10-K 1 coes10k.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 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-10054 COMMODORE ENVIRONMENTAL SERVICES, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 87-0275043 (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: Name of Each Exchange Title of Each Class on Which Registered ------------------- ----------------------- Common Stock, par value $0.01 per share None Securities registered pursuant to Section 12(g) of the Act: Not Applicable Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to be the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Non-affiliates of the registrant held shares of Common Stock as of March 30, 2001 with an aggregate market value of approximately $1,002,000 (based upon the average of the bid and asked prices of the Common Stock on March 31, 2001 as quoted by the National Association of Securities Dealers, Inc. OTC Bulletin Board). As of March 31, 2001, 80,796,476 shares of the registrant's Common Stock were outstanding. ---------------------------------- DOCUMENTS INCORPORATED BY REFERENCE None COMMODORE ENVIRONMENTAL SERVICES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 TABLE OF CONTENTS Page PART I.........................................................................3 ITEM 1. BUSINESS.....................................................3 General......................................................3 Research and Development.....................................5 Intellectual Property........................................5 Environmental Regulation.....................................5 Employees....................................................6 ITEM 2. PROPERTIES...................................................6 ITEM 3. LEGAL PROCEEDINGS............................................6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........6 PART II........................................................................7 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................................7 Market Information...........................................7 Dividend Information.........................................7 ITEM 6. SELECTED FINANCIAL DATA......................................8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................9 Overview.....................................................9 Results of Operations........................................9 Liquidity and Capital Resources.............................11 Net Operating Loss Carryforwards............................12 Year 2000 Considerations....................................12 New Accounting Pronouncements...............................12 Forward-Looking Statements..................................12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........................................................13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................13 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................13 PART III......................................................................14 1 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........14 Executive Officers and Directors............................14 Compensation of Directors...................................15 Compliance with Section 16(a) of the Exchange Act...........15 ITEM 11. EXECUTIVE COMPENSATION......................................16 Summary Compensation........................................16 Stock Options...............................................17 Compensation Committee Interlocks and Insider Participation...............................................18 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................20 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............21 Sale of Polymer Technologies................................21 Loans to Applied............................................21 Services Agreement..........................................22 PART IV.......................................................................23 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................................23 SIGNATURES....................................................................27 2 PART I ------ ITEM 1. BUSINESS. ------ -------- GENERAL Commodore Environmental Services, Inc. (the "Company") owns interests in diverse environmental, chemical and other businesses with a focus on new technologies that may have an impact upon their markets. As of March 22, 2001, the Company owned approximately 16.6% of Commodore Applied Technologies, Inc. ("Applied"), which through its operating companies, provides a range of engineering, technical, and financial services to the public and private sectors related to (i) remediating contamination in soils, liquids and other materials and disposing of or reusing certain waste by-products by utilizing its Solvated Electron Technology ("SET(TM)"), (ii) the settlement of complex, long-tail and latent insurance claims by utilizing a series of tools including an internally developed risk modeling program ("FOCUS(TM)"), and (iii) providing services related to, environmental management for on-site and off-site identification, investigation remediation and management of hazardous, mixed and radioactive waste. Effective as of September 28, 1998, the Company, through its wholly owned subsidiary, Commodore Environmental Services LLC, acquired from Applied approximately 87% of the outstanding common stock of Commodore Separation Technologies, Inc. ("Separation"), a publicly traded company and former operating subsidiary of Applied. Separation has developed its separation technology and recovery system known as SLiM(TM) (supported liquid membrane). Based on its continuing research and development program, the Company believed 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, Separation 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. Prior to these awards, the Separation 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, Separation 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. Separation'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. In April 2000, Separation 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 Separation 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. Separation had 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, Separation 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, Separation closed its Kennesaw, Georgia facility. As a result, Separation transferred approximately $227,000 of lab equipment and 3 furniture and fixtures to the Company, 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 an impairment reserve totaling $949,000 for inventory obsolescence, long-lived assets and intangible assets 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. In March 1998, the Company, through its wholly-owned subsidiary, Commodore Polymer Technologies, Inc. ("Polymer Technologies"), purchased the business (consisting of customer, supplier and industry relationships) related to the ceramic polymer known as CERASET(TM) from a subsidiary of Lanxide Corporation ("Lanxide"), a company which specializes in the manufacture of ceramic bonding and refractory materials. Lanxide is affiliated with the Company by significant common beneficial ownership. CERASET polymers are a unique family of low-viscosity, thermosettable ceramic-backboned, polyureasilazane-based polymers, which have exceptional thermal stability, corrosion resistance and rigidity. In connection with such purchase, Polymer Technologies also acquired a license, subject to pre-existing and certain future licenses, to utilize the technologies related to the CERASET polymers, and acquired the right to use the trademark "CERASET" in connection with the marketing and sale of products containing CERASET polymers, on a worldwide basis (excluding Japan). The CERASET materials and processes provide additional performance advantages for reinforced metals and reinforced ceramics, and extend the Company's business portfolio into the rapidly expanding area of high-performance polymer composites, adhesives, sealants and coatings. Initially, the Company believed that the market opportunities for CERASET were to extend to a broad range of industries such as basic processing, automotive, aerospace and defense, machine tool cement and sporting equipment industries. However the Company has had little success in penetrating these markets with a significant impact. From March 3, 1998 through March 6, 2000, CERASET had generated approximately $80,000 in revenue. Due to the limited success in expanding its sales, the Company believes that the CERASET License, CERASET Business and CERASET Trademark have a nominal value. Polymer believes that the CERASET License, CERASET Business and CERASET Trademark should be written down to its estimated recoverable value of $100,000 as of December 31, 1999 and December 31, 1998. Since 1998, the Company has embarked on efforts to develop new polymer technologies. In doing so, the Company has expensed approximately $240,000 in 1998 and $410,000 in 1999 in research and development expenses with respect to these new polymers (not including CERASET). The Company believes that the new polymers may serve some of the same markets that the CERASET technology was anticipated to serve and potentially other new markets. The technologies share some of the same properties however the new polymers are not dependent on CERASET. In March 2000, the Commodore Environmental Services LLC, a wholly owned subsidiary of the Company consummated the transfer of its 100% ownership in Polymer Technologies to the Blum Technology Trust for $1,588,902. Bentley J. Blum, Chairman, Chief Executive Officer and President of the Company and owner of 52% of the outstanding shares of the Company's common stock, is also a director of Polymer Technologies and the Trustee of the Blum Technology Trust. The consideration was determined as a result of good faith negotiation among the parties to the transfer of the Polymer stock taking into consideration Polymer's net deficit of approximately $30,000. Because of the sale of Polymer, it has been reflected as discontinued operations at December 31, 2000, 1999 and 1998 and the years then ended. 4 The Company was incorporated in Delaware in August 1988. As used in this Annual Report, and except as the context otherwise requires, "Applied" means Commodore Applied Technologies, Inc. and its subsidiaries, including Solution, Advanced Sciences and CFC Technologies. 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. 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 affiliates. All such activities are company-sponsored. Research and development expenditures for the Company and its affiliates including discontinued operations were $122,000 and $748,000 for the years ended December 31, 2000 and 1999, respectively. These expenditures relate to Separation for 1999 and 2000 and Polymer for 1999. INTELLECTUAL PROPERTY In September 1997, Separation 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, Separation filed a U.S. patent application for chromium removal and recovery covering the sole invention of Dr. W.S. Winston Ho, Senior Vice President - Technology. In February 1999, Separation filed a U.S. Patent Application for using a strip dispersion technique with SLiM covering the sole invention of Dr. W.S. Winston Ho. In February 2000, Separation 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. 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 Separation. Although Separation believes that SLiM may have advantages over many other known separation technologies, any one or more of its competitors, or other enterprises not presently known, may develop technologies which are superior to SLiM. To the extent Separation's competitors are able to offer comparable services at lower prices or of higher quality, or more cost-effective alternatives, Separation's ability to compete effectively could be materially adversely affected. Separation 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. Effective December 31, 2000, the Company wrote off its investment in intellectual property. The intellectual property is proven technology but the Company has not generated profitable operations from such technologies. ENVIRONMENTAL REGULATION Separation'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 Separation'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 Separation. Any such claims against Separation could materially adversely affect the Company's business, financial condition and results of operations. Separation maintains environmental liability insurance with limits of $1.0 million per occurrence and $2.0 million in the aggregate. There can be no 5 assurance that such insurance will provide coverage against all claims, and claims may be made against Separation or 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 December 31, 2000, the Company (including all of its direct and indirect subsidiaries) had a total of 5 full-time employees. None of such employees are covered by collective bargaining agreements, and the Company's relations with its employees are believed to be good. ITEM 2. PROPERTIES. ------ ---------- The Company's principal executive offices are located in 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 the Company and a director of Applied, Solution, Separation, Advanced Sciences and certain other affiliates of the Company. Such space also serves as the principal executive offices of certain other affiliates of the Company. The lease for the New York City space expires in January 2002. The Company pays an allocable portion of the rent per year under such lease. The Company also leases approximately 2,700 square feet of space in Great Neck, New York at a rental expense of approximately $77,000 per annum. The lease on the Great Neck space expires in March 2003. ITEM 3. LEGAL PROCEEDINGS. ------ ----------------- The Company is involved in litigation incidental to the conduct of its business, none of which management believes is, individually or in the aggregate, material to the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ------ --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth fiscal quarter of the year ended December 31, 2000. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY ------ AND RELATED STOCKHOLDER MATTERS. -------------------------------- MARKET INFORMATION The Company's common stock, par value $0.01 per share (the "Common Stock"), traded publicly on the Nasdaq System ("Nasdaq") under the symbol COES from January 1, 1988 to December 26, 1989. On December 26, 1989, the Common Stock ceased to be quoted on Nasdaq and began trading in the over-the-counter market in the so-called "pink sheets" of the National Quotation Bureau, Inc. and the OTC Bulletin Board of the National Association of Securities Dealers, Inc. (the "OTC Bulletin Board"), where it is currently traded under the symbol COES. On March 22, 2001, there were approximately 2,100 holders of record of Common Stock. The following table sets forth, for the fiscal years shown, the high and low bid prices (rounded to the nearest cent) for the Common Stock as quoted by the OTC Bulletin Board. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. High Low ---- --- Fiscal 2000 First Quarter...................................... $0.45 $0.06 Second Quarter..................................... 0.25 0.06 Third Quarter...................................... 0.30 0.12 Fourth Quarter..................................... 0.17 0.12 Fiscal 1999 First Quarter...................................... 0.12 0.06 Second Quarter..................................... 0.08 0.06 Third Quarter...................................... 0.20 0.06 Fourth Quarter..................................... 0.14 0.05 DIVIDEND INFORMATION The Company has not, for the last two fiscal years, paid cash dividends in respect of 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. 7 ITEM 6. SELECTED FINANCIAL DATA. ------ ----------------------- The following table presents selected financial data of the Company, as of December 31, 2000, for the fiscal years ended December 31, 1996, 1997, 1998, 1999 and 2000. During 1998, the Company's investment in Applied fell below 50% and is accounted for under the equity method of accounting, since that time. In September 1998, the Company acquired Applied's 87% ownership of Separation. Accordingly, Separation is included in the consolidated financial statements of the Company as of December 31, 1998 and for the period from acquisition to December 31, 2000. The following selected historical data is derived from the Company's Financial Statements and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements and Notes thereto included elsewhere in this Annual Report. Consolidated Statement of Operations Data:

Consolidated Balance Sheet Data:

