle, former President and Chief Operating Officer, upon Mr. Houle's death in May 1998. Mr. Magnell also served as Vice President of Applied from June 1996, was appointed Vice President - Technology & Business Development of Applied in June 1997 and from February 1998 until April 1998 served as Vice President - Technology and Sales & Sales of Applied. Mr. Magnell also served as Vice President of Environmental from September 1995 to June 1996. From 1992 to 1995, Mr. Magnell served as Director of Research for Civil Engineering Research Foundation (an industry-sponsored engineering research group), and from 1964 to 1992 Mr. Magnell served in various engineering capacities with the U.S. Army Corps of Engineers. Mr. Magnell holds a B.S. degree from the United States Military Academy, and an M.S. in civil engineering and political science from the Massachusetts Institute of Technology. James M. DeAngelis was appointed Senior Vice President--Sales & Marketing of the Company in July 1996, after having served as its Vice President--Marketing since November 1995. Mr. DeAngelis has also served as the President of CFC Technologies since September 1994, and served as Vice President--Marketing of Environmental from September 1992 to September 1995. Prior to September 1992, Mr. DeAngelis was completing M.B.A. and Masters in International Management degrees from the American Graduate School of International Management. Mr. DeAngelis holds B.S. degrees in Biology and Physiology from the University of Connecticut. Bentley J. Blum has been a director of the Company since August 1996. Mr. Blum has served as a director of Applied since March 1996 and served as its Chairman of the Board from March to November 1996. Mr. Blum has served as a director of Environmental since 1984 and served as its Chairman of the Board 17 from 1984 to November 1996. Mr. Blum also currently serves as a director of Solution and CFC Technologies. For more than 15 years, Mr. Blum has been actively engaged in real estate acquisitions and currently is the sole stockholder and director of a number of corporations that hold real estate interests, oil drilling interests and other corporate interests. Mr. Blum is a principal stockholder of Environmental and is the brother-in-law of Paul E. Hannesson, the Chairman of the Board and Chief Executive Officer of the Company. Each director is elected to serve for a term of one year or until his 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. On March 28, 2000, Herbert A. Cohen, David L. Mitchell, William R. Toller and Kenneth L. Adelman resigned from the Board of Directors of the Company. COMPENSATION OF DIRECTORS Each non-management director of the Company receives a director's fee of $500 per meeting for attendance at Board of Directors meetings, and is reimbursed 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 Common Stock of the Company, to file initial reports of beneficial ownership and reports of changes in beneficial ownership of shares of Common Stock with the Securities and Exchange Commission (the "Commission") and Nasdaq. Such persons are required by Commission regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the year ended December 31, 2000, and upon a review of Forms 5 and amendments thereto furnished to the Company with respect to the year ended December 31, 2000, or upon written representations received by the Company from certain reporting persons that no Forms 5 were required for those persons, the Company believes that no director, executive officer or holder of more than 10% of the shares of Common Stock of the Company 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, 2000. 18 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 the fiscal years ended December 31, 2000, 1999 and 1998, to the person serving as the Company's current Chief Executive Officer, to each of the Company's most highly compensated executive officers other than the Chief Executive Officer whose total salary and bonus compensation exceeded $100,000 during any such period.

-------------------- (1) Represents the amount of Mr. Hannesson's base salary allocated to the Company for such period. Mr. Hannesson's total base salary for calendar year 1998 was $434,500. Certain portions of such base salary were also allocated to Applied and Environmental. See "Certain Relationships and Related Transactions--Services Agreement." (2) Represents the amount of Mr. Hannesson's automobile allowance allocated to the Company for such period. Mr. Hannesson's total automobile allowance for 1998 was $12,000. Certain portions of such automobile allowance were also allocated to Applied and Environmental. (3) Mr. Houle passed away in May 1998. STOCK OPTIONS No stock options were granted in 2000 or 1999. The Company has no outstanding stock appreciation rights and granted no stock appreciation rights during the year ended December 31, 2000. 19 EMPLOYMENT AGREEMENTS Paul E. Hannesson, the Company's Chairman of the Board and Chief Executive Officer, entered into an employment agreement with Environmental as of November 18, 1996 for a term expiring on December 31, 1999. Pursuant to such employment agreement, Mr. Hannesson agreed to devote his business and professional time and efforts to the business of Environmental as a senior executive officer, and to serve in senior executive positions with one or more of Environmental's affiliates, including the Company. The employment agreement provides that Mr. Hannesson shall receive, among other things, a base salary at an annual rate of $395,000 through December 31, 1997, and will receive not less than $434,500 through December 31, 1998 and not less than $477,950 through December 31, 1999, for services rendered to Environmental and its affiliates, including the Company. Pursuant to the employment agreement, Mr. Hannesson received, among other things: (i) a signing bonus of (a) $150,000 cash and (b) stock options to purchase 950,000 shares of common stock of Environmental, which options vested on the date of his employment agreement; and (ii) options to purchase an aggregate of 2,500,000 shares of Environmental common stock, exercisable in installments over a period of five years commencing on the date of his employment agreement. Mr. Hannesson also received options to purchase common stock of the Company and Applied in the amount of 1.0% of each company's total outstanding shares of common stock on the date of grant, and is eligible to receive incentive compensation of up to $225,000 per year for achieving certain goals. Mr. Hannesson's base salary increased from $395,000 for calendar year 1997 to $434,500 for calendar year 1998, representing an increase of approximately 10%. Such base salary was allocated among the Company, Applied and Environmental based upon the amount of time and effort devoted by Mr. Hannesson to the respective businesses of such companies. Consequently, the Company, Applied and Environmental paid $94,504, $250,526 and $58,658, respectively, of such salary. Mr. Hannesson also received an automobile allowance of $12,000 for the 1998 calendar year, and the Company, Applied and