8 MANAGEMENT'S DISCUSSION AND ANALYSIS ITEM 7. OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ------ ------------------------------------------------ Overview From the Company's acquisition of Applied's predecessor (Commodore Laboratories, Inc. (formerly A.L. Sandpiper Corporation)) in December 1993 to the February 1998 Private Placement, the Company owned a controlling equity interest in Applied and its subsidiaries, including Solution, Separation, Advanced Sciences (which accounts for substantially all of Applied's revenues) and CFC Technologies. During such period the Company had not generated material revenues, except from the operations of Advanced Sciences, or any profits. As a result of the 1997 Private Placement and the February 1998 Private Placement, the Company's ownership interest in Applied decreased to below 50%. While the Company's financial condition for the year ended December 31, 1997 consolidates that of Applied and its operating subsidiaries, including Advanced Sciences, beginning February 1998 and as long as the Company's equity interest in Applied is less than 50%, the Company will no longer consolidate the financial condition of Applied and its subsidiaries. In September 1998, the Company acquired Applied's 87% ownership of Separation. Accordingly, Separation is included in the Consolidated Financial Statements of the Company as of December 31, 2000, 1999 and 1998 and for the period since the acquisition. See "Market for Registrant's Common Equity and Related Stockholder Matters" and "Certain Relationships and Related Transactions." Results of Operations Year ended December 31, 2000 compared to year ended December 31, 1999 Revenues for the year ended December 31, 2000 were $66,000 as compared to $337,000 for the year ended December 31, 1999. Such revenues for 2000 and 1999 consisted of Separation's revenues which were consolidated with that of the Company. Cost of sales for the year ended December 31, 2000 and 1999 were $111,000 and $541,000 respectively, which related to Separation. Cost of sales include direct labor and fringes, subcontractor costs, travel related expenses and material purchases. Research and development costs were $122,000 for the year ended December 31, 2000 as compared to $338,000 for the year ended December 31, 1999. The 2000 and 1999 results consisted of Separation's research and development costs. A significant cause for the decrease was that in 2000, Separation terminated its business activities. General and administrative expenses were $1,403,000 for the year ended December 31, 2000 as compared to $1,672,000 for the year ended December 31, 1999. In 2000, $320,000 of general and administrative expenses related to Separation's results as compared to $755,000 for the year ended December 31, 1999. In 2000, Separation' general and administrative expenses decreased due to its termination of business activities. In April 2000, Separation 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 Separation 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. Separation had 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, Separation has withdrawn its equipment from the Port of Baltimore and transferred it, along with its inventory, to a storage facility in Albuquerque, New Mexico. 9 In June 2000, Separation closed its Kennesaw, Georgia facility. As a result, Separation transferred approximately $227,000 of lab equipment and furniture and fixtures to the Company, 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 $949,000 of impairment reserves for inventory obsolescence, long-lived assets and write off of patents 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. In 2000, the Company incurred $4,534,000 of losses from unconsolidated affiliates as compared to $1,478,000 of losses from unconsolidated affiliates for 1999. The losses are primarily attributable to Applied. Minority interest's share of the loss in consolidated subsidiaries was $319,000 in 2000 as compared to $1,786,000 in 1999. Minority interest income for 1999 relates to the portion of Separation's losses which belong to the minority shareholders of Separation. In March 2000, Commodore Environmental Services LLC, a wholly owned subsidiary of the Company consummated the transfer of its 100% ownership in Commodore Polymer Technologies, Inc. ("Polymer") to the Blum Technology Trust for $1,588,902. Bentley J. Blum, Chairman, Chief Executive Officer and President of the Company and owner of 52% of the outstanding shares of the Company's common stock, is also a director of Polymer Technologies and the Trustee of the Blum Technology Trust. The consideration was determined as a result of good faith negotiation among the parties to the transfer of the Polymer stock taking into consideration Polymer's net deficit of approximately $30,000. Accordingly, the Company recorded a gain from disciontinued operations of $1,433,000 in 2000 and a loss from discontinued operations of $946,000 in 1999, relating to Polymer. Year ended December 31, 1999 compared to year ended December 31, 1998 Revenues for the year ended December 31, 1999 were $337,000 as compared to $1,632,000 for the year ended December 31, 1998. Such revenues for 1999 consisted of twelve months of Separation's revenues which were consolidated with that of the Company. As of February 1998, the Company's ownership of Applied dropped below 50% and therefore the results of Applied were not consolidated with those of the Company subsequent to that date. Revenues for 1998 consisted of $1,251,000 of revenues from Applied for the month of January, and the remaining balance consisted primarily of revenues in connection with recovery of bad debt associated with a non performing loan. Cost of sales for the year ended December 31, 1999 were $541,000 which related to Separation, as compared to $961,000 for 1998 which were Applied's results for the month of January. Cost of sales include direct labor and fringes, subcontractor costs, travel related expenses and material purchases. Research and development costs were $338,000 for the year ended December 31, 1999 as compared to $303,000 for the year ended December 31, 1998. The 1999 results consisted of twelve months of Separation's research and development costs. The 1998 results included $173,000 from Applied's results for January and $130,000 from Separation which was consolidated with the Company's results for the last quarter of 1998. A significant cause for the decrease was that the 1998 results include only one month of Applied's activity. General and administrative expenses were $1,672,000 for the year ended December 31, 1999 as compared to $7,443,000 for the year ended December 31, 1998. In 1999, $743,000 of general and administrative expenses related to Separation's results as compared to $1,096,000 for the year ended December 31, 1998. In 1999, Separation' general and administrative expenses decreased due to a reduction in the number of employees and thereby reducing the amount of related expenses. In 1998, the Company incurred a net charge of approximately $1,962,000 for the write off of certain related party loans and $660,000 for the impairment of certain warrants relating to the purchase of Applied common shares. In 1998, the Company recorded a gain on sale of subsidiary stock of $7,623,000. This gain resulted from two private placements, one of which the 10 Company sold 1,724,250 shares of Applied Common Stock as a result of conversions of the remaining 46,800 shares of Series D Preferred Stock, and the second of which the Company sold 2,782,646 shares of Applied Common Stock. In 1999, the Company incurred $1,478,000 of losses from unconsolidated affiliates as compared to $2,229,000 of losses from unconsolidated affiliates for 1998. The losses are primarily attributable to Applied. Effective February 1998, results from Applied were not consolidated with the Company and therefore the Company recorded its pro-rata share of the losses from Applied for the remainder of the period. Minority interest's share of the loss in consolidated subsidiaries was $1,786,000 in 1999 as compared to $468,000 in 1998. The Company had recorded minority interest income relating to Applied's losses for the month of January 1998. Minority interest income for 1999 relates to the portion of Separation's losses which belong to the minority shareholders of Separation. Interest income was $23,000 in 1999 as compared to $523,000 in 1998. Interest income in 1998 resulted primarily from intercompany loans with Applied. Interest expense was $520,000 in 1999 as compared to $616,000 in 1998. As of December 31, 1998, the Company has fully amortized deferred loan fees in connection with its long term indebtedness. In March 2000, Commodore Environmental Services LLC, a wholly owned subsidiary of the Company consummated the transfer of its 100% ownership in Commodore Polymer Technologies, Inc. ("Polymer") to the Blum Technology Trust for $1,588,902. Bentley J. Blum, Chairman, Chief Executive Officer and President of the Company and owner of 52% of the outstanding shares of the Company's common stock, is also a director of Polymer Technologies and the Trustee of the Blum Technology Trust. The consideration was determined as a result of good faith negotiation among the parties to the transfer of the Polymer stock taking into consideration Polymer's net deficit of approximately $30,000. Accordingly, the Company recorded a loss from discontinued operations of $946,000 in 1999 and $4,927,000 at December 31, 1998, relating to Polymer. LIQUIDITY AND CAPITAL RESOURCES In March 2000, the Commodore Environmental Services LLC, a wholly owned subsidiary of the Company consummated the transfer of its 100% ownership in Polymer Technologies to the Blum Technology Trust for $1,588,902. Bentley J. Blum, Chairman, Chief Executive Officer and President of the Company and owner of 52% of the outstanding shares of the Company's common stock, is also a director of Polymer Technologies and the Trustee of the Blum Technology Trust. The consideration was determined as a result of good faith negotiation among the parties to the transfer of the Polymer stock taking into consideration Polymer's net deficit of approximately $30,000. In 1993 and 1994 the Company issued $4,000,000 of convertible bonds that carry an interest rate of 8.5%, payable quarterly. The maturity date of the bonds has been extended from December 3, 1998 to December 4, 2000. The bonds are secured by 16,800,000 treasury shares of the Company's Common Stock and 6,000,000 shares of Applied's common stock that the Company owns. The bonds are convertible at any time into Common Stock of the Company at the rate of one share per $1.00 of bond principal. As of December 4, 2000, when the Company did not pay the outstanding principal of the bonds, through February 6, 2001, there was a continuing forbearance. The Company has, however, continued to make quarterly interest payments, the last of which in the amount of $85,000 was made on January 5, 2001. There was a notice of default on February 6, 2001, subsequent to which, the bondholder has begun the process to take possession of the shares pledged to secure the bonds. Further, the bondholder has affirmed that it will not vote any of these shares. Based on the market value of the pledged shares as of February 6, 2001, the collateral has a value of $3,648,000. On February 22, 2001, the Company delivered to the bondholder documents relating to the transfer of the collateral. 11 The outstanding $4,000,000 principal amount of the bonds is currently due and payable and any difference after the sale of the collateral will still remain as an obligation of the Company. The Company has sustained losses of $5,756,000, $3,896,000 and $6,761,000 for the years ended December 31, 2000, 1999 and 1998. At December 31, 2000 and 1999, the Company had a working capital deficit of $8,378,000 and $8,056,000, respectively, and a Stockholders' Deficit of $10,329,000 at December 31, 2000 and $6,349,000 at December 31, 1999. The Company's increase in stockholders' deficit is primarily due to the net loss for the period. The Company is dependent upon financing from its majority shareholder. There can be no assurance, however, that the majority shareholder will continue to provide adequate financing for the Company to continue as a going concern. There also can be no assurance that the Company will be able to obtain financing from external sources. NET OPERATING LOSS CARRYFORWARDS The Company has net operating loss carry forwards of approximately $38,000,000, which expire in the years 2001 through 2019. The amount of net operating loss carry forward that can be used in any one year will be limited by the applicable tax laws which are in effect at the time such carry forward can be utilized. A full valuation allowance of $11,764,000 has been established to offset any benefit from the net operating loss carry forwards. It cannot be determined when or if the Company will be able to utilize the 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. 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 our business, financial condition and results of operations. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company will adopt SFAS 133 in the first quarter of 2001. Due to the Company's limited use of derivative instruments, SFAS 133 is not expected to have a material effect on the financial position or results of operations of the Company. 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 12 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 consolidated financial statements of the Company are included on pages F-1 through F-40 of this Annual Report and are incorporated herein by reference. The financial statements of the Company's significant subsidiary, Commodore Applied Technologies, Inc., are also included on pages F-41 through F-81 of this Annual Report and are incorporated herein by reference. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ITEM 9. ON ACCOUNTING AND FINANCIAL DISCLOSURE. ------ -------------------------------------- On August 17, 1999, the Company and its former auditors, PricewaterhouseCoopers LLP ("PWC"), mutually agreed to terminate the client-auditor relationship between the Company and PWC effective as of such date. Additionally, as of August 19, 1999, the Company retained Tanner + Co. ("Tanner") to serve as independent accountants. Tanner had been the Company's independent accountants prior to the Company's retention of PWC. The decision to terminate the Company's client-auditor relationship with PWC and to retain Tanner again was recommended by the Audit Committee of the Board of Directors and unanimously approved by the Board of Directors of the Company. During the past two fiscal years 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 reports. No "reportable events" as described under Item 304(a)(1)(v) of Regulation S-K occurred during the Company's past two fiscal years. 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. 13 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ------- -------------------------------------------------- EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The names and ages of the executive officers, directors and key employees of the Company, and their positions with the Company, as of March 22, 2001, are as follows: Name Age Position ---- --- -------- Bentley J. Blum 59 Chairman of the Board, President and Chief Executive Officer Jerry Karlik 47 Vice President and Director Andrew P. Oddi 39 Vice President and Treasurer ---------------------- Bentley J. Blum has served as a director of the Company since 1984 and served as the Chairman of the Board from 1984 to November 1996 and subsequently since June 1998. 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 also currently serves as a director of Separation, Solution and CFC Technologies. For more than 15 years, Mr. Blum has been actively engaged in real estate acquisitions and currently is the sole stockholder and director of a number of corporations that hold real estate interests, oil drilling interests and other corporate interests. Mr. Blum is a director of Federal Resources Corporation, a company formerly engaged in manufacturing, retail distribution and natural resources development and North Valley Development Corp., an inactive real estate development company. Mr. Blum is a principal stockholder of the Company and is the brother-in-law of Paul E. Hannesson, the former Chairman of the Board, President and Chief Executive Officer of Applied. Jerry Karlik has served as Vice President of the Company since 1986. Mr. Karlik also served as the Company's Treasurer from 1986 to 1997. For more than thirteen years, Mr. Karlik has been Chief Financial Officer of a number of corporations, most of which are controlled by or affiliated with Mr. Blum. Andrew P. Oddi was appointed Vice President and Treasurer of the Company, Applied, Separation, Solution and CFC Technologies in June 1997. Mr. Oddi also served as Vice President of Finance & Administration and Chief Financial Officer of the Company from 1987 to May 1997 and as a director of the Company from December 1990 to July 1996. Mr. Oddi also served as the Vice President of Finance, Chief Financial Officer and Secretary of Applied from March to November 1996, and as the Vice President--Finance of Separation from September 1996 to May 1997. From 1982 to 1987, Mr. Oddi was employed by Ernst & Young, independent accountants, and held the position of audit manager in 1986 and 1987. Mr. Oddi is a Certified Public Accountant. Each director is elected to serve for a term of one year or until his or her successor is duly elected and qualified. The Company's officers are elected by, and serve at the pleasure of, the Board of Directors, subject to the terms of any employment agreements. No family relationship exists among any other directors or executive officers of the Company. 14 COMPENSATION OF DIRECTORS The Company does not separately compensate employees for serving as directors. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10% of the outstanding shares of the Company's Common Stock, to file initial reports of beneficial ownership and reports of changes in beneficial ownership of shares of Common Stock with the Commission. Such persons are required by 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 outstanding shares of Common Stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during, or with respect to, the year ended December 31, 2000. 15 ITEM 11. EXECUTIVE COMPENSATION. ------- ---------------------- SUMMARY COMPENSATION The following table sets forth the amount of all compensation paid by the Company and/or its affiliates and allocated to the Company's operations for services rendered during each of 2000, 1999, and 1998 to the Company's Chief Executive Officer at December 31, 2000, and to one additional individual who served as the Company's Chief Executive Officer during 1998, but not at December 31, 1998.

(1) Represents the amount of Mr. Hannesson's base salary allocated to the Company. Mr. Hannesson's total base salary for 1998 was $434,500. Certain portions of such base salaries were also allocated to Applied and Separation. See "Certain Relationships and Related Transactions--Services Agreement." (2) Represents the amount of Mr. Hannesson's automobile allowance allocated to the Company. Mr. Hannesson's total automobile allowance for 1998 was $12,000, certain portions of which were also allocated to Applied and Separation. (4) In November 1996, Mr. Hannesson was granted options to purchase 3,450,000 shares of Company Common Stock, which options were rescinded, re-issued in June 1997 and cancelled in December 1998. 16 STOCK OPTIONS No stock options were granted during the year ended December 31, 2000 to the individuals listed in the Summary Compensation Table pursuant to the Company's 1996 Stock Option Plan (the "Plan") and otherwise. The Company has no outstanding stock appreciation rights and granted no stock appreciation rights during the year ended December 31, 2000. The following table sets forth certain information concerning the exercise of options and the value of unexercised options held under the Plan and otherwise at December 31, 2000 by the individuals listed in the Summary Compensation Table.