Environmental paid $2,610, $7,770 and $1,620, respectively, of such allowance. For the 1997 calendar year, Mr. Hannesson was awarded an incentive bonus of $100,000. Such bonus was allocated among the Company, Applied and Environmental based upon the amount of time and effort devoted by Mr. Hannesson to the respective businesses of such companies. Consequently, the Company, Applied and Environmental paid $32,770, $63,356 and $3,874, respectively, of such bonus. In June 1998, Mr. Hannesson's Employment Agreement was assigned from Environmental to Applied. On September 28, 1998, the Company was sold by Applied to Environmental and effective as of that date the costs associated with Mr. Hannesson's employment agreement ceased being allocated to the Company. The employment agreements also provide for termination by the Company upon death or disability (defined as three aggregate months of incapacity during any 365-consecutive day period) or upon conviction of a felony crime of moral turpitude or a material breach of their obligations to the Company. In the event any of the employment agreements are terminated by the Company without cause, such executive will be entitled to compensation for the balance of the term. The employment agreements also contain covenants (a) restricting the executive from engaging in any activities competitive with the business of the Company during the terms of such employment agreements and one year thereafter, (b) prohibiting the executive from disclosure of confidential information regarding the Company at any time, and (c) confirming that all intellectual property developed by the executive and relating to the business of the Company constitutes the sole and exclusive property of the Company. See "Certain Relationships and Related Transactions--Services Agreement." ITEM 12. SECURITY OWNERSHIP OF CERTAIN -------- BENEFICIAL OWNERS AND MANAGEMENT. --------------------------------- The following table sets forth certain information with respect to the beneficial ownership of the Company's common stock as of March 22, 2001 by (i) each person known to the Company to be the beneficial owner of more than 5% of the outstanding shares of the Company's common stock, (ii) each director of the Company, (iii) each executive officer of the Company, and (iv) all executive officers and directors of the Company as a group, as reported by such persons. Unless otherwise indicated, the owners have sole voting and investment power with respect to their respective shares.

------------------------ * Percentage ownership is less than 1%. (1) The address of each of Commodore Environmental Services, Inc., Bentley J. Blum, Paul E. Hannesson and James M. Deangelis is 150 East 58th Street, Suite 3400, New York, New York 10155. Bentley J. Blum and Paul E. Hannesson are brothers-in-law. (2) As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose 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. (3) Consists of: (a) 10,000,000 shares of the Company's Common Stock held by Commodore Environmental Services LLC, a wholly owned subsidiary of Commodore Environmental Services, Inc.; and (b) 2,380,000 shares of the Company's Common Stock underlying 3,570 shares of the Company's Series B preferred stock held by Commodore Environmental Services, Inc. (4) Consists of: (a) 50,000 shares of the Company's Common Stock underlying currently exercisable options granted to Mr. Blum by the Company under the Plan; and (b) Mr. Blum's indirect beneficial ownership of the Company's common stock based upon Mr. Blum's beneficial ownership of (i) 28,479,737 shares and his spouse's ownership of 2,000,000 shares of common stock of Environmental, and (ii) 4,500,000 shares of common stock of Environmental underlying currently exercisable stock options, representing together 41.0% of the outstanding shares of Environmental common stock. Does not include 450,400 shares of Environmental common stock owned by Simone Blum, the mother of Mr. Blum, and 385,000 shares of Environmental common stock owned by Samuel Blum, the father of Mr. Blum. Mr. Blum disclaims any beneficial interest in the shares of Environmental common stock owned by his spouse, mother and father. (5) Consists of: (a) 280,000 shares of Common Stock underlying currently exercisable stock options granted to Mr. Hannesson by the Company under the Plan and (b) Mr. Hannesson's indirect beneficial ownership of Common Stock based upon his beneficial ownership of an aggregate of (i) 2,650,000 shares of Environmental common stock owned by Suzanne Hannesson, the spouse of Mr. Hannesson, (ii) 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, (iii) 500,000 shares of Environmental common stock issued to the Hannesson Family Trust in exchange for the surrender of options to purchase 950,000 shares of Environmental common stock (iv) currently exercisable options to purchase 525,705 shares of Environmental common stock, representing in the aggregate 7.8% of the outstanding shares of Environmental common stock. Does not include 1,000,000 shares of Environmental common stock owned by each of Jon Paul and Krista Hannesson, the adult children of Mr. Hannesson. Mr. Hannesson disclaims any beneficial interest in the shares of Environmental common stock owned by or for the benefit of his spouse and children. (6) Consists of: (a) 1,000 shares of Common Stock; (b) 1,000 shares of Common Stock underlying currently exercisable warrants; (c) 187,500 shares of Common Stock underlying currently exercisable stock options granted to Mr. DeAngelis by the Company under the Plan; and (d) Mr. DeAngelis' indirect beneficial ownership of Common Stock based upon his beneficial ownership of 580,000 shares of Environmental common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. -------- ----------------------------------------------- ORGANIZATION AND CAPITALIZATION OF THE COMPANY The Company was organized in November 1995 as a wholly-owned subsidiary of Environmental. In February 1996, pursuant to an assignment of technology agreement between the Company and Srinivas Kilambi, Ph.D., the Company's former Senior Vice President--Technology, the Company acquired rights to the SLiM technology from Dr. Kilambi. In consideration for such technology, the Company caused Environmental to transfer to Dr. Kilambi 200,000 shares of Environmental common stock and agreed to pay Dr. Kilambi a royalty through December 3, 2002 equal to 2% of the Company's revenues actually received and attributed to the commercial application of the acquired technology, except for applications related to the radionuclides, technetium and rhenium, for which Dr. Kilambi is entitled to receive a royalty of 0.66% of net sales (less allowances for returns, discounts, commissions, freight, and excise or other taxes). In exchange for Environmental's issuance of such shares to Dr. Kilambi, as well as Environmental's funding and support of the Company, the Company issued to 21 Environmental 10,000,000 shares of Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." From the Company's inception to December 1996, Environmental financed the research and development activities of the Company through direct equity investments and loans to the Company. In December 1996, as part of a corporate restructuring to consolidate all of its environmental technology businesses within Applied, Environmental transferred to Applied all of the outstanding shares of capital stock of the Company and CFC Technologies. In addition, Environmental assigned to Applied outstanding Company notes aggregating $976,200 at December 2, 1996, representing advances previously made by Environmental to the Company. Such advances have been capitalized by Applied as its capital contribution to the Company. In consideration for such transfers, Applied paid Environmental $3,000,000 in cash and issued to Environmental a warrant expiring December 2, 2003 to purchase 7,500,000 shares of Applied common stock at an exercise price of $15.00 per share. Such warrant was subsequently amended to, among other things, reduce the exercise price thereof from $15.00 per share to $10.00 per share. Such warrant is valued at $2.4 million and contains provisions granting certain registration rights with respect to the warrant shares. As a result of the IPO, Applied owned 87% of the outstanding shares of Common Stock of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Effective September 28, 1998, Commodore Environmental Services LLC, a Delaware limited liability company wholly owned by Environmental, acquired 10,000,000 shares of common stock, par value $.001 per share (the "Company Stock"), of the Company, representing approximately 87% of the issued and outstanding shares of capital stock of the Company, from Applied, as part of a debt repayment plan between Environmental and Applied. In addition, Environmental received 3,570 shares of the Company's Series B Preferred Stock that converts into 2,380,000 shares of the Company's common stock in exchange for indebtedness to the Company of $357,000. The acquisition was consummated on December 25, 1998. Environmental currently owns approximately 16% of the outstanding shares of Applied common stock. Bentley J. Blum, a director of COES and the beneficial owner of approximately 38% of the outstanding shares of Environmental common stock, is also a director of Applied and the Company. By virtue of the foregoing transaction, the Company had become the direct, 87%-owned subsidiary of Environmental. Paul E. Hannesson, the Chairman of the Board, President and Chief Executive Officer of Applied and the Chairman of the Board and Chief Executive Officer of the Company, and James M. DeAngelis, the Vice President--Finance and Treasurer of Applied and the Vice President--Sales & Marketing of the Company, maintained their current management positions in the Company. The acquisition of the Company by Environmental was accounted for under the purchase method of accounting. OFFICES The Company maintains approximately 2,000 square feet of office space in New York, New York, which also serves as offices of Environmental, Applied, certain of their affiliates, and Messrs. Bentley J. Blum and Paul E. Hannesson. SERVICES AGREEMENT In September 1997, the Company, Applied, Environmental, Advanced Sciences, and certain other affiliates of the Company (the "Affiliated Parties") entered into a services agreement, dated as of September 1, 1997 (the "Services Agreement"), whereby the Company and the Affiliated Parties agreed to cooperate in sharing, where appropriate, costs related to accounting services, financial management, human resources and personnel management and administration, information systems, executive management, sales and marketing, research and development, engineering, technical assistance, patenting, and other areas of service as are appropriately and necessarily required in the operations of the Company and the Affiliated Parties (collectively, the "Services"). Pursuant to the Services Agreement, services provided by professional employees of the Company and the Affiliated Parties to one another are charged on the basis of time actually worked as a percentage of salary (including cost of benefits) attributable to that professional. In addition, charges for rent, utilities, office services and other routine charges regularly incurred in the normal course of business are apportioned to the professionals working in the office on the basis of salary, and then charged to any party in respect of whom the professional devoted such time based upon time actually worked. Furthermore, charges from third parties, including, without limitation, consultants, attorneys and accountants, are levied against the party actually receiving the benefit of such services. Pursuant to the Services Agreement, Applied acts as the coordinator of billings and payments for Services on behalf of itself, the Company and the other Affiliated Parties. 22 FUTURE TRANSACTIONS In connection with the IPO, the Company's Board of Directors adopted a policy whereby any future transactions between the Company and any of its subsidiaries, affiliates, officers, directors, principal stockholders or any affiliates of the foregoing will be on terms no less favorable to the Company than could reasonably be obtained in "arm's length" transactions with independent third parties, and any such transactions will also be approved by a majority of the Company's disinterested outside directors. 23 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT ------- SCHEDULES AND REPORTS ON FORM 8-K. ---------------------------------- The following documents are filed as part of this Annual Report:

All financial statement schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and, therefore, have been omitted. Exhibits. -------- Exhibit No. Description ----------- ----------- 1.1 Form of Underwriting Agreement between the Company and National Securities Corporation, as Representative of the several Underwriters listed therein (the "Representative").(5) 3.1 Restated Certificate of Incorporation of the Company.(1) 3.2 By-Laws of the Company.(1) 4.1 Specimen Common Stock Certificate.(2) 4.2 Form of Warrant Agreement among the Company, the Representative and the Bank of New York.(5) 4.3 Specimen Warrant Certificate.(3) 4.4 Form of Representative's Warrant Agreement between the Company and the Representative, including form of Representative's Warrant therein.(5) 4.5 Specimen Convertible Preferred Stock Certificate.(3) 4.6 Form of Certificate of Designation, Preferences and Rights of 10% Senior Convertible Redeemable Preferred Stock of the Company.(6) 4.7 Certificate of Designation, Preferences and Rights of Series B Convertible Redeemable Preferred Stock of the Company. 24 10.1 Employment Agreement, dated as of August 1, 1996, between the Company and Alan R. Burkart.(1) 10.2 Employment Agreement, dated as of September 1, 1996, between the Company and Carl O. Magnell.(1) 10.3 Employment Agreement, dated as of September 1, 1996, between the Company and James M. DeAngelis.(1) 10.4 Employment Agreement, dated as of September 1, 1996, between the Company and Srinivas Kilambi, Ph.D.(1) 10.5 Employment Agreement, dated as of September 1, 1996, between the Company and Michael D. Kiehnau.