(1) Represents the difference between the exercise price and the closing price on the date of exercise, multiplied by the number of shares acquired. (2) Represents the difference between the last reported sale price of the Common Stock on December 31, 2000, and the exercise price of the option multiplied by the applicable number of options exercised. 17 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Executive Officer Compensation Base Salaries. In 2000, total compensation was paid to executives primarily based upon the terms of their employment agreements with the Company, if any, and upon individual performance and the extent to which the business plans for their areas of responsibility were achieved or exceeded. On balance, performance goals were substantially met or exceeded and therefore compensation was paid accordingly. Mr. Hannesson, the former Chairman of the Board, President and Chief Executive Officer of the Company, the former Chairman of the Board, President and Chief Executive Officer of Applied, and the Chairman of the Board and Chief Executive Officer of Solution and CFC Technologies, received annual compensation based upon, among other things, the terms of his employment agreement with the Company, which agreement was assigned to Applied in June 1998. Pursuant to the terms of his employment agreement, Mr. Hannesson was entitled to receive a base salary at an annual rate of not less than $434,500 through December 31, 1998 and not less than $477,950 through December 31, 1999 for services rendered to the Company and certain of its affiliates, including Applied and Separation. For 2000, neither the Company nor Separation have incurred any compensation expense for Mr. Hannesson. Mr. Hannesson's base salary increased from $395,000 for 1997 to $434,500 for 1998, representing an increase of approximately 10%. Such base salary was allocated among the Company, Applied and Separation based upon the amount of time and effort devoted by Mr. Hannesson to the respective businesses of such companies. Consequently, the Company, Applied and Separation paid $58,658, $271,465 and $94,504, respectively, of such salary. Annual Incentive Bonus. Annual incentive bonuses for executive officers are intended to reflect the Compensation Committee's belief that a significant portion of the annual compensation of each executive officer should be contingent upon the performance of the Company. For 2000, 1999 and 1998 no incentive bonuses were paid to any officers or employees. Stock Options. The Compensation Committee has the power to grant stock options under the Plan. With respect to executive officers, it has been the Compensation Committee's practice to grant, on an annual basis, stock options that vest at the rate of 20% upon grant and 20% in each calendar year thereafter for four years, and that are exercisable over a ten-year period at exercise prices per share set at the fair market value per share on the date of grant. Generally, the executives must be employed by the Company at the time the options vest in order to exercise the options and, upon announcement of a Change in Control (pursuant to and as defined in the Plan), such options become immediately exercisable. The Compensation Committee believes that stock option grants provide an incentive that focuses the executives' attention on managing the Company from the perspective of an owner with an equity stake in the business. The Company's stock options are tied to the future performance of the Company's stock and will provide value to the recipient only when the price of the Company's stock increases above the option grant price. No options were granted in 2000 or 1999. A total of 8,245,000 stock options were granted in 1998, of which 4,500,000 and 525,705 were granted to Messrs. Blum and Hannesson, respectively, and 50,000 were granted to the other individual named in the Summary Compensation Table. The number of stock options granted in 1998 were determined by reference to the long-term compensation for comparable positions at other similar public companies and based upon an assessment of individual performance. 18 Impact of Section 162(m) of the Internal Revenue Code The Company's policy is to structure compensation awards for executive officers that will be consistent with the requirements of Section 162(m) of the U.S. Internal Revenue Code of 1986 (the "Code"). Section 162(m) limits the Company's tax deduction to $1.0 million per year for certain compensation paid in a given year to the Chief Executive Officer and the four highest compensated executives other than the Chief Executive Officer named in the Summary Compensation Table. According to the Code and corresponding regulations, compensation that is based on attainment of pre-established, objective performance goals and complies with certain other requirements will be excluded from the $1.0 million deduction limitation. The Company's policy is to structure compensation awards for covered executives that will be fully deductible where doing so will further the purposes of the Company's executive compensation program. However, the Company also considers it important to retain flexibility to design compensation programs that recognize a full range of performance criteria important to the Company's success, even where compensation payable under such programs may not be fully deductible. The Company expects that all compensation payments in 1998 to the individuals listed in the Summary Compensation Table will be fully deductible by the Company. Conclusion The Compensation Committee believes that the quality of executive leadership significantly affects the long-term performance of the Company and that it is in the best interest of the stockholders to compensate fairly executive leadership for achievement meeting or exceeding the high standards set by the Compensation Committee, so long as there is a corresponding risk when performance falls short of such standards. A primary goal of the Compensation Committee is to relate compensation to corporate performance. Based on the Company's performance in 2000, the Compensation Committee believes that the Company's current executive compensation program meets such standards and has contributed, and will continue to contribute, to the Company's and its stockholders' long-term success. 19 SECURITY OWNERSHIP OF CERTAIN ITEM 12. BENEFICIAL OWNERS AND MANAGEMENT. ------- -------------------------------- The following table sets forth certain information, as of December 31, 2000, with respect to the beneficial ownership of Company Common Stock by each person known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock of the Company, each director, each individual listed in the Summary Compensation Table and 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 addresses of each of Bentley J. Blum, Paul E. Hannesson and Jerry Karlik is 150 East 58th Street, Suite 3238, New York, New York 10155. The addresses of Credit Agricole Deux Sevres is 4 Boulevard Louis Tardy, 79000 Niort, France. 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 Exchange Act as consisting of sole or shared voting power (including the power to vote or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights. (3) Represents Mr. Blum's beneficial ownership of 28,479,737 shares, his spouse's ownership of 2,000,000 shares of Common Stock of the Company and 4,500,000 shares of Common Stock underlying currently exercisable options, representing together 41.0% of the outstanding shares of Company Common Stock at March 22, 2001. Does not include 450,400 shares of Common Stock owned by Simone Blum, the mother of Mr. Blum, and 385,000 shares of Common Stock owned by Samuel Blum, the father of Mr. Blum. Mr. Blum disclaims any beneficial interest in the shares of Common Stock owned by his spouse, mother and father. (4) Consists of an aggregate of: (i) 2,650,000 shares of Company Common Stock owned by Suzanne Hannesson, the spouse of Mr. Hannesson; (ii) 2,650,000 shares of Company 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 Company Common Stock issued to the Hannesson Family Trust in exchange for the surrender of options to purchase 950,000 share of Company Common Stock and (iv) currently exercisable options to purchase 525,705 shares of Company Common Stock at $0.10 per share, representing collectively 7.8% of the outstanding shares of Company Common Stock. Does not include 1,000,000 shares of Company 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 Company Common Stock owned by or for the benefit of his spouse and children. 20 (5) Consists of the number of shares of Company Common Stock owned. (6) Represents 200,000 shares of Company Common Stock owned by Mr. Karlik and 50,000 shares of Company Common Stock underlying currently exercisable stock options granted to Mr. Karlik by the Company under the Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ------- ---------------------------------------------- SALE OF POLYMER TECHNOLOGIES In March 2000, the Commodore Environmental Services LLC, a wholly owned subsidiary of the Company consummated the transfer of its 100% ownership in Polymer Technologies to the Blum Technology Trust for $1,588,902. Bentley J. Blum, Chairman, Chief Executive Officer and President of the Company and owner of 52% of the outstanding shares of the Company's common stock, is also a director of Polymer Technologies and the Trustee of the Blum Technology Trust. The consideration was determined as a result of good faith negotiation among the parties to the transfer of the Polymer stock taking into consideration Polymer's net worth of approximately $30,000. Because of the sale of Polymer, it has been reflected as discontinued operations at December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998. LOANS TO APPLIED In September 1997, the Company provided a $4.0 million unsecured loan to Applied, evidenced by the Convertible Note. Pursuant to the terms of the Convertible Note, Applied was obligated to pay the Company interest only at the rate of 8% per annum, payable quarterly. Unless converted into common stock of Applied at any time, the unpaid principal amount of the Convertible Note was due and payable, together with accrued and unpaid interest, on August 31, 2002. Payments of principal and accrued interest under the Convertible Note was subordinated to all other indebtedness for money borrowed of Applied. The Company had the right to convert the Convertible Note into shares of Applied common stock at a conversion price of $3.89 per share. Such conversion price was fixed at approximately 85% of the five day average closing bid price of Applied common stock ($4.575 per share) prior to August 22, 1997, the date that the executive committees of the respective Boards of Directors of the Company and Applied authorized such loan. In connection with the $4.0 million loan, Applied issued the Company a five-year warrant to purchase 1,000,000 shares of Applied common stock at an exercise price of $5.0325 per share (approximately 110% of the $4.575 five day average closing bid price of Applied common stock prior to August 22, 1997). In March 1998, Applied prepaid $2.0 million of the Convertible Note by (i) paying the Company the sum of $500,000 in cash and (ii) transferring to the Company a promissory note, dated August 30, 1996, in the principal amount of $1.5 million. To induce the Company to accept Applied's prepayment of $2.0 million of the Convertible Note (and thereby give up the right to convert $2.0 million of the Convertible Note into Applied common stock), Applied issued to the Company an additional warrant to purchase up to 514,000 shares of Applied common stock at an exercise price of $4.50 per share. Such exercise price was fixed at approximately 110% of the closing sale price of Applied common stock on February 20, 1998, the trading day immediately prior to the date the Board of Directors of the Company approved such prepayment. The estimated fair value of such warrant is approximately $340,000. In February 1998, the Company provided a $5,450,000 unsecured loan to Applied, evidenced by the Intercompany Note. Pursuant to the terms of the Intercompany Note, interest on the unpaid principal balance of the Intercompany Note was payable at the rate of 8% per annum semiannually in cash. The unpaid principal amount of the Intercompany Note was due and payable, together with accrued and unpaid interest, on the earlier to occur of (a) December 31, 1999, or (b) consummation of any public offering or private placement of securities of Applied with net proceeds aggregating in excess of $6.0 million, other than in respect of working capital financing or secured financing of assets received by Applied in the ordinary course of business from any bank or other lending institution. In connection with the loan, Applied amended and restated in its entirety the five-year warrant to purchase 7,500,000 shares of Applied common stock issued to the Company on December 2, 1996 to, among other things, reduce 21 the exercise price of the warrant from $15.00 per share to $10.00 per share. In addition, Applied issued to the Company an additional five-year warrant to purchase 1,500,000 shares of Applied common stock at an exercise price of $10.00 per share. Such warrant was subsequently amended to reduce the exercise price thereof from $10.00 per share to $1.50 per share. Effective September 28, 1998, Applied repaid the remaining balances on the Convertible Note and the Intercompany Note, which totaled an aggregate of $6,755,864, by (i) transferring 10,000,000 shares of Separation common stock, representing 87% of Separation's outstanding common stock, to Commodore Environmental Services, LLC, a Delaware limited liability company wholly-owned by the Company; (ii) issuing 20,909 shares of newly created Series B Preferred Stock, 10,189 shares of newly created Series C Preferred Stock, and 20,391 shares of newly created Series D Preferred Stock of Applied to the Company; (iii) assigning to the Company an account receivable due to Applied from Separation in the amount of $357,000; and (vi) amending the warrant held by the Company to purchase 1,500,000 shares of Applied common stock to reduce the exercise price thereof from $10.00 per share to $1.50 per share. On November 24, 1999, Environmental elected to convert all of the issued and outstanding shares of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock into an aggregate of 7,258,533 shares of Applied common stock, and such shares were issued to the Company as of that date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." SERVICES AGREMENT In September 1997, the Company, Applied, Separation, Advanced Sciences, and certain other affiliates of the Company (the "Affiliated Parties") entered into a services agreement, dated as of September 1, 1997 (the "Services Agreement"), whereby the Company and the Affiliated Parties agreed to cooperate in sharing, where appropriate, costs related to accounting services, financial management, human resources and personnel management and administration, information systems, executive management, sales and marketing, research and development, engineering, technical assistance, patenting, and other areas of service as are appropriately and necessarily required in the operations of the Company and the Affiliated Parties (collectively, the "Services"). Pursuant to the Services Agreement, services provided by professional employees of the Company and the Affiliated Parties to one another are charged on the basis of time actually worked as a percentage of salary (including cost of benefits) attributable to that professional. In addition, charges for rent, utilities, office services and other routine charges regularly incurred in the normal course of business are apportioned to the professionals working in the office on the basis of salary, and then charged to any party in respect of whom the professional devoted such time based upon time actually worked. Furthermore, charges from third parties, including, without limitation, consultants, attorneys and accountants, are levied against the party actually receiving the benefit of such services. Pursuant to the Services Agreement, Applied acts as the coordinator of billings and payments for Services on behalf of itself, the Company and the other Affiliated Parties. 22 PART IV ------- EXHIBITS, FINANCIAL STATEMENT ITEM 14. SCHEDULES AND REPORTS ON FORM 8-K ------- --------------------------------- The following documents are filed as part of this Annual Report: Page No. -------- Financial Statements. -------------------- Commodore Environmental Services, Inc. Independent Auditor's Report........................................ F-1 Consolidated Balance Sheets as of December 31, 2000 and 1999........ F-2 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.................................. F-3 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2000, 1999 and 1998.............. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.................................. F-5 Notes to Consolidated Financial Statements.......................... F-7 Commodore Applied Technologies, Inc. Independent Auditor's Report........................................ F-41 Report of Independent Accountants................................... F-41A Consolidated Balance Sheets as of December 31, 2000 and 1999........ F-42 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.................................. F-44 Consolidated Statements of Stockholders' Equity for the years Ended December 31, 2000, 1999 and 1998............................ F-45 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.................................. F-47 Notes to Consolidated Financial Statements.......................... F-51 Except for the unconsolidated financial statements of Commodore Applied Technologies, Inc. included herein, all other financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and, therefore, have been omitted. 23 Exhibits. -------- Exhibits No. Description ------------ ----------- 3.1 Certificate of Incorporation of Commodore Environmental Services, Inc. (1) 3.2 Certificate of Stock Designation of Commodore Environmental Services, Inc. (6) 3.3 By-Laws of Commodore Environmental Services, Inc. (1) 10.1 Certificate from the State of Vermont for Harvest American Insurance Company. (1) 10.2 Letter Agreement, dated March 18, 1991 with Ameritech Oil Gas Corporation with respect to Oklahoma Oil & Gas Field. (3) 10.3 Operating Agreement, dated March 22, 1991 with Ameritech Oil and Gas Corporation with respect to Oklahoma Oil & Gas Field. (3) 10.4 Assumption Agreement, dated April 11, 1991 by and between Commodore Environmental Services, Inc. and Harvest American Insurance Company. (3) 10.5 Option Agreement, dated March 15, 1993, and among Commodore Environmental Services, Inc. and the Principal Shareholders and Board of Directors of A.L. Sandpiper Corporation and CFC Technologies, Inc. (4) 10.6 Option Agreement, dated March 15, 1993, by and among Commodore Environmental Services, Inc. and Paul Hannesson. (4) 10.7 Option Agreement, dated March 15, 1993, by and among Commodore Environmental Services, Inc. and the Principal Shareholders and Board of Directors of A.L. Sandpiper Corporation and CFC Technologies, Inc. (4) 10.8 Agreement and Plan of Merger dated as of June 24, 1993 between the Company, Sandpiper, its principal shareholders and ALS Acquisition Corp. (5) 10.9 License Agreement between Sandpiper and the Company. (5) 10.10 Employment Agreements between Sandpiper and Abel and Augur, respectively. (5) 10.11 Non-competition Agreements between Sandpiper and Abel and Augur. (5) 10.12 Form of the Company's Warrant. (5) 10.13 Stock Option Agreements between the Company and Abel and Augur, respectively. (5) 10.14 Security Agreement between Sandpiper and the Company. (5) 10.15 Escrow Agreement between the Company, Sandpiper, its principal shareholders and counsel to the parties. (5) 10.16 $125,000 Non-Recourse, Non-Negotiable, secured Promissory Note from Albert and Connie Abel to the Company. (5) 10.17 Tax and loan Indemnity Agreement between the Company and Albert Abel and Connie Abel. (5) 10.18 Agreement and Plan of Merger dated July 28, 1993 between the Company, CFC, Abel, Augur and CFC Acquisition Corp. (5) 10.19 Sublicense Agreement between the Company and CFC Technologies, Inc. (5) 24 10.20 Escrow Agreement between the Company, CFC Technologies, Inc., Abel, Augur and counsel to the parties. (5) 10.21 Securities Purchase Agreement by and between Commodore Environmental Services, Inc. and purchasers of Series "AA" Preferred Stock. (6) 10.22 Bond Purchase Agreement by and between Commodore Environmental Services, Inc. and purchasers of Convertible Bonds. (6) 10.23 Stock Option Agreement, dated November 22, 1993, by and between Commodore Environmental Services, Inc. and Jim DeAngelis. (6) 10.24 Employment Agreement, dated January 1, 1994, by and between Commodore Environmental Services, Inc. and Jim DeAngelis. (6) 10.25 Employment Agreement, dated October 3, 1994, by and between Commodore Environmental Services, Inc. and Vincent Valeri. (7) 10.26 Warrant, dated October 3, 1994, by and between Commodore Environmental Services, Inc. and Vincent Valeri. (7) 10.27 Employment Agreement, dated June 1, 1995, by and between Commodore Environmental Services, Inc. and Neil Drobny. (7) 10.28 Stock Option Agreement, dated June 1, 1995, by