(1) 10.6 1996 Stock Option Plan of the Company.(1) 10.7 Executive Bonus Plan of the Company.(1) 10.8 Memorandum of Understanding, dated August 30, 1996, between the Company and Teledyne Brown Engineering, a Division of Teledyne Industries, Inc., as amended.(1) and (5) 10.9 Memorandum of Understanding, dated August 29, 1996, between the Company and Sverdrup Environmental, Inc., as amended.(1) and (5) 10.10 Services Agreement, dated August 31, 1996, between the Company and Commodore CFC Technologies, Inc.(1) 10.11 Assignment of Technology Agreement, dated as of December 4, 1995, by and between the Company (formerly Commodore Membrane Technologies, Inc.) and Srinivas Kilambi, Ph.D.(1) 10.12 Employment Agreement, dated as of October 31, 1996, between Environmental and Edwin L. Harper, Ph.D.(3) 10.13 Undivided Rights (Sole Commercial) License Agreement, dated January 5, 1997, between Lockheed Martin Energy Research Corporation and the Company.(3) 10.14 Stock Purchase Agreement, dated as of December 2, 1996, by and between Environmental and Applied.(3) 10.15 Form of Revolving Credit Agreement between the Company and Environmental.(5) 10.16 Employment Agreement, dated as of January 27, 1997, between the Company and Kenneth J. Houle.(4) 10.17 Employment Agreement, dated as of November 18, 1996, between Environmental and Paul E. Hannesson.(7) 10.18 Employment Agreement, dated May 7, 1997, between Environmental and Michael D. Fullwood.(7) 10.19 Equipment Lease, dated as of November 25, 1997, between the Company and Maryland Environmental Service.(8) 10.20 License Agreement, dated as of November 25, 1997, between the Company and Maryland Environmental Service.(8) 10.21 Equipment Lease, dated as of February 5, 1998, between the Company and Maryland Environmental Service.(8) 25 10.22 License Agreement, dated as of February 5, 1998 between the Company and Maryland Environmental Service.(8) 10.23 Debt repayment agreement, dated as of September 28, 1998 between Environmental and Applied.(9) 22.1 Subsidiaries of the Company.(1) -------------------------- * Filed herewith. (1) Incorporated herein by reference and filed as an Exhibit to the Registrant's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 12, 1996 (File No. 333-11813) (the "Registration Statement"). (2) Incorporated herein by reference and filed as an Exhibit to Amendment No. 1 to the Registration Statement filed with the Securities and Exchange Commission on October 18, 1996. (3) Incorporated herein by reference and filed as an Exhibit to Amendment No. 3 to the Registration Statement filed with the Securities and Exchange Commission on January 23, 1997. (4) Incorporated herein by reference and filed as an Exhibit to Amendment No. 4 to the Registration Statement filed with the Securities and Exchange Commission on January 28, 1997. (5) Incorporated herein by reference and filed as an Exhibit to Amendment No. 5 to the Registration Statement filed with the Securities and Exchange Commission on March 13, 1997. (6) Incorporated herein by reference and filed as an Exhibit to Amendment No. 6 to the Registration Statement filed with the Securities and Exchange Commission on March 25, 1997. (7) Incorporated herein by reference and filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997. (8) Incorporated herein by reference and filed as an Exhibit to the Company's Transition Report on Form 10-K for the six months ended December 31, 1997. (9) Incorporated herein by reference and filed as an Exhibit to the Company's Form 8-K dated December 25, 1998 and filed with the Securities and Exchange Commission on January 5, 1999. Reports on Form 8-K: ------------------- None. 26 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 11, 2001 COMMODORE SEPARATION TECHNOLOGIES, INC. By: /s/ Paul E. Hannesson ------------------------------------- Paul E. Hannesson, Chairman of the Board and Chief Executive 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/ James M. DeAngelis Senior Vice President, Sales and April 11, 2001 ---------------------- Marketing (principal financial and James M. DeAngelis accounting officer) /s/ Paul E. Hannesson Chairman of the Board and Chief April 11, 2001 ---------------------- Executive Officer (principal Paul E. Hannesson executive officer) /s/ Bentley J. Blum Director April 11, 2001 ---------------------- Bentley J. Blum 27 COMMODORE SEPARATION TECHNOLOGIES, INC. Financial Statements December 31, 2000 and 1999 COMMODORE SEPARATION TECHNOLOGIES, INC. Index -------------------------------------------------------------------------------- Page ---- Independent Auditors' Reports Tanner + Co. F-1 PricewaterhouseCoopers, LLP F-2 Balance Sheet as of December 31, 2000 and 1999 F-3 Statement of Operations for the years ended December 31, 2000, 1999 and 1998, and cumulative amounts since inception F-4 Statement of Stockholders' Deficit Period November 15, 1995 (date of inception) through December 31, 2000 F-5 Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998, and cumulative amounts since inception F-8 Notes to Financial Statements F-10 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Commodore Separation Technologies, Inc. We have audited the balance sheet of Commodore Separation Technologies, Inc. (a development stage company) as of December 31, 2000 and 1999 and the related statements of operations, stockholders' deficit and cash flows for the years then ended and the period from November 15, 1995 (date of inception) to December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 financial statements referred to above present fairly, in all material respects, the financial position of Commodore Separation Technologies, Inc. (a development stage company) as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended, and the period from November 15, 1995 (date of inception) to December 31, 2000 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2, the Company's significant operating losses, deficits in working capital, and net stockholder's deficit raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 2. The accompanying financial statements do not include any adjustment that might be the result from the outcome of this uncertainly. Salt Lake City, Utah January 19, 2001 F-1 Report of Independent Accountants To the Board of Directors and Stockholders of Commodore Separation Technologies, Inc. (a development stage company): In our opinion, the accompanying statements of operations, of stockholders' deficit and of cash flows for the year ended December 31, 1998 present fairly, in all material respects, the results of operations and cash flows of Commodore Separation Technologies, Inc. (a development stage company) for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. We have not audited the financial statements of Commodore Separation Technologies, Inc. for any period subsequent to December 31, 1998. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and net cash outflows from operations. These facts raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania April 13, 1999 F-2

See accompanying notes to financial statements.