and between Commodore Environmental Services, Inc. and Neil Drobny. (7) 10.29 Employment Agreement, dated August 31, 1995, by and between Commodore Environmental Services, Inc. and Carl Magnell. (7) 10.30 Stock Option Agreement, dated August 31, 1995, by and between Commodore Environmental Services, Inc. and Carl Magnell. (7) 10.31 Assignment of Technology Agreement, dated December, 1995, by and between Commodore Membrane Technologies, Inc. and Sri Kilambi. (7) 10.32 Stock Option Agreement, dated as of February 16, 1996, by and between Commodore Environmental Services, Inc. and Paul E. Hannesson. (7) 10.33 Form of Employment Agreement by and between the Company and Paul E. Hannesson. (8) 10.34 Agreement and Plan of Merger, dated November 13, 1996, by and among the Company, Lanxide Corporation and COES Acquisition Corp. (9) 10.35 Line of Credit Agreement, dated November 13, 1996, by and between the Company and LPM. (9) 10.36 Line of Credit Promissory Note, dated November 13, 1996, by LPM in favor of the Company. (9) 10.37 Security Agreement, dated November 13, 1996, by and between the Company and LPM. (9) 10.38 Guarantee, dated November 13, 1996, by Lanxide Corporation in favor of the Company. (9) 10.39 Warrant, dated March 5, 1998, issued by Lanxide Corporation to the Company. (10) 10.40 Settlement and Release Agreement, dated March 5, 1998, by and among Lanxide Corporation, Lanxide Performance Materials, Inc., Marc S. Newkirk, the Company and Applied. (10) 10.41 Amendment to Securities Purchase Agreement, dated March 5, 1998, by and between the Company and Lanxide Corporation. (10) 25 10.42 License Agreement, dated as of March 5, 1998, by and among Commodore Polymer Technologies, Inc., Lanxide Corporation and Lanxide Technology Company L.P. (10) 10.43 Debt Repayment Agreement, dated September 28, 1998, between the Company and Applied. (11) 16.1 Letter regarding change in certifying accountant. (12) *21.1 Subsidiaries of the registrant. ---------------------------------- * Filed herewith. (1) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K dated April 14, 1988. (2) Incorporated by reference to Exhibits 10.1 through 10.13 to the Registrant's Form 10-Q for the quarter ended June 30, 1990. (3) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K dated April 30, 1992. (4) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K dated March 23, 1993. (5) Incorporated by reference to Exhibit 10 in the Registrant's Form 8-K dated August 10, 1993. (6) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K dated April 14,1994. (7) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K for the fiscal year ended December 31, 1995 filed with the Commission on April 12, 1996. (8) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K for the fiscal year ended December 31, 1996 filed with the Commission on April 15, 1997. (9) Incorporated by reference to Exhibits 1, 3, 4, 5 and 6 in the Registrant's Form 8-K dated November 13, 1996. (10) Incorporated by reference to Exhibit 10 in the Registrant's Form 10-K for the fiscal year ended December 31, 1997 filed with the Commission on April 6, 1998. (11) Incorporated by reference and filed as an Exhibit to the Registrant's Form 8-K dated December 25, 1998. (12) Incorporated by reference and filed as an Exhibit to Registrant's Current Report on Form 8-K filed with the Commission on August 23, 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. Dated: April 12, 2001 COMMODORE ENVIRONMENTAL SERVICES, INC. By: /s/ Bentley J. Blum ----------------------------------------- Bentley J. Blum Chairman of the Board, President 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/ Bentley J. Blum Chairman of the Board, President and April 12, 2001 ---------------------------------- Chief Executive Officer (principal Bentley J. Blum Executive officer) /s/ Jerry Karlik Director April 12, 2001 ---------------------------------- Jerry Karlik

27 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2000 and 1999 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Index -------------------------------------------------------------------------------- Page ---- Independent Auditor's Report F-1 Consolidated Balance Sheet as of December 31, 2000 and 1999 F-2 Consolidated Statements of Operations for the years ended December 31, 2000 and 1999, and 1998 F-3 Consolidated Statements of Stockholders' (Deficit) Equity for the years ended December 31, 2000, 1999 and 1998 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 F-6 Notes to Consolidated Financial Statements F-8 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Commodore Environmental Services, Inc. We have audited the consolidated balance sheet of Commodore Environmental Services, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for the years ended December 31, 2000, 1999 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commodore Environmental Services, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years ended December 31, 2000, 1999 and 1998, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses, net cash outflows from operations, and has a net stockholders deficit that raise substantial doubt about its ability to continue as a going concern. Management's plan regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Salt Lake City, Utah April 7, 2001 F-1

COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000 and 1999 (Amounts in thousands, except shares and per share data) -------------------------------------------------------------------------------- 1. Background Commodores Environmental Services, Inc. and subsidiaries ("Commodore"), from January 1, 1991 to December 31, 1995 had been engaged primarily in real estate operations. Since then, Commodore has been engaged in the destruction and neutralization of hazardous waste and the separation of hazardous waste from other materials through its consolidated subsidiaries and affiliates. Commodore owns technologies related to the separation and destruction of polychlorinated biphenyls (PCBs) and chlorofluorocarbons (CFCs). Commodore is currently working on the commercialization of these technologies through various development effects, licensing arrangements, and joint ventures. As discussed in Note 17, during the periods represented by these financial statements, Commodore has experienced significant changes in the ownership structure of its two publicly held affiliates, Commodore Applied Technologies, Inc. ("Applied") and Commodore Separation Technologies, Inc. ("Separation"). The following table summarizes the related party ownership structure of these entities for the three year periods ended December 31, 2000: Applied Separation ------- ---------- January 1, 1998 56 percent owned by 87 percent owned by Applied Commodore and consolidated and consolidated with Applied with Commodore February 1998 Commodore's ownership in Applied drops below 50 percent, Commodore begins to account - for investment in Applied under the Equity method September 1998 Applied sold its 87 percent - ownership in Separation to Commodore and Separation is consolidated with Commodore December 31, 1998 35 percent owned by 87 percent owned by Commodore and accounted for Commodore and consolidated under the equity method with Commodore -------------------------------------------------------------------------------- F-7 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 1. Background Continued Applied Separation ------- ---------- November 1999 Commodore converted preferred stock to common stock, increasing its common stock - ownership to 49 percent December 31, 1999 49 percent owned by 87 percent owned by Commodore Commodore and accounted for and consolidated with under the equity method Commodore. September 2000 Applied issued 15,500,000 shares of common stock reducing Commodore's - ownership to 32 percent November 2000 Commodore sold 1 million shares of its Applied stock to a third party reducing its ownership to 30 - percent December 31, 2000 30 percent owned by 87 percent owned by Commodore and accounted for Commodore and consolidated under the equity method with Commodore 2. Summary of Principles of Consolidation Significant The consolidated financial statements include the Accounting accounts of Commodore and its majority-owned Policies subsidiaries. All significant intercompany balances and transactions have been eliminated. Investments in 20% to 50% owned affiliates are accounted for on the equity method. In February 1998, Commodore's investment in Commodore Applied Technologies, Inc. ("Applied") fell below 50% and has been accounted for under the equity method of accounting (see Note 17). In September 1998, Commodore acquired Applied's 87% ownership of Commodore Separation Technologies, Inc. ("Separation"). Accordingly, Separation is included in the consolidated financial statements of Commodore as of December 31, 2000, 1999 and 1998 (for the period since acquisition) (see Note 17). -------------------------------------------------------------------------------- F-8 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Principles of Consolidation - Continued Significant Discontinued operations include Commodore Polymer Accounting Technologies, Inc. (Polymer) from March 5, 1998 (date of Policies inception) through March 6, 2000 (date of disposition). Continued The Company sold Polymer effective March 6, 2000 to an entity with common majority ownership, recognizing a gain on disposal of discontinued operations (see Notes 14 and 17). Cash and Cash Equivalents Commodore considers cash and highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Restricted Cash and Certificates of Deposit Restricted cash at December 31, 2000 and 1999 consisted of $233 and $220, respectively, held in an interest bearing deposit accounts as collateral for a performance bond at December 31, 2000 and 1999, and $50 held in certificates of deposit at December 31, 1999. Restricted cash and certificates of deposit are classified according to the term of their restriction. Inventory Inventory, held by Separation, 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 value. 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 loss of $519. Property and Equipment Property and equipment are recorded at cost. Improvements which substantially increase the useful lives of assets are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or disposal, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recorded in the statement of operations. Depreciation and amortization are computed on the straight-line method based on the estimated useful lives of the assets, which range from 2 - 10 years. During the year ended December 31, 2000, the Company determined the recoverability of the property and equipment was less then the book value and recorded an impairment loss of $256. -------------------------------------------------------------------------------- F-9 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Other Assets Significant Completed technology represents certain technology Accounting acquired in connection with the purchase of third-party Policies interests in consolidated subsidiaries (See Note 17) and Continued other technology acquired from a related party (see Note 14) which are being amortized on a straight-line basis over their estimated 7 and 15 year lives, respectively. Patents are being amortized on a straight-line basis over their estimated life of 17 years. During the year ended December 31, 2000 the Company determined the recoverability of the patent and completed technology costs was less than the book value and recorded an impairment of $174. Impairment of Long-Lived Assets Commodore reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through undiscounted future cash flows. If it is determined that an impairment loss has occurred based on expected cash flows, such loss is recognized in the statement of operations. Unearned Revenue Separation has unearned revenue of $263 at December 31, 2000 and 1999, related to the contracts described in the revenue recognition policy. Revenue Recognition Interest Income. Commodore recognizes interest income on notes receivable when earned. The recognition of interest income on notes receivable is discontinued when management determines that the continuing accrual of interest may exceed the net realizable value of the receivable. -------------------------------------------------------------------------------- F-10 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Revenue Recognition - Continued Significant Contracts. Through January 1998, the period prior to Accounting Commodore's ownership of Applied falling below 50%, Policies substantially all of Commodore's revenues were derived Continued from Advanced Sciences, Inc. ("ASI"), a subsidiary of Applied, consisting of engineering and scientific services performed for the U.S. Government and prime contractors that serve the Federal Government under a variety of contracts, most of which provide for reimbursement of costs plus fixed fees. Revenue under cost-reimbursement contracts is recorded using the percentage of completion method as costs are incurred and include estimated fees in the proportion that costs incurred to date bear to total estimated costs. Anticipated losses on contracts are provided for by a charge to expense during the period such losses are first identified. Changes in job performance, job conditions, estimated profitability (including those arising from contract penalty provision) and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. In February 1998 and November 1997, Separation entered into two contracts 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. As of December 31, 1998, Separation had not yet commenced work on these contracts and accordingly, had not recorded revenue related to the contracts. As of December 31, 1999, Separation had not yet commenced work on the second contract and accordingly, had not recorded revenue related to this contract during 1999. As of December 31, 2000, Separation had discontinued its work on the first contract and terminated its second contract. Thus, no revenue was recorded during 2000 related to these contracts. Research and Development Research and development expenditures are charged to operations as incurred. -------------------------------------------------------------------------------- F-11 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Income Taxes Significant Income taxes are determined in accordance with Statement Accounting of Financial Accounting Standards ("SFAS") 109, which Policies requires recognition of deferred income tax liabilities Continued and assets for the expected future tax consequences of events that have been included in the financial 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 estimated 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 only if it is more likely than not that the asset will be realized in future years. Stock-Based Compensation Compensation costs attributable to stock option and similar plans are recognized based on the difference between the quoted market price of the stock on the date of the grant and the amount the employee is required to pay to acquire the stock (In the intrinsic value method under Accounting Principles Board Opinion 25). SFAS 123, "Accounting for Stock-Based Compensation," requires companies electing to continue to use the intrinsic value method to make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. Commodore has adopted the disclosure only provisions of SFAS 123. Concentration of Credit Risk Commodore maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. Commodore has not experienced any losses in such accounts. Commodore believes it is not exposed to any significant credit risk on cash and cash equivalents. Segment Reporting In 1998, Commodore adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 provides that the internal organization that is used by management for making operating decisions and assessing performance is the source of Commodore's reportable segments. SFAS 131 also requires disclosure about products and services, geographic areas and major customers. The adoption of SFAS 131 did not affect the results of operations or financial position of Commodore. Required disclosures are included in Note 19. -------------------------------------------------------------------------------- F-12 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Fair Value of Financial Instruments Significant The fair value of financial instruments is determined by Accounting reference to various market data and other valuation Policies techniques as appropriate. Convertible bonds, accounts Continued receivable, notes receivables, long-term debt and the line of credit are financial instruments that are subject to possible material market variations from the recorded book value. There are no material differences between the fair value of these financial instruments and the recorded book value as of December 31, 2000 and 1999. Use of Estimates The preparation of consolidated 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 the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Going Going Concern Concern The accompanying consolidated financial statements have been prepared under the assumption that Commodore will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As shown in the financial statements for the years ended December 31, 2000, 1999, and 1998, Commodore has incurred substantial losses and net cash outflows from operating activities. At December 31, 2000 and 1999, Commodore also has a net stockholders' deficit. -------------------------------------------------------------------------------- F-13 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 3. Going The consolidated financial statements do not include any Concern adjustments that might be necessary should Commodore be Continued unable to continue as a going concern. Commodore's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitability. Potential sources of cash include new contracts, profitable operations, 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 Commodore will be able to obtain any of these potential sources of cash. 4. Other On December 30, 1994, Commodore entered into an Receivables agreement with one of its debtors whereby the debtor would pay to Commodore all future proceeds from a note which the debtor received as proceeds from the sale of the property. Management has adjusted the realization allowance to reflect its estimate of the net realizable value of the receivable. During the year ended December 31, 2000, the Company received proceeds in satisfaction of the receivable. Other receivables comprise the following at December 31, 2000 and 1999: 2000 1999 ------------------------------- Note receivable, with interest at 10%, due in various installments through 2002, unsecured $ - $ 221 Self insurance receivable 100 100 ------------------------------- Total notes and other receivables, net of realization allowance $ 100 $ 321 ------------------------------- -------------------------------------------------------------------------------- F-14 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 5. Investments Investments consist of the following: 2000 1999 --------------------------------- Commodore Applied Technologies $ 154 $ 2,987 Louisiana Property - 98 --------------------------------- $ 154 $ 3,085 --------------------------------- As described in notes 1, 2, and 17, the Company accounts for Applied on the equity method at December 31, 2000 and 1999. The difference between the carrying value of Commodore's ownership percentage in Applied and the equity book value on Applied's financial statements is the result of various equity sales of preferred stock by Applied. Condensed financial statements for Applied at December 31, 2000 and 1999 and for the years then ended are as follows: December 31, --------------------------------------- 2000 1999 --------------------------------------- Current assets $ 7,141 $ 6,001 --------------------------------------- Non-current assets $ 30,332 $ 10,046 --------------------------------------- Current liabilities $ 24,017 $ 5,195 --------------------------------------- Equity - preferred and other $ 7,322 $ 4,782 --------------------------------------- Equity - common $ 533 $ 5,169 --------------------------------------- Years Ended December 31, ---------------------------------------------- 2000 1999 1998 ---------------------------------------------- Revenues $ 20,631 $ 18,147 $ 17,470 Expenses 32,072 22,132 (30,823) ---------------------------------------------- Net loss $ (11,441) $ (3,985) $ (13,353) ---------------------------------------------- In 1994, Commodore obtained an interest in an oil and gas field located in Louisiana. The investment, has been accounted for under the equity method. During the year ended December 31, 2000, the Company sold its investment and received proceeds equal to its book value of the investment of $98. -------------------------------------------------------------------------------- F-15 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 6. Property and Property and equipment consist of the following: Equipment December 31, ------------------------ 2000 1999 ------------------------ Machinery and equipment $ - $ 1,370 Furniture, fixtures, and equipment 100 366 Leasehold improvements - 211 ------------------------ 100 1,947 Less: accumulated depreciation and amortization (73) 1,211 ------------------------ Net property and equipment $ 27 $ 736 ------------------------ During the year ended December 31, 2000, due to the loss of the contracts at the Port of Baltimore by Separation, Separation recorded a write down of the majority of its equipment and exchanged the remaining equipment for a reduction of a payable to a company owned by an officer and shareholder of the Company. 