Non cash investing and financing activities: The Company accrued dividends on preferred stock of $599, $616 and $300 which were not declared, or paid, for the years ending December 31, 2000, 1999 and 1998, respectively. During the year ended December 31, 2000, the Company reduced a payable to its parent company, Commodore Environmental Services, by $227, in exchange for assets. -------------------------------------------------------------------------------- See accompanying notes to financial statements. F-9 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 1. Organization Organization and Commodore Separation Technologies, Inc. (a development Significant stage company) (the "Company") was incorporated on Accounting November 15, 1995, under the laws of the State of Policies Delaware. Effective February 29, 1996, the Company acquired the rights to its proprietary separation technology and entered into a royalty agreement with the inventor of the technology as described in Note 6. The Company is a process technology company which has developed and intends to commercialize its separation technology and recovery system, known as SLiM(TM). The Company believes SLiM(TM) is capable of effectively separating and extracting various solubilized materials, including metals, organic chemicals, biochemicals, radionuclides and other targeted substances, from liquid and possibly gaseous process streams. The Company has commenced planned principal operations but has not received significant revenue therefrom. As such, the Company is considered a development stage company as defined in Statement of Financial Accounting Standards ("SFAS") No. 7. Cash and Cash Equivalents Cash and cash equivalents include cash and investments in money market funds with remaining maturities of 90 days or less at the time of purchase. Restricted Cash Restricted cash consists of certificates of deposit that act as a partial compensating balance for $600 of letters of credit which represent collateral for a performance bond related to a contract with the Port of Baltimore. Inventory Inventory represents finished goods and consists of machinery and equipment built and held for sale. Inventory is recorded at the lower of historical cost per unit or market. During the year ended December 31, 2000, the Company determined the market value of inventory to be zero and as a result recorded an impairment allowance of $519. -------------------------------------------------------------------------------- F-10 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 1. Organization Property and Equipment and Property and equipment are stated at cost. Major Significant additions and improvements are capitalized and minor Accounting replacements, maintenance and repairs which do not Policies increase the useful lives of the assets are expensed as Continued incurred. Depreciation and amortization are recorded using a straight-line method over estimated useful lives of the assets, which vary from two to ten years. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective accounts, and any resulting gain or loss is included in the statement of operations. During the year ended December 31, 2000, the Company recorded an impairment on the full book value of the remaining assets of $513 due to the Company's assessment of recoverability of the assets through operations. Intangible Assets The Company has incurred costs associated with application for certain patents. These costs are capitalized and amortized over 17 years. During the year ended December 31, 2000, the Company recorded an impairment on the full remaining book value of the assets of $175 due to the Company's assessment of recoverability of the assets through operations. Advance Deposits The Company has collected a $263 deposit related to a contract with the Port of Baltimore. As of December 31, 2000 the contract had been terminated. Contract Revenues In November 1997, the Company entered into a contract with the State of Maryland for the treatment of chromium-contaminated leachate at the Hawkins Point Hazardous Waste Treatment Facility at the Port of Baltimore. During 1999, the Company commenced work on this contract and accordingly, has recorded revenue related to the contract. Costs incurred in preparation for the commencement of the contract are recorded as expenses as incurred. For the year ended December 31, 1999, substantially all of the Company's revenues are from this contract. As of December 31, 2000, the contract was terminated. -------------------------------------------------------------------------------- F-11 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 1. Organization Research and Development Expenditures and Research and development expenditures are charged to Significant operations as incurred. Accounting Policies Income Taxes Continued 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. Concentration of Credit Risk The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents. Impairment of Long-Lived Assets The Company periodically performs analyses on the recoverability of long-lived assets. Any excess of the carrying amount of an asset over the estimated future undiscounted cash flows associated with the asset would be recorded as an impairment loss in the statement of operations. During the year ended December 31, 2000 the Company recorded impairment losses on property and equipment totaling $513 and $175 related to intangible assets. -------------------------------------------------------------------------------- F-12 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 1. Organization Stock Compensation and The Company has adopted the intrinsic value method of Significant accounting for stock options and warrants under Accounting Accounting Principles Board Opinion No. 25. Under this Policies standard, no compensation expense is recorded when the Continued exercise price of options granted to employees is equal to or greater than the market price of the underlying stock on the date of the grant. The Company has elected the disclosure-only provisions of SFAS 123, which requires fair value accounting for options issued to employees. Use of Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. 2. Going The accompanying financial statements have been prepared Concern under the assumption that the Company 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 financial statements, the Company has incurred substantial losses from operations and has not generated cash from operating activities. Presently, the Company does not have sufficient cash resources to meet its requirements in 2001 or the necessary working capital to develop profitable operations from using its patented technology. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing as may be required, and ultimately to attain profitability. Potential sources of cash include new contracts, the issuance of external debt, the sale of new shares of Company stock or alternative methods such as mergers or sale transactions. No assurances can be given, however, that the Company will be able to obtain any of these potential sources of cash. -------------------------------------------------------------------------------- F-13 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 3. Earnings All earnings per share amounts reflect the Per Share implementation of SFAS 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share and requires all prior period earnings per share data be restated to conform with the provisions of the statement. Basic earnings per share are computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of shares determined for the basic computation plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period. Period From November 15, 1995 Year Ended December 31, (Inception) to ------------------------------------------- December 31, 2000 1999 1998 2000 ----------------------------------------------------------- Net loss $ (1,915) $ (1,786) $ (3,629) $ (13,328) Preferred stock dividends - - (300) (738) Dividends on Series A Preferred Stock (not declared) (578) (600) (300) (1,478) Dividends on Series B Preferred Stock (not declared) (21) (16) - (37) ------------------------------------------------------- Net loss applicable to common shareholders $ (2,514) $ (2,402) $ 4,229 $ (15,581) ----------------------------------------------------------- -------------------------------------------------------------------------------- F-14 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 3. Earnings Per Share Continued Weighted average common shares outstanding (basic) 11,575,000 11,516,000 11,514,000 11,103,000 Convertible Preferred Stock (*) (*) (*) (*) Warrants issued in initial public offering (*) (*) (*) (*) Employee stock options (*) (*) (*) (*) --------------------------------------------------- Weighted average common shares outstanding (diluted) 11,575,000 11,516,000 11,514,000 11,103,000 --------------------------------------------------- Loss per share - basic and diluted $ (.22) $ (.21) $( .37)$ (1.40) --------------------------------------------------- (*) Due to the Company's loss from continuing operations the incremental shares issuable in connection with these instruments are anti-dilutive and accordingly not considered in the calculation. 4. Related On September 28, 1998, Commodore Environmental Services Party LLC, a Delaware limited liability company wholly owned Transactions by Commodore Environmental Services, Inc. ("Environmental") acquired 10,000,000 shares of common stock of the Company representing approximately 87% of the issued and outstanding shares of capital stock from Commodore Applied Technologies, Inc., (Applied), a 35% owned affiliate of Environmental, as part of a debt repayment plan between Environmental and Applied. Because of the outstanding publicly traded preferred stock of the Company, the resultant purchase accounting adjustments have not been recorded by the Company. In connection with Environmental's September 1998 acquisition of 87% of the Company's common stock from Applied, Applied transferred a $357 receivable due from the Company to Environmental. In December 1998, the Company issued 3,570 shares of Series B Preferred Stock (see Note 7) valued by independent appraisal at $143 to Environmental in exchange for the forgiveness of $357 of indebtedness. Because Environmental owns 87% of the common stock of the Company, the $214 gain on troubled debt restructuring was recorded as a direct reduction in additional paid in capital. -------------------------------------------------------------------------------- F-15 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 4. Related For the nine months ended September 30, 1998, the Party Company was charged management fees by Applied of $529. Transactions This management fee is a result of allocated wages and Continued salaries, rent, insurance (including director and officer liability insurance) and other administrative expenses. Management fees were not charged to the Company by Environmental for the years ended December 31, 2000 and 1999 or for the three months ended December 31, 1998. The Company owed advances of $179, $179, and $27 to Applied as of December 31, 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, the Company also owed Environmental $985 and $717, respectively, for uncollateralized advances to the Company. 5. Income The Company provides for deferred income taxes on Taxes temporary differences which represent tax effects of transactions reported for tax purposes in periods different than for book purposes. The difference between the income tax benefit at statutory rates for 2000 and 1999 and the amount presented in the financial statements is due to the change in the tax valuation allowance which offsets the income tax benefit of the operating loss. The provision for income taxes which differs from federal income tax rates is follows: Cumulative Year Ended December 31, Amounts ---------------------------------------- Since 2000 1999 1998 Inception ------------------------------------------------------- Expected tax benefit at federal statutory rate $ (651) $ (598) $ (1,234) $ (4,528) State income tax benefits, net of federal income tax benefit (87) (90) (218) (745) Change in valuation allowance 738 688 1,452 5,273 ------------------------------------------------------- Income taxes $ - $ - $ - $ - ------------------------------------------------------- -------------------------------------------------------------------------------- F-16 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 5. Income The components of net deferred income taxes as of Taxes December 31, are as follows: Continued Year Ended December 31, ----------------------------------- 2000 1999 ----------------------------------- Net operating loss carryforward $ 5,277 $ 4,539 Less: Valuation allowance (5,277) (4,539) ----------------------------------- Net deferred tax asset $ - $ - ----------------------------------- The Company conducts a periodic examination of its valuation allowance. Factors considered in the evaluation include recent and expected future earnings and the Company's liquidity and equity positions. For the years ended December 31, 2000 and 1999, the Company has established a valuation allowance for the entire amount of net deferred tax assets. At December 31, 2000, the Company had tax loss carryforwards of approximately $13,300. The amount of and ultimate realization of benefit from the net operating loss for income tax purposes is dependent, in part, upon the tax laws in effect, future earnings of the Company, and other future events, the effects of which cannot be determined. The change in control of the Company that took place in September 1998 could limit the Company's ability to utilize all prior tax loss carryforwards. These net operating carryforwards begin to expire in 2011. 