7. Other Other accrued liabilities consist of the following: Accrued Liabilities 2000 1999 ------------------------------- Warrants issued for purchase of Applied Common Stock $ 992 $ 1,054 Interest payable 85 - Other 184 126 ------------------------------- $ 1,261 $ 1,180 ------------------------------- -------------------------------------------------------------------------------- F-16 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 8. Bonds Bonds Payable Payable and In 1993 and 1994, Commodore issued $4,000 of convertible Long-Term bonds which carry an interest rate of 8.5% payable Debt quarterly, and matured on December 4, 2000. The bonds are secured by 16,800,000 unissued shares of Commodore's Common Stock and 6,000,000 shares of Applied's Common Stock which Commodore owns. The bonds are convertible at any time into Common Stock of Commodore at the rate of one share per $1.00 of bond principal. To obtain the bonds, Commodore paid an aggregate commission of $480 in cash and issued 5 year warrants to purchase 2,233,332 shares of Common Stock at $.10 per share. The bonds are redeemable at Commodore's option at the face amount thereof plus accrued interest when the bid price of Commodore's Common Stock exceeds $1.25 per share. In 1995, as consideration to modify the collateral agreement, Commodore issued warrants to the lender for the purchase of 2,000,000 shares of Common Stock at a price of $.68 per share through December 31, 2000. The bonds are in default at December 31, 2000. Promissory Note Payable The Company has an 8% note payable to a former officer of a subsidiary. The principal amount of the loan is $2,250 at December 31, 2000 and 1999, and is due in 2006. The note is unsecured and requires interest only payments until maturity. Accrued and unpaid interest is $528 and $349 as of December 31, 2000 and 1999, respectively, and is included in amounts due to related parties. 9. Income Commodore 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. -------------------------------------------------------------------------------- F-17 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 9. Income The provision for income taxes for the years ended Taxes December 31, results in an effective tax rate which Continued differs from federal income tax rates as follows: 2000 1999 1998 --------------------------------------- Expected tax benefit at federal statutory rate $ (1,957) $ (1,325) $ (2,299) State income taxes, net of federal income tax benefit (345) (234) (406) Loss from unconsolidated subsidiary 1,814 591 892 Change in valuation allowance 488 963 1,807 Other - 5 6 --------------------------------------- Income tax benefit $ - $ - $ - --------------------------------------- The components of the net deferred income tax as of December 31, are as follows: 2000 1999 1998 --------------------------------------- Net operating loss carryforward 11,764 11,276 10,313 Less: Valuation allowance (11,764) (11,276) (10,313) --------------------------------------- Total $ - $ - $ - --------------------------------------- Included in the change in the valuation allowance at December 31, 1998 is $10,923 which relates to the deconsolidation of Applied and its net operating loss carryforwards which are no longer available to the consolidated group. Commodore conducts a periodic assessment of its valuation allowance. Factors considered in the evaluation include recent and expected future earnings and Commodore's liquidity and equity positions. As of December 2000 and 1999, Commodore has established a valuation allowance for the entire amount of net deferred tax assets. -------------------------------------------------------------------------------- F-18 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 9. Income Commodore has net operating loss ("NOL") carryforwards Taxes at December 31, 2000 of approximately $38,000 which Continued includes the NOL of Separation and expire in the years 2001 through 2020. The NOL carryforwards are limited to use against future taxable income due to changes in ownership and control. If a substantial change in Commodore's ownership should occur, there would be an annual limitation of the amount of NOL carryforwards which could be utilized. 10. Stockholders' Common Stock Equity In 1998, Commodore issued 500,000 shares of Common Stock valued at $55 in exchange for services. Common Stock issued through the exercise of options and warrants is described in Note 12. Preferred Stock Commodore has authorized 3,000,000 shares of Series AA Preferred Stock, par value $.01 per share. The Series AA Preferred Stock pays non-cumulative annual dividends from current earnings of $.10 per share and has a liquidation value of $1.00 per share. The Series AA Preferred Stock is redeemable by Commodore for $1.00 per share at any time the bid price of Commodore's Common Stock equals or exceeds $1.25 per share and is convertible into shares of Commodore Common Stock at a 1 to 1 ratio. In 1998, 200,000 shares of Series AA Preferred Stock were converted into 200,000 shares of Commodore Common Stock. In 2000, 600,000 shares of Series AA Preferred Stock were converted into 1,200,000 shares of Commodore Common Stock. The Series AA Preferred shares carry detachable warrants to purchase 6,000,000 shares of Commodore Common Stock at an exercise price of $.10 per share. At December 31, 2000 and 1999, 1,925,000 shares and 2,525,000 shares of Series AA Preferred Stock remained outstanding, respectively. -------------------------------------------------------------------------------- F-19 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 10. Stockholders' Preferred Stock - Continued Equity Commodore has authorized 1,600,000 shares of Series B Continued Preferred Stock, par value $.01 per share. The Series B Preferred Stock pays non-cumulative annual dividends from current earnings of $.08 per share (commencing in 1998) and has a liquidation value of $1.00 per share. The Series B Preferred Stock is redeemable by Commodore at any time at a redemption price of $1.10 per share and is convertible into Commodore Common Stock at a ratio of 3 shares of Series B Preferred Stock to 1 share of Common Stock. In 1998, 82,167 shares of Series B Preferred Stock were converted into 27,389 shares of Commodore Common Stock. At December 31, 2000 and 1999, 1,387,202 shares of Series B Preferred Stock remained outstanding. Commodore has authorized 1,500,000 shares of Series C Preferred Stock, par value of $.01 per share. The Series C Preferred Stock does not pay dividends. In January, 1998, all of the outstanding shares of the Series C Preferred Stock was converted into Commodore Common Stock at a ratio based on the market value of the Common Stock at that time compared to an assumed value of Series C Preferred Stock of $10.00 per share. The market value used in this conversion was approximately $.51 per share. The total amount of Commodore's Common Stock issued in connection with this conversion was 2,244,361 shares. In addition, the Company has 3.9 million shares of unissued preferred stock. 11. Redeemable In May and August 1997, Commodore sold an aggregate of Preferred 88,000 shares of its Series D Preferred Stock for net Stock proceeds of $7,612 after transaction costs of $968. The Series D Preferred Stock is convertible into shares of Applied Common Stock held by Commodore at a conversion price equal to approximately 85% of the Applied Common Stock market price, subject to certain floors. -------------------------------------------------------------------------------- F-20 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 11. Redeemable Because the Redeemable Preferred Stock had a conversion Preferred rate less than the market price of Applied Common Stock Stock on the date of issue (a beneficial conversion feature), Continued the intrinsic value of the difference, $1,553, was recorded in 1997 as a direct increase in paid-in capital. This amount was to be recorded as a non-cash Preferred dividend over the earliest possible conversion period (five months). Because of the early conversions discussed in the following paragraphs, only $1,477 of the total amount was required to be recorded as a preferred dividend. During 1998, the remaining shares of Series D Preferred Stock were converted into 1,724,250 shares of Applied Common Stock, based upon conversion prices ranging from $1.50 per share to $3.93 per share. These conversions resulted in net gains of $3,046 during the year ended December 31, 1998 which were included in gain on sale of subsidiary stock. Because the Series D Preferred Stock was convertible into a security other than the Common Stock of Commodore, the Series D Preferred stock was classified as Redeemable Preferred Stock, and excluded from stockholder's equity. The purchasers of the Series D Preferred Stock also received five-year warrants to purchase an aggregate of 1,175,000 shares of Applied Common Stock held by Commodore at exercise prices ranging from $5.15 per share to $7.14 per share. Such exercise prices were subject to reset on August 18, 1998 to an exercise price equal to approximately 110% of the market price of Applied Common Stock on August 17, 1998. In addition, if Applied Common Stock traded at less than 50% of the August 17, 1998 closing bid price for any 10 consecutive trading days, the exercise price was subject to further reset (on one occasion only) to 50% of such August 17, 1998 closing bid price. The warrants were valued at $850 and were recorded as a liability until such time as the warrants are either exercised or expire. Affiliates of the placement agent also received warrants to purchase an aggregate of 85,000 shares of Applied Common Stock, with identical price reset features. The placement agent warrants were also recorded as a liability at the time of issuance. The exercise price of the warrants issued in connection with the Series D Preferred Stock were reset to $0.82 per share effective August 18, 1998, and again reset to $0.34 per share effective October 1998. -------------------------------------------------------------------------------- F-21 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 11. Redeemable During the year ended December 31, 2000 options were Preferred exercised to purchase 74,375 shares for an aggregate Stock amount of $26. The Company reduced its investment in Continued Applied and reduced its liability recorded in connection with the warrants and recognized a gain on sale of subsidiary stock of $77. 12. Stock Option Under the 1997 Stock Option Plan (the Option Plan), a Plan maximum of 15,000,000 Non-Qualified and 3,000,000 incentive options may be granted to purchase common stock at the date of grant. Under the Option Plan, grants of non-qualified options may be made to selected officers, directors, key employees, and consultants without regard to performance measures. The options may be immediately exercisable or may vest over time as determined by the Board of Directors. However, the maximum term of an option may not exceed ten years. Options may not be transferred except by reason of death, with certain exceptions and termination of employment accelerates the expiration date of any outstanding options to 3 months from the date of termination. Number of Option Price Options Warrants Per Share ------------------------------------------ Outstanding at January 1, 1998 8,665,000 14,823,000 $0.05 - 1.13 Granted 8,245,000 3,557,000 0.10 Exercised - (1,141,000) 0.10 Expired/Forfeited - (11,482,000) 0.01 - 0.10 Rescinded (6,905,000) - 0.10 - 0.84 ------------------------------------------ Outstanding at December 31, 1998 10,005,000 5,757,000 0.10 - 1.13 Granted - - - Exercised - - - Expired/Forfeited - (200,000) 0.14 ------------------------------------------ Outstanding December 31, 1999 10,005,000 5,557,000 0.10 - 1.13 Granted - - Exercised - - Expired/Forfeited (450,000) (1,975,000) 0.37 - 0.50 ------------------------------------------ Outstanding December 31, 2000 9,555,000 3,582,000 $0.10 - 1.13 ------------------------------------------ -------------------------------------------------------------------------------- F-22 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 12. Stock Option Options exercisable are as follows: Plan Continued December 31, ---------------------------------------- 2000 1999 1998 ---------------------------------------- Options exercisable 9,555,000 9,965,000 9,633,000 Options available for grant 9,755,000 9,755,000 9,755,000 13. Stock Based The Company has adopted the disclosure-only provisions Compensation of Statement of Financial Accounting (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 2000, 1999, and 1998 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 (in thousands, except per share amounts): Years Ended December 31, --------------------------------------- 2000 1999 1998 --------------------------------------- Net loss - as reported $ (5,756) $ (3,896) $ (6,761) Net loss - pro forma $ (5,773) $ (3,928) $ (7,418) Loss per share - as reported $ (0.09) $ (0.06) $ (0.11) Loss per share - pro forma $ (0.09) $ (0.06) $ (0.12) -------------------------------------------------------------------------------- F-23 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 13. Stock Based No option grants were made in 2000 or 1999. The fair Compensation value of each option grant is estimated at the date of Continued grant using the Black-Scholes option pricing model with the following assumptions: 1998 ----------------- Expected dividend yield $ - Expected stock price volatility 105% Risk-free interest rate 5% Expected life of options 5-10 years ----------------- The weighted average fair value of options granted during 1998 is $.10. The following table summarizes information about stock options and warrants outstanding at December 31, 2000. Outstanding Exercisable -------------------------------------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercisable Prices Outstanding Life Price Exercisable Price --------------------------------------------------------------------------- $.05 - .10 11,098,000 2.48 years $ 0.09 11,098,000 $ 0.09 .28 - .29 1,479,000 5.32 years 0.29 1,479,000 0.29 1.12 560,000 3.00 years 1.12 560,000 1.12 --------------------------------------------------------------------------- $.05 - 1.12 13,137,000 2.82 years $ 0.16 13,137,000 $ 0.16 --------------------------------------------------------------------------- Stock Warrants In 1998, Warrants for the purchase of 591,143 shares of Common Stock were exercised resulting in net proceeds to Commodore of $39. In 1998, warrants for the purchase of 2,070,834 shares of common stock were issued to consultants, the warrants were valued at $81 and recorded as an expense. As of December 31, 2000, all stock warrants and options are exercisable. -------------------------------------------------------------------------------- F-24 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 14. Related Party In March 1998, Applied held a note receivable from Transactions Lanxide Performance Materials, Inc. (LPM), a wholly owned subsidiary of Lanxide Corp. Lanxide Corp. was related to Commodore by significant common ownership. The receivable was recorded at a net realizable value of $831. During March 1998, Applied transferred its receivable from LPM and $500 cash to Commodore as a payment on amounts due under the September 1997 Intercompany Note (see Note 17). Also in March 1998, Commodore incorporated Polymer as a wholly- owned subsidiary, and through Polymer exchanged its note receivable from LPM, including the note recently acquired from Applied, along with $500 cash for a license and trademark technology called CERASET owned by Lanxide. Commodore recorded the license at the carrying value of the notes receivable plus the cash exchanged. The Company sold its investment in Polymer on March 6, 2000 to a company related by common ownership (see Note 17). Due to Related Parties The Company has a note payable to a related party in the amount of $2,250 at December 31, 2000 and 1999 with accrued interest payable of $528 and $349, respectively (see note 8). The Company has a payable to a company wholly owned by the majority shareholder of Commodore of $2,132 and $2,300 at December 31, 2000 and 1999, respectively, for cash advances and accrued interest on cash advances at 8.5% recorded in due to related parties. The Company also has a payable to Applied of $262 at December 31, 1999. During the year ended December 31, 2000 the Company sold 1 million shares of its Applied common stock as an incentive to the buyer to make a loan to Applied. The amount of $500 was recorded as a receivable from Applied for the fair value of the 1 million shares less the amount paid by the lender. The Company used the receivable to offset its payable to Applied and the remaining receivable amount of $242 was written off as related party bad debt. At December 31, 2000 there is no receivable or payable from Applied. -------------------------------------------------------------------------------- F-25 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 14. Related Party Sale of Discontinued Operations Transactions The Company in March 2000 sold its investment in Polymer Continued to an entity related by common ownership. The Company exchanged its investment in Polymer for a reduction of payables to the related entity of $1,589. The Company realized a gain of $1,568 on the disposal. 15. Non-Cash During the years ended December 31, 2000, 1999, and Investing and 1998, Commodore had the following non-cash investing and Financing financing transactions: Activities 2000 ---- o Commodore recorded equity gains on changes of interest in Applied of $1,770 as direct increases in equity (see note 17). o Commodore sold 74,375 shares of its common stock of Applied and received $25 in cash and $62 in reduction of a liability as proceeds. o Commodore sold 1 million shares of its common stock in Applied and received $10 in cash and $500 as receivable from Applied (see Note 14). o Preferred shareholders converted an aggregate 600,000 shares of Series AA Preferred Stock to 1,200,000 shares of common stock resulting in a decrease of $6 of additional paid-in capital. o Proceeds from the sale of discontinued operations of $1,589 and the sale of equipment of $227 were received as a reduction in related party payables. 1999 ---- o Commodore recorded equity losses on changes of interest in Applied of $31 as a direct decrease in equity (see Note 17). -------------------------------------------------------------------------------- F-26 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 15. Non-Cash 1998 Investing and ---- Financing o In February 1998, Commodore's investment in Applied Activities was reduced below 50% and Commodore began to account Continued for its investment on the equity method rather than through consolidation. Upon de- consolidation, Commodore removed its minority interest liability related to Applied of $5,478 and recorded an investment in Applied of $6,060. The Company also removed the following assets and liabilities from its consolidation: Assets ------ Cash $ 11,060 Accounts receivable, net 2,926 Notes and advances to related parties 911 Restricted cash and CDs 107 Inventory 487 Prepaid and other current assets 275 Other receivables 32 Investments and advances 1,333 Property and equipment, net 2,440 Patents and completed technology 1,144 Goodwill, net 7,332 Other assets 93 -------- Total assets $ 28,140 -------- Liabilities ----------- Accounts payable $ 1,441 Payables to related parties 251 Line of credit 1,069 Accrued liabilities 3,794 Long term debt 53 Notes to related parties 3,340 Minority interest 6,645 -------- Total liabilities $ 16,593 -------- -------------------------------------------------------------------------------- F-27 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 15. Non-Cash o In September 1998, Commodore acquired an 87% common Investing and stock interest in Separation from Applied and Financing consolidated the financial statements of Separation. Activities Separation was acquired for $1,250,000 which was Continued partial satisfaction of a receivable from Applied. Due to the liquidation value of the preferred stock held by minority shareholders the entire net assets of Separation of $2,138 is recorded as a minority interest liability. Consequently, the Company's investment in Separation was written down to zero. The assets and liabilities acquired are as follows: Assets ------ Cash $ 715 Accounts receivable 1 Notes and advances to related parties 2 Restricted cash and CDs 210 Inventory 631 Property and equipment, net 1,494 Patents and completed technology 184 -------- Total assets $ 3,237 -------- Liabilities ----------- Accounts payable $ 93 Payables to related parties 367 Unearned revenue 450 Accrued liabilities 183 Long term debt 6 -------- Total liabilities $ 1,099 -------- o In February 1998, Applied transferred a receivable of $1,500 from an affiliate to Commodore for debt reduction. o In March 1998, Commodore transferred notes receivables from an affiliate of $3,936, and cash of $500 in exchange for purchased technology (see Note 14). -------------------------------------------------------------------------------- F-28 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 15. Non-Cash o In September 1998, Applied repaid Intercompany Notes Investing and of $5,506 through the exchange of a receivable from Financing Separation of $357 and issuance of Preferred Stock of Activities $5,149 (see Note 17). Continued o Commodore recorded equity gains on changes of interest in Applied of $720 as a direct increase in equity (see Note 17). o The remaining shares of Series D Preferred Stock were converted into shares of Applied common stock held by Commodore. o 397,375 shares of Preferred stock were converted into 2,471,750 shares of common stock. o The Company distributed its common stock of Applied as a dividend to holders of Series D Preferred Stock in the amount of $152. 16. Earnings Per All earnings per share amounts reflect the Share implementation of SFAS 128, "Earnings Per Share." Basic earnings per share are computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of shares determined for the basic computations plus the number of shares of Common Stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share that were outstanding for the year. Years Ended December 31 ----------------------------------- 2000 1999 1998 ----------------------------------- Net loss from continuing operations $ (7,189) $ (2,950) $ (1,834) Preferred Stock dividends - - (279) ----------------------------------- Net loss applicable to common shareholders from continuing operations (7,189) (2,950) (2,113) Net income (loss) applicable to common shareholders from discontinued operations 1,433 (946) (4,927) ----------------------------------- Total net loss applicable to common shareholders $ (5,756) $ (3,896) $ (7,040) ----------------------------------- Weighted average common shares outstanding (basic) 62,905,000 62,796,000 61,981,000 ----------------------------------- -------------------------------------------------------------------------------- F-29 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 16. Earnings Per Share Continued Employee stock options (Note 14) (*) (*) (*) Series AA Convertible Preferred Stock (Note 11) (*) (*) (*) Series B Convertible Preferred Stock (Note 11) (*) (*) (*) Series C Convertible Preferred Stock (Note 11) (*) (*) (*) Warrants issued in connection with various transactions (Note 14) (*) (*) (*) --------------------------------- Weighted average common shares outstanding (diluted) 62,905,000 62,796,000 61,981,000 Net loss per share - basic and diluted - continuing operations $ (.11) $ (.05) $ (.03) Net income (loss) per share - basic and diluted - discontinued operations $ .02 $ (.01) $ (.08) ------------------------------------ Total net loss per share $ (.09) $ (.06) $ (.11) ----------------------------------- (*) Due to Commodore's loss from continuing operations in 2000, 1999, and 1998, the incremental shares issuable in connection with these instruments are anti-dilutive and accordingly not considered in the calculation. 17. Acquisitions Commodore Applied Technologies, Inc. and Reorgan- At December 31, 2000 and 1999, Commodore owned 30% and izations 49%, respectively, of the Common Stock outstanding of Commodore Applied Technologies, Inc. ("Applied"). Commodore capitalized Applied in March 1996 by exchanging the capital stock of other consolidated subsidiaries; rights, titles, assets and properties related to certain proprietary technology; and a promissory note for all 15,000,000 newly issued shares of Applied. In February 1998, Commodore's investment in Applied fell below 50% due to the Company selling an aggregate of 2,782,646 shares of its investment in Applied. Accordingly, Applied was deconsolidated and is now accounted for under the equity method of accounting from February 1, 1998 through December 31, 2000. -------------------------------------------------------------------------------- F-30 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 17. Acquisitions Commodore Applied Technologies, Inc. - Continued and Reorgan- In October 1997, Applied sold 700,000 shares of Common izations Stock for net proceeds of approximately $2,344. The Continued sales agreement related to these shares specified certain price reset provisions. At December 31, 1997, the aggregate price reset amount was $1,198 which was accrued by Applied as a liability. In 1998, Applied issued 599,063 additional shares of Applied Common Stock to unrelated parties in fulfillment of this liability. This issuance of Applied's Common Stock resulted in a net gain for Commodore of $343, which was recorded directly to equity during 1998. In 1998, Stockholders owning 9,600 shares of Applied's Series A Preferred Stock elected to convert their shares to Applied Common Stock. Commodore recognized a $376 gain on the 1998 conversions of preferred stock as a direct increase in equity. In February 1998, Commodore sold (i) 1,381,692 shares of its Applied Common Stock and (ii) three-year warrants to purchase an aggregate of 150,000 shares of Applied Common Stock at an exercise price equal to $6.00 per share, for an aggregate purchase price of $6,000. Pursuant to the terms of this transaction, Commodore was required to issue an additional 1,400,954 shares of Applied Common Stock to the investors for no additional consideration related to price reset provisions of the sale agreement, based upon the market price of Applied Common Stock. This sale of Applied Common Stock resulted in a net gain for Commodore of $4,577 during 1998 which is reflected in the statement of operations. The warrants were valued at $131 and were recorded as a liability until such time as the warrants are either exercised or expire. In March 1998, Applied transferred its $1.5 million receivable from Lanxide Performance Materials, Inc., a wholly-owned subsidiary of Lanxide Corporation, with a carrying value of $831 with $500 in cash for debt reduction for amounts due under the 1997 Intercompany Note (see Note 15). Lanxide was related to Commodore by substantial common ownership. In connection with the exchange, Applied issued a warrant to Commodore to purchase 14,000 shares of Common Stock at an exercise price of $4.50, 100% of the market price on the date of closing. The warrant expires in August 2001. The warrant issued in connection with this transaction was subsequently valued at $0 with no net effect on the financial statements. -------------------------------------------------------------------------------- F-31 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 17. Acquisitions Commodore Applied Technologies, Inc. - Continued and Reorgan- On September 28, 1998, Applied repaid the Intercompany izations Notes Receivable which totaled $6,756 owed to Commodore Continued by i) transferring its 87% interest in the common stock of Separation ii) issuing 20,909 shares of newly created Applied Series B Convertible Preferred Stock, iii) issuing 10,189 shares of newly created Applied Series C Convertible Preferred Stock, iv) issuing 20,391 of newly created Applied Series D Convertible Preferred Stock, v) transferring a $357 receivable from Separation, and vi) making a modification of the new warrants granted in connection with the 1998 Intercompany Note reducing the exercise price to $1.50. The value of the stock and receivable was determined by an outside unrelated party. The value of consideration received was less than the carrying amount of the Intercompany Notes. Accordingly, a $1,962 loss was recognized on satisfaction of the notes receivable and is included in general and administration expenses. In November 1999, Commodore converted all of its 51,489 shares of Applied's Series B, C and D Convertible Preferred Stock to 7,258,533 shares of Applied's Common Stock, increasing its ownership of Applied Common Stock to 49%. In December 1999, Applied paid dividends to the holders of its Series E Convertible Preferred Stock. As a result, Commodore recorded a decrease in its investment in Applied of $31 directly against equity. During 2000, Applied paid dividends to holders of its Preferred Stock. As a result, Commodore recorded a decrease in its investment in Applied of $255 directly against equity. During 2000, Applied issued an aggregate 15,600,000 shares of common stock to purchase another entity and in settlement of litigation. As a result, Commodore recorded an increase in its investment in Applied of $1,760 as a direct increase to equity. During 2000, Applied issued common stock related to the exercise of options, the settlement of a lawsuit and conversions from preferred stock. As a result of these transactions, Commodore recorded a net increase in its investment in Applied of $271 directly against equity. -------------------------------------------------------------------------------- F-32 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 17. Acquisitions Commodore Separation Technologies, Inc. and Reorgan- On December 2, 1996 Applied purchased three wholly-owned izations subsidiaries of Commodore, including, Separation, for Continued $5,400, consisting of $3,000 in cash and warrants to purchase 7,500,000 shares of Applied's Common Stock at an exercise price of $15.00 per share and with termination date of December 2, 2003. These warrants were amended in February 1998. The acquisition was accounted for as a transaction between entities under common control (carryover basis). In April 1997, Separation completed an initial public offering of its Common and Preferred equity securities. This offering reduced Applied's equity ownership in Separation from 100 percent to 87 percent. The face value and liquidation value of the Separation Preferred Stock was $6,000. The non-cumulative dividend rate on the Separation Preferred Stock is 10%. During 2000 Separations preferred shareholders converted 30,500 shares of preferred stock to Separation common stock reducing the liquidation value of the preferred stock to $5,695. For the years ended December 31, 2000, 1999 and 1998, Separation paid dividends to its Preferred shareholders of $0, $0 and $300, respectively. Effective September 28, 1998, Commodore acquired Applied's 87% ownership of Separation, as part of the debt restructuring between Commodore and Applied as previously discussed. Accordingly, Separation is included in the consolidated financial statements of Commodore as of December 31, 2000 and 1999 and for the period since the acquisition. The results of operations of Separation were consolidated with Commodore through January 1998, through Commodore's ownership in Applied. The unaudited pro forma combined results of operations of Commodore for the year ended December 31, 1998, as if the acquisition of Separation had occurred on January 1, 1998 is as follows: Revenues $ 1,673 Net loss before extraordinary item $ (6,105) Net loss $ (8,067) Net loss per share $ (0.13) -------------------------------------------------------------------------------- F-33 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 17. Acquisitions Commodore Polymer Technologies, Inc. and Reorgan- On March 5, 1998 Commodore incorporated a new company, izations Commodore Polymer Technologies, Inc. (Polymer), as a Continued wholly-owned subsidiary and transferred the CERASET technology acquired from Lanxide into Polymer (see Note 15). The Company determined that although the CERASET technology has proven effective during testing, the commercial viability of the technology has not been demonstrated. Further, the Company is unable to determine the cost, in dollars or time, necessary to bring the CERASET technology to economic profitability. As a result of this uncertainty, at December 31, 1998 Polymer recorded an impairment on the technology asset of $4,154, bringing its net equity, and the investment of Commodore in Polymer to $100. Also in 1998 and through March 6, 2000 the Company began developing new Polymer technologies. During 2000, 1999 and 1998, the Company, through Polymer, has expensed approximately $135, $240 and $410, respectively, related to the development of the new technologies. Effective March 6, 2000 Commodore sold all of its stock in Polymer, which contains the new technologies, to Blum Technology Trust, an entity with common majority ownership for $1,589, recognizing a gain of $1,568 on disposal of discontinued operations in 2000. Minority Interests in Consolidated Subsidiaries Minority interest in the consolidated financial statements at December 31, 2000 and 1999 consist of the Separation Preferred Stock and accrued unpaid dividends to Separation's preferred stockholders. By December 31, 1998, all of Separation's Common Equity had been reduced to zero, resulting in 100% of the equity operations of Separation for 1999 being attributed to Separation's preferred stockholders. During 2000 Separation continued to have losses which resulted in the liabilities of Separation exceeding the assets and thereby reducing Separation's Preferred Equity to zero. The remaining losses were all attributable to Commodore, the majority common shareholder. -------------------------------------------------------------------------------- F-34 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 18. Discontinued Condensed financial information for Polymer, which was Operations discontinued, is as follows for the period from January 1, 2000 to March 6, 2000 (date of disposition), the year ended December 31, 1999 and the period from March 5, 1998 (date of inception) through December 31, 1998: 2000 1999 1998 --------------------------------- Revenues $ - $ 44 $ 22 Costs and expenses (135) (990) (795) Impairment loss - - (4,154) --------------------------------- Net loss before income tax expense (135) (946) (4,927) Income tax expense - - - --------------------------------- Net loss from discontinued operations $ (135) $ (946) $ (4,927) --------------------------------- Net liabilities of discontinued operations consists of the following at December 31, 1999: Property and equipment, net $ 21 Completed technology, net 60 Accounts payable (110) --------------- $ (29) --------------- -------------------------------------------------------------------------------- F-35 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 19. Segment Using the guidelines set forth in SFAS No. 131, Information "Disclosures About Segments of an Enterprise and Related Information," Commodore has identified three reportable segments in which it has operations based on the services it provides. The reportable segments are as follows: Commodore Applied Technologies, Inc., ("Applied") which primarily provides various engineering, legal, sampling and public relations service to Government agencies on a cost -plus basis; Commodore Separation Technologies, Inc., ("Separation"), which provides water and contaminant separation by use of patented process; and Commodore Polymer Technologies, Inc. ("Polymer"), which specializes in the manufacture of ceramic bonding and refractory materials. Common overhead costs are allocated between segments based on a record of time spent by executives. Commodore evaluates segment performance based on the segment's net income (loss). The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Commodore's foreign and export sales and assets located outside of the United States are not significant. Summarized financial information concerning Commodore's reportable segments is shown in the following table. Effective February 1998, Commodore's investment in Applied fell below 50% and is now accounted for on the equity method. Accordingly, the 1998 results of operations reflected only one month for Applied and nothing is reflected for 2000 and 1999. Effective September 28, 1998, Applied sold its investments in Separation to Commodore, and accordingly, the summarized information for Separation is only included from the date of sale for 1998. -------------------------------------------------------------------------------- F-36

COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 20. Commitments Operating Leases and Commodore and its subsidiaries are committed under Contingencies non-cancelable operating leases for office space and other equipment. Future obligations under the leases for the next five years are as follows: Year Amount ---- ------ 2001 $ 86 2002 86 2003 21 --------- $ 193 --------- Rent expenses were approximately $197, $200 and $137, in 2000, 1999 and 1998, respectively. Royalties Commodore and its related entities have entered into agreements where upon the generation of certain revenue royalties will be accrued and paid under various technology agreements. Litigation Commodore has matters of litigation arising in the ordinary course of its business which, in the opinion of the management, will not have a material adverse effect on the financial condition or results of operation. 21. 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 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. 22. Subsequent In February 2000 the Company satisfied a portion of its Event bonds payable with the issuance of 16,800,000 shares of its common stock and the transfer of 6,000,000 of Applied's common stock owned by the Company to the bondholders. -------------------------------------------------------------------------------- F-40 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Commodore Applied Technologies, Inc. and Subsidiaries We have audited the consolidated balance sheet of Commodore Applied Technologies, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commodore Applied Technologies, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses and net cash outflows from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Salt Lake City, Utah March 2, 2001 F-41 Report of Independent Accountants To the Board of Directors and Shareholders of Commodore Applied Technologies, Inc. and Subsidiaries: In our opinion, the consolidated statements of operations and comprehensive loss, of stockholders' equity 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 Applied Technologies, Inc. and its subsidiaries 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 consolidated financial statements of Commodore Applied 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 that 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania April 8, 1999 F-41A