6. Royalty The Company has an agreement with a former officer of Agreements the Company pursuant to which the former officer is to receive a royalty of 2% of collected revenues from the Company's membrane separation technology directly attributable to his patentable property through December 3, 2002, except for applications related to the radionuclides technetium and rhenium, for which the former officer is entitled to receive a royalty of .66% of net sales directly attributable to his patentable property (less allowances for returns, discounts, commissions, freight and excise or other taxes). No royalties have been accrued as of December 31, 2000. -------------------------------------------------------------------------------- F-17 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 6. Royalty The Company also has a license agreement with Lockheed Agreements Martin Energy Research Corporation, manager of the Oak Continued Ridge National Laboratory, a U.S. Department of Energy national laboratory, for which the Company paid Lockheed Martin a $50 licensing fee during the year ended June 30, 1997. Under this agreement, Lockheed Martin is to receive a royalty of 2% of net sales of the Company's products or processes covered under the agreement (less allowances for returns, discounts, commissions, freight, and excise or other taxes) up to total net sales of $4,000 and 1% of net sales thereafter. In addition, the Company has agreed to guarantee Lockheed Martin, commencing in the third year of the agreement, an annual minimum royalty of $15. As of December 31, 2000, $30 of royalties have been paid. 7. Capital Preferred Stock, Series A Structure The Convertible Preferred Stock, Series A, has a par value of $.001 per share and a stated value of $10.00 per share. Cumulative dividends are payable at the rate of $1.00 per share per annum, payable quarterly, commencing June 30, 1997, when, and if declared by the Board of Directors, before any dividends are declared or paid on the Common Stock or any capital stock ranking junior to the Convertible Preferred Stock, Series A. Failure to pay any quarterly dividend will result in a reduction of the conversion price as described below. The Convertible Preferred Stock, Series A, is convertible into Common Stock at any time prior to redemption at a conversion rate of 1.67 shares of Common Stock for each share of Convertible Preferred Stock (an effective conversion price of $6.00 per share of Common Stock), subject to adjustment under certain circumstances, including the failure of the Company to pay a dividend on the Convertible Preferred Stock, Series A, within 30 days of a dividend payment date, which will result each instance in a reduction of $.50 per share in the conversion price but not below $3.75 per share. Since June of 1998 the Company has not paid dividends, and therefore has adjusted the effective conversion price from $6.00 to $3.75 per share. Accumulated and unpaid dividends at December 31, 2000 and 1999 amounted to $1,478 and $900, an amount equal to $2.60 and $1.50 per share, respectively. Dividends will not be declared until there is sufficient accumulated earnings. -------------------------------------------------------------------------------- F-18 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 7. Capital Preferred Stock, Series A - Continued Structure The Convertible Preferred Stock, Series A is redeemable, Continued in whole but not in part, by the Company upon 30 days prior written notice after April 3, 2000 at $10 per share, plus accumulated and unpaid dividends, provided the closing bid price of the Common Stock for at least 20 consecutive trading days ending not more than 10 trading days prior to the date of the notice of redemption equals or exceeds $10 per share or, after April 3, 2001, at certain cash redemption prices plus accumulated and unpaid dividends. The holders of Convertible Preferred Stock, Series A, 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, Series A, with respect to declaration and payment of dividends or the distribution of assets on liquidation, dissolution or winding-up. In addition, if the company fails to pay dividends on the Convertible Preferred Stock, Series A, for four consecutive quarterly dividend payment periods, holders of Convertible Preferred Stock, Series A, voting separately as a class will be entitled to elect one director; such voting right will be terminated as of the next annual meeting of stockholders of the Company following payment of all accrued dividends. Upon liquidation, dissolution or winding up of the company, holders of Convertible Preferred Stock, Series A, are entitled to receive liquidation distributions equivalent to $10 per share (plus accumulated and unpaid dividends) before any distribution to holders of the Common Stock or any capital stock ranking junior to the convertible Preferred Stock, Series A. Preferred Stock, Series B In December 1998, the Company issued 3,570 shares of Preferred Stock, Series B. The Preferred Stock, Series B ranks junior to Preferred Stock, Series A and senior to Common Stock. -------------------------------------------------------------------------------- F-19 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 7. Capital Preferred Stock, Series B - Continued Structure The Convertible Preferred Stock, Series B, has a par Continued value of $.001 per share and a stated value of $100 per share. Cumulative dividends are payable at the rate of $6 per share per annum, payable quarterly in arrears, commencing June 30, 1999, when, and if declared by the Board of Directors, before any dividends are declared or paid on the Common Stock or any capital stock ranking junior to the Convertible Preferred Stock, Series B. The Company has not paid any dividends on these shares. Accumulated and unpaid dividends at December 31, 2000 and 1999 amounted to approximately $37 and $16, an amount equal to $10.36 and $4.50 per share, respectively. The Convertible Preferred Stock, Series B is convertible into Common Stock at any time prior to redemption at a conversion rate of 666.67 shares of Common Stock for each share of Convertible Preferred Stock, Series B (an effective conversion price of $.15 per share of Common Stock), subject to adjustment under certain circumstances. The Convertible Preferred Stock, Series B, is redeemable, in whole but not in part, by the Company not less than 30 nor more than 60 days prior to the Business Day designated by written notice as the Redemption Date at $105 per share, plus accumulated and unpaid dividends. The holders of Convertible Preferred Stock, Series B, 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. Upon liquidation, dissolution or winding up of the Company, holders of Convertible Preferred Stock are entitled to receive liquidation distributions equivalent to $100 per share (plus accumulated and unpaid dividends) before any distribution to holders of the Common Stock or any capital stock ranking junior to the convertible Preferred Stock, Series B. -------------------------------------------------------------------------------- F-20 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 7. Capital Warrants Structure Each Warrant entitles the holder thereof to purchase, at Continued any time from April 3, 1998 through April 3, 2002, one share of Common Stock at a price of $5.50 per share, subject to adjustment. Commencing October 3, 1998, the Warrants are subject to redemption by the Company, in whole but not in part, at $.10 per Warrant on 30 days prior written notice provided that the average closing sale price of the Common Stock equals or exceeds $15 per share, subject to adjustment, for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. Representative's Warrants In connection with the Initial Public Offering, the Company sold to the Underwriter for $.0001 per warrant, warrants to purchase from the Company up to 60,000 shares of Convertible Preferred Stock, 150,000 shares of Common Stock and/or 210,000 Warrants (the "Representative's Warrants"). The Representative's Warrants are exercisable at a price of $12 per share of Convertible Preferred Stock, $6 per share of Common Stock and $.12 per Warrant from April 3, 1998 through April 3, 2002, and are restricted from sale, transfer, assignment or hypothecation prior to that date, except to officers of the Underwriter. The Representative's Warrants provide for adjustment in the number of securities issuable upon the exercise thereof as a result of certain subdivisions and combinations of the Common Stock. The Representative's Warrants grant to the holders thereof certain rights of registration for the securities issuable upon exercise thereof. 