Non-Cash Investing and Financing Activities: 2000 ---- Effective August 31, 2000, the Company acquired an 81% interest in Dispute Resolution Management, Inc. (DRM) (see Note 6). Consideration consists of the following: 9.5 million option shares of common stock $ 13,122 6.0 million shares of common stock 6,563 Warrants to purchase 1 million shares of common stock 959 Future payment guarantee 7,412 -------------- Total consideration $ 28,056 -------------- Assets and liabilities acquired: Accounts receivable $ 157 Property and equipment 124 Prepaids and other current assets 47 Goodwill 25,095 Covenant not to compete 2,625 Other assets 36 Accounts payable (61) Accrued expenses (5) Note payable (470) -------------- $ 27,548 -------------- Cash received $ 508 -------------- -------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-48 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows Continued -------------------------------------------------------------------------------- 2000 - Continued ---------------- A shareholder of the Company transferred 100,000 shares of its common stock in the Company to holders of notes payable from the Company. The common stock was valued at $500 with $167 considered prepaid and $333 expensed as interest. The Company issued a warrant valued at $89 in connection with a debt issuance. The Company converted 45,000 shares of Series E & F Preferred Stock to 440,581 shares of common stock. The Company financed equipment and prepaid assets with notes payable and long-term debt of $459. The Company accrued $420 of unpaid dividends to holders of Preferred Stock. 1999 ---- In 1999, 51,489 shares of Series B, C and D Preferred Stock held by Commodore with an aggregate value of $2,001 were converted into common stock (Note 12). 1998 ---- In February 1998, Commodore provided a $5,450 loan to Applied. In connection with the loan, Applied issued new and amended warrants valued at $1,369 in the aggregate and recorded as additional paid-in capital (Note 15). In February 1998, Applied transferred a receivable from an affiliate with a carrying value of $830 to Commodore for debt reduction. In connection with the transaction, Applied issued a warrant to Commodore with a fair value of $340 which was recorded as additional paid-in capital (Note 15). In September 1998, Applied repaid Intercompany Notes with a carrying value of $5,660 through the exchange of 87% interest in the Common Stock of Separation and receivable from Separation with a value of $500, issuance of Preferred Stock with a value of $2,001 and modification of a warrant with a value of $5 (Note 15). In October 1998, Applied satisfied a price reset liability with an aggregate balance of $1,198, recorded as an accrued liability at December 31, 1997, through the issuance of additional shares of Common Stock Note 15). In 1998, 9,600 shares of Series A Preferred Stock with an aggregate value of $876 were converted into Common Stock (Note 12). -------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-49 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows Continued -------------------------------------------------------------------------------- Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 158 $ 166 $ 289 -------------------------------- Taxes $ - $ - $ - -------------------------------- -------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-50 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000 and 1999 (In thousands except share and per share data) -------------------------------------------------------------------------------- 1. Background Commodore Applied Technologies, Inc. and subsidiaries ("Applied"), is engaged in the destruction and neutralization of hazardous waste from other materials. Applied owns technologies related to the separation and destruction of polychlorinated biphenyls (PCBs) and chlorofluorocarbons (CFCs). Applied is currently working on the commercialization of these technologies through development efforts, licensing arrangements and joint ventures. Through Commodore Advanced Sciences, Inc. ("CASI"), formerly Advanced Sciences, Inc., a subsidiary acquired on October 1, 1996, Applied has contracts with various government agencies and private companies in the United States and abroad. As some government contracts are funded in one year increments, there is a possibility for cutbacks as these contracts constitute a major portion of CASI's revenues, and such a reduction would materially affect the operations. However, management believes the subsidiary's existing client relationships will allow Applied to obtain new contracts in the future. Through Dispute Resolution Management, Inc. (DRM), a subsidiary acquired August 30, 2000, Applied provides a package of services to help companies recover financial settlements from insurance policies to defray costs associated with environmental liabilities. Until September 1998, Applied was also engaged in the separation of hazardous waste through its 87% owned subsidiary, Commodore Separation Technologies, Inc. ("Separation"). Effective September 28, 1998, Applied sold its investments in Separation to Commodore Environmental Services, Inc. ("Commodore") (See Note 15). -------------------------------------------------------------------------------- F-51 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Going Concern Significant The accompanying consolidated financial statements have Accounting been prepared under the assumption that Applied will Policies continue as a going concern. Such assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements for the years ended December 31, 2000, 1999 and 1998, Applied incurred losses of $11,441, $3,985, and $13,353, respectively. Applied has also experienced net cash outflows from operating activities. The consolidated financial statements do not include any adjustments that might be necessary should Applied be unable to continue as a going concern. Applied's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitability. Potential sources of cash include new contracts, external debt, the sale of new shares of Company stock or alternative methods such as mergers or sale transactions. Principles of Consolidation The consolidated financial statements include the accounts of Applied and its majority-owned subsidiaries. Dispute Resolution Management, Inc. is included in the consolidated operations from August 30, 2000 (date of acquisition) (see Note 6). All significant intercompany balances and transactions have been eliminated. The investment in Teledyne-Commodore, LLC, a 50% owned joint venture with Teledyne Environmental, Inc., has been accounted for under the equity method of accounting for the year ended December 31, 1998 and at the lower of cost or market for December 31, 1999 and 2000 due to the recovery value of the joint venture as Applied does not have a controlling interest in the venture. Effective September 28, 1998, Applied sold its investment in Separation to Commodore (see Note 15). Revenue Recognition Substantially all of Applied's revenues are generated by its subsidiaries, CASI and DRM. CASI revenues consist of engineering and scientific services performed for the U.S. Government and prime contractors that serve the U.S. Government under a variety of contracts, most of which provide for reimbursement of cost plus fixed fees. Revenue under cost-reimbursement contracts is recorded using the percentage of completion method as costs are incurred and include estimated fees in the proportion that costs incurred to date bear to total estimated costs. -------------------------------------------------------------------------------- F-52 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Revenue Recognition - Continued Significant Anticipated losses on contracts are provided for by a Accounting charge to income during the period such losses are first Policies identified. Changes in job performance, job conditions, Continued estimated profitability (including losses arising from contract penalty provisions) and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Direct and indirect contract costs are subject to audit by the Defense Contract Audit Agency ("DCAA"). Management does not expect these audits to materially affect the financial statements and have established appropriate allowances to cover potential audit disallowances. Contract revenues have been recorded in amounts which are expected to be realized upon final settlement. The DCAA has audited CASI's contracts through 1996. An allowance for doubtful accounts and potential disallowances has been established based upon the portion of billed and unbilled receivables that management believes may be uncollectible. DRM revenue is recognized on retainers according to the terms of each contract. Revenue is recognized on contingent success fees as each dispute with each insurer is resolved and a binding settlement agreement has been executed by all parties. Cash and Cash Equivalents Applied considers cash and highly liquid debt instruments with original maturities of three months or less at the date of purchase to be cash equivalents. Applied's investments in cash equivalents are diversified among securities with high credit ratings in accordance with Applied's investment policy. Concentration of Credit Risk and Significant Customers Applied maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Applied has not experienced any losses in such accounts. With respect to trade receivables, Applied generally does not require collateral as the majority of Applied's services are performed for the U.S. Government and prime contractors that serve the U.S. Government. Applied believes it is not exposed to any significant credit risk on cash, cash equivalents and trade receivables. -------------------------------------------------------------------------------- F-53 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Sales to major customers which exceeded 10 percent of Significant revenues are as foll0ws: Accounting Policies Years Ended December 31, Continued -------------------------------- 2000 1999 1998 ---- ---- ---- Customer A $ 11,618 $ 12,287 $ 10,673 Customer B $ 1,476 $ 3,692 $ 4,061 Customer C $ 742 $ 1,006 $ 1,972 The contract with Customer A ended on December 31, 2000. Risk and Uncertainty Applied's operations involving the separation and destruction of PCBs requires a permit from the EPA. Currently, Applied has a valid nationwide permit related to the treatment of PCBs in certain substances. The current permit expires September 15, 2001. If this permit is not renewed, Applied will not be permitted to service any contracts which utilize Applied's separation and destruction technology related to the treatment of PCB's. Presently, there is no information to suggest that the EPA will not renew Applied's permit or grant them the requested revision. Impairment of Long-Lived Assets Applied reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through undiscounted future cash flows. If it is determined that an impairment loss has occurred based on expected cash flows, such loss is recognized in the Statement of Operations. During the year ended December 31, 2000 the unamortized goodwill associated with the purchase of CASI was determined to be impaired and was written off in the amount of $6,586. This was a non-cash expense for the year 2000. -------------------------------------------------------------------------------- F-54 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Property and Equipment Significant Property and equipment are recorded at cost. Accounting Improvements which substantially increase the useful Policies lives of assets are capitalized. Maintenance and repairs Continued are expensed as incurred. Upon retirement or disposal, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recorded in the Statement of Operations. Provisions for depreciation are computed on the straight-line method based on the estimated useful lives of the assets which range from 2-10 years. Intangible Assets Goodwill represents the fair value of securities issued plus the fair value of net liabilities assumed in connection with the acquisitions of CASI and DRM (see Note 6). Goodwill is being amortized on a straight-line basis over its estimated life (20 to 30 years). Completed technology represents certain technology and related patents acquired in connection with the purchase of third-party interests in Commodore Laboratories, Inc. ("Labs"). Completed technology and patents are being amortized on a straight-line basis over their estimated 7 and 17 year lives, respectively. Covenants to compete are amortized over 5 years which is the life of the covenant (see Note 6). Applied annually evaluates the existence of impairment on the basis of whether the goodwill, covenants not to compete, patents and completed technology are fully recoverable from the projected undiscounted net cash flows of the assets to which they relate. Income Taxes Income taxes are determined in accordance with Statement of Financial Accounting Standards ("SFAS") 109, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the difference between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS 109 also provides for the recognition of deferred tax assets if it is more likely than not that the assets will be realized in future years. -------------------------------------------------------------------------------- F-55 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Research and Development Significant Research and development expenditures are charged to Accounting operations as incurred. Policies Continued Fair Value of Financial Instruments The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Accounts receivable, notes receivable, cash equivalents, long term debt and the line of credit are financial instruments that are subject to possible material market variations from the recorded book value. The Company has reflected in the financial statements debt discounts which are being amortized over the estimated lives of the obligations. The debt discounts bring the obligations to a market rate of interest. The fair value of these financial instruments approximate the recorded book value as of December 31, 2000 and 1999. Stock-Based Compensation Compensation costs attributable to stock option and similar plans are recognized based on any difference between the quoted market price of the stock on the date of the grant over the amount the employee is required to pay to acquire the stock (in the intrinsic value method under Accounting Principles Board Opinion 25). SFAS 123, "Accounting for Stock-Based Compensation," requires companies electing to continue to use the intrinsic value method to make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. Applied has adopted the disclosure only provisions of SFAS 123. Segment Information In 1998, Applied adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 provides that the internal organization that is used by management for making operating decisions and assessing performance is the source of Applied's reportable segments. SFAS 131 also requires disclosure about products and services, geographic areas and major customers. The adoption of SFAS 131 did not affect the results of operations or financial position of Applied (see Note 18). -------------------------------------------------------------------------------- F-56 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 2. Summary of Use of Estimates Significant The preparation of consolidated financial statements in Accounting conformity with generally accepted accounting principles Policies requires management to make estimates and assumptions Continued that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts in prior years have been reclassified to conform with the current year presentation. 3. Receivables The components of Applied's trade receivables are as follows as of December 31, 2000 and 1999: 2000 1999 -------- --------- Contract receivables: Amounts billed $ 4,807 $ 3,637 Retainages 25 25 Other - 8 -------- --------- 4,832 3,670 Less: Allowance for doubtful accounts and potential disallowances (296) (118) -------- --------- Total receivables - net $ 4,536 $ 3,552 ======== ========= The balances billed but not paid by customers pursuant to retainage provisions are due upon completion and acceptance of the contracts. Substantially all of CASI trade receivables are pledged to collateralize its line of credit (see Note 8). -------------------------------------------------------------------------------- F-57 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 4. Property Property and equipment consist of the following: and Equipment Average December 31, Useful Life 2000 1999 -------------------------------- Machinery and equipment 10 $ 2,386 $ 3,022 Furniture and fixtures 5 417 277 Computer equipment 4 944 1,275 Leasehold improvements 5 19 82 ---------------- 3,766 4,656 Less: accumulated depreciation and amortization (1,783) (2,412) Total property and equipment $ 1,983 $ 2,244 ================ 5. Other Assets Applied has an investment in a joint venture with Teledyne Environmental, Inc. (LLC). Due to uncertainties over the success of various claims made by the LLC against various government agencies, Applied recorded a reserve of $43 in the fourth quarter of 1998 to reduce its investment to $0 at December 31, 1998. Applied did not record its equity in the losses of the LLC in 2000 and 1999 as the LLC agreement states that members of the LLC can only be asked to fund approved capital calls and Applied has no obligation to fund these 2000 and 1999 losses. The Company recorded losses of $0, $0 and $(2,383) for the years ended December 31, 2000, 1999 and 1998, respectively, from its investment in the joint venture. -------------------------------------------------------------------------------- F-58 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 5. Other Summarized information of the LLC's net assets and Assets results of operations are as follows at December 31, Continued 1998: Current assets $ 2,049 Non-current assets 1,549 Current liabilities 3,873 Revenues 1,788 Expenses 6,467 Investment in LLC: Opening balance $ 554 Capital contribution 2,581 Advances to LLC, net of repayments (752) Loss reserve (43) Equity in net loss (2,340) --------- Net amount $ - ========= 6. Acquisition On August 30, 2000, Applied completed a stock purchase of Dispute agreement with Dispute Resolution Management, Inc. (DRM) Resolution and its two shareholders. This agreement amended and Management restated in its entirety the terms of an agreement and plan of merger, dated August 30, 2000, which Applied had previously entered into with DRM and its shareholders. Under terms of the current agreement, Applied purchased 81% of the issued and outstanding capital stock of DRM from the two shareholders. The consideration to these shareholders (and their designees) consisted of: a) 10.5 million shares of Applied common stock. Of these 10.5 million shares, 9.5 million shares are subject to a one-year option to repurchase any or all shares. The option expires August 30, 2001 for the 9.5 million shares. b) 5 million shares of Applied common stock in exchange for an option to purchase the remaining 19% interest in DRM. The option expires after five years and the option price will be based upon the relative appraised values of DRM and Applied at the time of purchase. -------------------------------------------------------------------------------- F-59 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 6. Acquisition c) Five-year warrants to purchase up to an aggregate of Dispute of 1.0 million shares of Applied common stock at Resolution an exercise price of $2.00 per share. Management d) Quarterly earn-out distributions equal to 35% of the cash flow of DRM over an earn-out period commencing as of September 1, 2000 and ending December 31, 2005. Applied has agreed that if DRM has not distributed to these shareholders a total of $10.0 million in cash in earn-out payments by December 31, 2003, Applied will make up the difference between $10.0 million and the actual cash distributed. This difference can be paid in cash or Applied common shares at Applied's sole discretion. Applied has an absolute and irrevocable obligation to repurchase, by the end of the one-year option period, that number of 9.5 million shares of Applied common stock necessary to provide the holders of those shares with a total of $14.5 million. It is Applied's intention to exercise its option to reacquire these shares during the one-year period and sell these shares to generate the cash necessary to meet the $14.5 million obligation. The obligation has been recorded as a note payable and interest has been imputed on the note payable to record debt of $13,122. The former owners of DRM have entered into five-year employment agreement with DRM providing for starting salaries of $262 per year, with annual increases of not more than 5%. In addition, these individuals have entered into five-year non-competition agreements with DRM. Applied has valued the consideration given as follows: 9.5 million option common shares $ 13,122 5.0 million common shares 5,469 1.0 million common shares 1,094 Warrants to purchase 1.0 million shares 959 Future payment guarantee 10,000 Imputed interest on future payment guarantee (2,588) ---------- Total $ 28,056 ========== -------------------------------------------------------------------------------- F-60 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 6. Acquisition DRM's equity at the date of acquisition was $414. 81% of Dispute of this equity was $336. Resolution Management Applied recorded the difference between the consideration given $28,056 and its ownership in DRM equity $336 as follows: Covenants not to compete $ 2,625 Goodwill 25,095 --------- Total $ 27,720 ========= Covenants not to compete are amortized over their 5 year life. Goodwill is amortized over 20 years. The Company recorded $341 of minority interest expense related to the minority shareholders portion of DRM income for the period August 30, 2000 (date of acquisition) through December 31, 2000. Supplemental twelve month pro forma consolidated operations as though DRM had been acquired January 1, 2000, is as follows: Proforma DRM January 1, Year Ended Commodore 2000 to December 31, Applied August 30, 2000 2000 --------- --------------- ------------ Revenues $ 20,631 $ 4,271 $ 24,902 Net income (loss) $ (11,441) $ 2,182 $ (9,259) (Loss) earnings per share $ (.34) $ .06 $ (.28) 7. Other Other accrued liabilities consist of the following: Accrued Liabilities 2000 1999 Compensation and employee benefits $ 652 $ 994 Accrued consulting 185 - Dividend payable 408 - Loss reserve 357 357 Related parties 185 185 Severance payments 76 171 Other 626 733 ---------------- $ 2,489 $ 2,440 ================ -------------------------------------------------------------------------------- F-61 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 8. Line of At December 31, 2000 and 1999, CASI had a $1,459 and Credit $948 outstanding balance, respectively, on revolving lines of credit. In October 2000, CASI refinanced its line of credit and a note payable with the current line of credit. The current line of credit is not to exceed 85% of eligible receivables or $2,500 and is due October 2002 with interest payable monthly at prime plus 2.0 percent (11.5% at December 31, 2000). The credit line is collateralized by the assets of CASI and is guaranteed by Applied. The line of credit contains certain financial covenants and restrictions including minimum ratios that CASI must satisfy. As of December 31, 2000 the Company was not in compliance with the loan covenants. 