8. Non The Company's 1996 Stock Option Plan (the "1996 Plan") Qualified provides the Board of Directors the authority to issue Stock Option incentive and non-qualified stock options to purchase up Plan to 1,350,000 shares of the Company's Common Stock to officers, directors, key employees and/or consultants. -------------------------------------------------------------------------------- F-21 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 8. Non Under the 1998 Non-Qualified Stock Option Plan, (the Qualified Option Plan), a maximum of 2,000,000 options may be Stock Option granted to purchase common stock at prices generally not Plan less than the fair market value of common stock at the Continued date of grant. Under the Option Plan, grants of options may be made to employees, officers, and directors without regard to any performance measures. The options may be immediately exercisable or may vest over time as determined by the Board of Directors. Information regarding the option plan is summarized below: Weighted Number of Average Options Exercise Price -------------------------- Outstanding at year ended June 30, 1997 $ 996,689 $ 4.42 Granted 1,042,252 4.31 Exercised - Forfeited - Rescinded (996,689) 4.42 ------------ Outstanding at six months ended December 31, 1997 1,042,252 4.31 Granted 1,461,950 0.19 Exercised - Forfeited - Rescinded (1,092,252) 4.14 ------------ Outstanding at year ended December 31, 1998 1,411,950 0.19 Granted - Exercised - Forfeited (80,900) 0.10 Rescinded - ------------ Outstanding at year ended December 31, 1999 1,331,050 0.19 Granted - Exercised - Forfeited (507,300) 0.09 Rescinded - ------------ Outstanding at year ended December 31, 2000 $ 823,750 $ 0.24 ------------ Options exercisable and available for future grant are as follows: December 31, ---------------------------------------- 2000 1999 1998 ---------------------------------------- Options exercisable 748,750 1,066,460 950,890 Options available for grant 1,176,250 668,950 588,050 -------------------------------------------------------------------------------- F-22 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 8. Non In December 1998, the Company terminated the 1996 Plan Qualified and all of the outstanding options granted were Stock Option surrendered to the Company for cancellation. The Company Plan awarded 1,386,950 five year non-qualified options under Continued the 1998 Plan to employees, officers and directors. These options carry an exercise price of $.09375, equal to the market price at the time of the awards. For purposes of the SFAS 123 disclosures in the following paragraphs, this transaction was treated as a rescission of the initial awards and a grant of new awards. 9. Stock Based The Company has adopted the disclosure-only provisions Compensation of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized in the financial statements. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1997, consistent with the provisions of SFAS No 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: Year Ended December 31, Since Cumulative ------------------------------------------ Amounts 2000 1999 1998 Inception ------------------------------------------------------- Net loss - as reported $ (1,915) $ (1,786) $ (3,629) $ (13,328) Net loss - pro forma $ (1,915) $ (1,791) $ (4,303) $ (18,818) Loss per share - as reported $ (.22) $ (.21) $ (.37) $ (1.40) Loss per share - pro forma $ (.22) $ (.21) $ (.43) $ (1.90) SFAS 123 requires stock options to be valued using an approach such as the Black-Scholes option pricing model. The Black-Scholes model calculates the fair value of the grant based upon certain assumptions about the underlying stock. For options granted during 1998, the expected dividend yield of the stock is zero, the expected life of the options is 10 years, the expected volatility is 60 percent, and the expected risk-free rate of return is between 4.6 and 6.5 percent, calculated as the rate offered on U.S. Government securities with the same term at the expected life of the options. No options were granted in 1999 or 2000. -------------------------------------------------------------------------------- F-23 COMMODORE SEPARATION TECHNOLOGIES, INC. Notes to Financial Statements Continued (In thousands, except shares and per share data) -------------------------------------------------------------------------------- 9. Stock Based The following table summarizes information about stock Compensation options outstanding at December 31, 2000: Continued Options Outstanding Options Exercisable ------------------------------------------------------------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Average Exercise Outstanding Contractual Life Exercise Number Exercise Prices at 12/31/00 (Years) Price Exercisable Price ------------------------------------------------------------------------------- $ 5.00 25,000 5.97 $ 5.00 25,000 $ 5.00 $ 0.09 798,750 7.96 $ 0.09 723,750 $ 0.09 ------------------------------------------------------------------------------- $ 0.09 - 5.00 823,750 8.92 $ .24 748,750 $ 0.26 ------------------------------------------------------------------------------- 10. Commitments Claim and The Company has a matter of possible litigation arising Contingencies out of the Port of Baltimore contract. It is not known what amount if any that the Company may be required to pay. The December 31, 2000 financial statements reflect $263 as a liability related to the contract. It is not known if any additional amounts will be incurred. 11. Recent In June 1999, the FASB issued SFAS No. 137, "Accounting Accounting for Derivative Instruments and Hedging Activities- Pronounce- Deferral of the Effective Date of FASB Statement No. ments 133." SFAS 133 establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. SFAS 133 is now effective for fiscal years beginning after June 15, 2000. The Company believes that the adoption of SFAS 133 will not have any material effect on the financial statements of the Company. -------------------------------------------------------------------------------- F-24

COMMODORE SEPARATION TECHNOLOGIES INC 10-K