9. Notes Payable Notes payable consist of the following at December 31: 2000 1999 ----------------- Obligation to minority shareholders of DRM wherein the minority shareholders are to receive $14,500 cash from the Company through the repurchase of the 9.5 million option common shares issued to the minority shareholders' (see note 6). The Company has imputed an interest rate of 10.5% on the obligation which is secured by Commodore's ownership of DRM. $ 14,500 $ - Unamortized discount for imputed interest rate (919) - Notes payable to individuals with interest at 12%, due February 13, 2001, secured by DRM accounts receivable. In connection with this note, one of the majority shareholders of the Company sold 1 million shares of the Company's common stock it owned to the note holders at a discount. The discounted amount of $500,000 is recorded as interest expense over the term of the loan. 500 - -------------------------------------------------------------------------------- F-62 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 9. Notes Payable Note payable to an officer of the Continued Company with interest at 9.75%. The note is unsecured and is convertible into common stock of the Company at the market rate of the common stock. The note was originally due March 15, 2001 but has been extended until December 31, 2001. The Company also has imputed a discount for warrants for $89 issued in connection with the note which is being amortized over the original term of the note. 500 - Unamortized discount imputed for warrants (29) - Note payable to an insurance company with interest at 8.18%, secured by an insurance contract and due December 2001. 130 - ----------------- $ 14,682 $ - ================= 10. Long-Term The Company has the following long-term debt at December Debt 31: 2000 1999 ----------------- Obligation to the minority shareholders of DRM wherein the Company has guaranteed to distribute 35% of the cash flows of DRM to the 19% minority shareholders in amounts not less than $10,000 by December 31, 2003 (see note 6). The Company has imputed interest on the obligation at 10.5%, and the obligation is secured by the Company's ownership of DRM. The Company has also estimated the current and long-term portions of the obligatio $ 10,000 $ - Unamortized discount for imputed interest rate (2,389) - -------------------------------------------------------------------------------- F-63 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 10. Long-Term Notes payable to an entity requiring Debt monthly payments of $11, plus interest Continued at 8.5% secured by an insurance contract 221 - Note payable to a financial institution requiring monthly payments of $17 plus interest at prime plus 1.5% (10.0% at December 31, 1999), secured by property and equipment. The note was refinanced with the line of credit in 2000 - 916 ----------------- 7,832 916 Less current maturities (2,650) (200) ----------------- $ 5,182 $ 716 ================ Future maturities on long-term debt are as follows: Year ---- 2001 $ 2,650 2002 2,645 2003 2,537 ---------- Total $ 7,832 ========== 11. Income Taxes Applied provides for deferred income taxes on temporary differences which represent tax effects of transactions reported for tax purposes in periods different than for book purposes. -------------------------------------------------------------------------------- F-64 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 11. Income Taxes The provision for income taxes for the years ended Continued December 31 results in an effective tax rate which differs from federal income tax rates as follows: 2000 1999 1998 ------------------------------------ Expected tax benefit at federal statutory rate $ (3,890) $ (1,355) $ (1,882) State income tax benefit, net of federal income tax benefit (686) (239) (332) Loss on sale of subsidiary - - (2,866) Loss of NOLs in connection with sale of affiliate - - 3,689 Change in valuation allowance 3,790 1,594 476 Interest accretion 333 - 796 Other 453 - 119 ----------------------------------- Income tax benefit $ - $ - $ - =================================== The components of the net deferred tax as of December 31, are as follows: 2000 1999 1998 ------------------------------------ Reserve for uncollectable receivables and potential disallowances $ 242 $ - $ 480 Net operating loss carryforward 15,703 14,394 12,254 Goodwill 2,239 - - In process technology 837 837 903 ----------------------------------- 19,021 15,231 13,637 Valuation allowance (19,021) (15,231) (13,637) ----------------------------------- Net deferred taxes $ - $ - $ - =================================== Applied conducts a periodic examination of its valuation allowance. Factors considered in the evaluation include recent and expected future earnings and Applied's liquidity and equity positions. As of December 2000, 1999 and 1998, Applied has established a valuation allowance for the entire amount of net deferred tax assets. -------------------------------------------------------------------------------- F-65 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 11. Income Taxes Applied has net operating loss ("NOL") carryforwards at Continued December 31, 2000 of approximately $39,000 which expire in years 2010 through 2020. The NOL carryforwards are limited to use against future taxable income due to changes in ownership and control. 12. Stockholders' Series A Convertible Preferred Stock At January 1, 1998, Equity Applied had 9,600 shares of Series A Convertible Preferred Stock outstanding. The Series A Convertible Preferred Stock had a liquidation preference of $100 per share plus accumulated and unpaid dividends (the "Liquidation Preference") and paid a 7% annual cumulative dividend. The Series A Preferred Stock was convertible by investors into that number of shares of Common Stock equal to the Liquidation Preference divided by the Conversion Price. The Conversion Price was defined as the amount equal to the lesser of (i) $4.64, representing 100% of the average of the closing sale prices of the Common Stock for the five consecutive trading days preceding the issuance date of the Series A Preferred Stock, or (ii) 88% of the average of the closing sale prices of the Common Stock for the five consecutive trading days immediately prior to the date of conversion (beneficial conversion feature). The Conversion Price was subject to certain floors based upon the trading price of Applied Common Stock. The Series A Preferred Stock was subject to mandatory redemption at the Liquidation Preference upon certain events, including (i) the average share price for any sixty consecutive days was less than $2.00, (ii) Applied's Common Stock was not listed on any exchange or over-the-counter market for fifteen consecutive trading days, or (iii) Applied was required to obtain stockholder approval under exchange regulations in order to issue shares of Common Stock and failed to obtain such approval within ninety calendar days. In 1998, all 9,600 outstanding shares of Series A Preferred Stock were converted into 336,866 shares of Common Stock based upon conversion prices ranging from $2.48 to $3.69 per share. At the time of conversion, Applied recorded $14 of preferred dividends related to the accumulated and unpaid dividends on shares converted. -------------------------------------------------------------------------------- F-66 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 12. Stockholders' Series B, C & D Convertible Preferred Stock Equity Effective September 28, 1998, Applied authorized and Continued issued three new series of Preferred Stock. Series B, C and D Preferred Stock were authorized up to 25,000, 15,000 and 25,000 shares, respectively, all at $.001 par value. Each of the Series B, C and D Preferred Stock is convertible into common shares of Applied; each has a par value of $.001 and a stated value of $100 per share; each carries a dividend rate of $6.00 per share per annum from the date of issuance, payable quarterly commencing December 31, 1998, when, and if declared by the Board of Directors; and each has non-cumulative dividends. During 1998 the Company issued 20,909 shares of Series B, 10,189 shares of Series C, and 20,391 shares of Series D Convertible Preferred Stock for an aggregate amount of $2,001 (see Note 15). Applied did not declare any dividend payment as of December 31, 1998. The Series B, C and D Convertible Preferred Stock is convertible into Common Stock at any time prior to redemption at a conversion rate of 142.9 shares of Common Stock for each share of Series B and D Convertible Preferred Stock and 133.3 shares of Common Stock for each share of Series C Convertible Preferred Stock (an effective conversion price of $.70 and $.75 per share of Common Stock, respectively). The conversion price is subject to adjustment under certain circumstances, including Applied taking action to change the number of Common Shares outstanding, such as declaring a stock dividend. In November 1999, all of the outstanding shares of Series B, C and D Convertible Preferred Stock was converted into 7,258,533 shares of common stock. Series E Convertible Preferred Stock Effective November 4, 1999, Applied issued 335,000 shares of Series E Convertible Preferred Stock with a stated value of $10 per share. -------------------------------------------------------------------------------- F-67 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 12. Stockholders' This stock has a dividend rate of 12% per annum through Equity April 30, 2000 and thereafter 5% per annum paid Continued quarterly. In addition the stock has a special dividend at the rate of 7.5% per annum which began to accrue on May 1, 2000, payable on May 1, 2001. The special dividend will not be paid on any stock converted to common stock on or before April 30, 2001. The Series E Convertible Preferred Stock has a liquidation preference of $10 per share. In connection with the issuance of the Series E Convertible Preferred Stock, the Company issued warrants to purchase 572,500 shares of common stock at a purchase price equal to 110% of the market price on the date of closing ($1.20). These warrants were valued at $60 and expire on November 4, 2004. The Series E Convertible Preferred Stock is convertible into common stock at any time on or after April 30, 2000 at a conversion price equal to the arithmetic mean of the closing prices of common stock as reported in the American Stock Exchange for the ten trading days immediately preceding the date of conversion. During the year ended December 31, 2000 35,000 shares of Series E Convertible Preferred Stock were converted into 330,992 shares of common stock. Series F Convertible Preferred Stock In March 2000, Applied issued 266,700 shares of Series F Convertible Preferred Stock with a stated value of $10 per share. Transaction costs on the issuance totaled $230 resulting in net proceeds to the Company of $1,770. The stock has a dividend rate of 12% per annum through September 30, 2000 and thereafter 5% per annum paid quarterly. In addition the stock has a special dividend at the rate of 7.5% per annum which began to accrue October 1, 2000, payable on October 1, 2001. The special dividend will not be paid on stock converted to common stock on or before September 30, 2001. The Series F Convertible Preferred Stock has a liquidation preference of $10 per share. In connection with the issuance of Series F Convertible Preferred Stock, the Company issued warrants to purchase 363,475 shares of common stock at $1.93875 per share. These warrants expire on March 16, 2005. -------------------------------------------------------------------------------- F-68 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 12. Stockholders' The Series F Convertible Preferred Stock is convertible Equity into common stock at any time on or after September 30, Continued 2000. On conversion, the investor will receive for each converted preferred share the greater number of common stock as determined by (1) the face value per share ($10) plus accrued dividends divided by the average of the closing prices over a ten consecutive trading day period ending on the trading day immediately preceding the conversion date, or (2) $7.50 (the cash invested for each preferred share) divided by $1.93875. During the year ended December 31, 2000 10,000 shares of Series F Convertible Preferred Stock was converted to 109,589 shares of commons stock. The holders of all series of convertible preferred stock have the right, voting as a class, to approve or disapprove of the issuance of any class or series of stock ranking senior to or on a parity with the convertible preferred stock with respect to declaration and payment of dividends or the distribution of assets on liquidation, dissolution or winding-up. Upon liquidation, dissolution or winding up of Applied, holders of Series E and Series F Convertible Preferred Stock are entitled to receive liquidation distributions equivalent to $10.00 per share before any distribution to holders of the Common Stock or any capital stock ranking junior to the Series E Convertible Preferred Stock. 13. Stock Options Applied has adopted the intrinsic value method of and Stock accounting for stock options and warrants under APB 25 Warrants with footnote disclosures of the pro forma effects as if the FAS 123 fair value method had been adopted. Had compensation expense for Applied's employee stock options been determined based on the fair value at the grant date for awards in 2000, 1999 and 1998 consistent with the provisions of FAS 123, Applied's net loss per share would have been increased to the pro forma amounts indicated below: 2000 1999 1998 --------------------------------------- Net loss - as reported $ (11,441) $ (3,985) $ (13,353) Net loss - pro forma $ (12,619) $ (6,335) $ (15,749) Loss per share - as reported $ (.34) $ (0.16) $ (0.58) Loss per share - pro forma $ (.37) $ (0.26) $ (0.68) -------------------------------------------------------------------------------- F-69 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 13. Stock Options FAS 123 requires stock options to be valued using an and Stock approach such as the Black-Scholes option pricing model. Warrants The Black-Scholes model calculates the fair value of the Continued grant based upon the following assumptions about the underlying stock: The expected dividend yield of the stock is zero, the assumed volatility is 165%, the expected risk-free rate of return is 4.6 - 6.5 percent, calculated as the rate offered on U.S. Government securities with the same term as the expected life of the options, and the expected term is the maximum possible term under the option. Stock Options In December 1998, Applied adopted its 1998 Stock Option Plan pursuant to which officers, directors, key employees and/or consultants of Applied can receive non-qualified stock options to purchase up to an aggregate 5,000,000 shares of Applied's Common Stock. During 1999 and 2000 Applied increased the number of shares authorized by 5,000,000 shares each year resulting in 15,000,000 shares currently available under the 1998 stock option plan. Exercise prices applicable to stock options issued under this Plan represent no less than 100% of the fair value of the underlying common stock as of the date of grant. Stock options granted under the plan may vest immediately or for any period up to five years. Applied amended stock options to purchase 1,826,234 shares granted under the 1996 Stock Option Plan to extend the term to 10 years and to change the exercise price to $.44, 100% of the fair market value of Applied's on the date of the amendment. A summary of the status of options granted under the Plan as of December 31, 2000, 1999 and 1998 and changes during the periods then ended is presented below:

-------------------------------------------------------------------------------- F-70 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 13. Stock Options The following table summarizes information about and Stock employee stock options outstanding at December 31, 2000: Warrants Continued

Stock Warrants Outstanding warrants (vested and not vested) at December 31, 2000 are as follows:

There were no warrants exercised in 2000, 1999 or 1998. As of December 31, 2000 all warrants are exercisable. -------------------------------------------------------------------------------- F-71 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 14. Earnings Per All earnings per share amounts reflect the Share implementation of SFAS 128 "Earnings per Share". Basic earnings per share are computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of shares determined for the basic computations plus the number of shares that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period.

-------------------------------------------------------------------------------- F-72 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 14. Earnings Per (*) Due to Applied's loss from continuing operations in Share 2000, 1999 and 1998, the incremental shares issuable in Continued connection with these instruments are anti-dilutive and accordingly not considered in the calculation. 15. Related Party The Company has the following material related party Transactions transactions: Effective September 20, 2000, Applied received a $500 loan from an affiliated individual. This loan matures on December 31, 2001 and bears interest at 9.75%, payable monthly. The note can be converted into Applied common shares at an exchange rate of one share for every $1.0625 of loan value. In addition, the Company issued a warrant to purchase 100,000 Applied common shares at $1.0625. The warrant expires September 20, 2002 and was valued at $89, which will be amortized to interest expense over the life of the related debt. The Company at December 31, 2000 has obligations relating to the purchase of 81% of DRM (see Notes 6, 9 and 10). During the year ended December 31, 2000 a shareholder of the Company sold, at a discount, 1,000,000 common shares that it owned of Applied to individuals who loaned $500 to Applied. The discount amount of $500 was used to offset receivables from related parties and result in a net related party payable of $247. The Company has receivables from entities under common control of $-0- and $265 at December 31, 2000 and 1999, respectively. The Company also has payables to related parties of $185 at both December 31, 2000 and 1999 recorded in accrued liabilities. The Company expensed as bad debt $109 of related party receivables during the year ended December 31, 2000. -------------------------------------------------------------------------------- F-73 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 15. Related Party During 1996, Applied advanced an aggregate amount of Transactions $1.5 million to Lanxide Performance Materials, Inc. Continued ("LPM"), a wholly-owned subsidiary of Lanxide Corp. Lanxide is related to Commodore by substantial common ownership. The promissory notes became due on February 28, 1998. At December 31, 1997 a $814 reserve against this receivable existed, reducing the net receivable to its estimated fair value. In March 1998, Applied realized this receivable by exchanging it for amounts due under the Intercompany Convertible Note with a carrying value of $3,889. In connection with the exchange, Applied issued a warrant to Commodore to purchase 514,000 shares of Common Stock at exercise price of $4.50 expiring August 2001. The $340 fair value of the warrant was recorded as additional paid-in capital. In February, 1998, Commodore provided a $5,450 uncollaterized loan to Applied, evidenced by Applied's 8% non-convertible note (the "1998 Intercompany Note"). Pursuant to the terms of the 1998 Intercompany Note, interest on the unpaid principal balance was payable at the rate of 8% per annum semiannually in cash. The unpaid principal amount of the 1998 Intercompany Note was due and payable, together with accrued and unpaid interest, on December 31, 1999, or earlier under certain circumstances. In connection with the loan, Applied amended a five-year warrant to purchase 7,500,000 shares of Applied Common Stock issued to Commodore on December 2, 1996 to, among other things, reduce the exercise price of the warrant from $15.00 per share to $10.00 per share. In addition, Applied issued to Commodore an additional five-year warrant to purchase 1,500,000 shares of Applied at an exercise price of $10.00 per share. The new warrant and the modification of the existing warrant issued in connection with this transaction were valued at $1,369 in the aggregate and recorded as additional paid-in capital. Through the date of the extinguishment of this note, the discount associated with this allocation was being recognized using the effective interest rate method over the term of the loan. Amortization of the discount for 1998 was $542. As of September 28, 1998, carrying values of the Intercompany Notes were $5,660. -------------------------------------------------------------------------------- F-74 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 15. Related Party On September 28, 1998, Applied repaid all amounts owed Transactions to Commodore by exchanging i) its 87% interest in the Continued Common Stock of Separation, ii) 20,909 shares of newly created Series B Convertible Preferred Stock, iii) 10,189 shares of newly created Series C Convertible Preferred Stock, iv) 20,391 shares of newly created Series D Convertible Preferred Stock, v) a $357 receivable from Separation and vi) a modification of the new warrants granted in connection with the 1998 Intercompany Notes reducing the exercise price to $1.50. The value of the consideration given was less than the carrying amount of the Intercompany Notes. Accordingly, due to the relationships of the parties involved a $3,154 gain was recorded as a contribution to equity on debt restructuring as follows: Carrying value of Intercompany Notes $ 5,660 Value of 87% interest in a receivable from Separation 500 Value of Series B Convertible Preferred Stock 813 Value of Series C Convertible Preferred Stock 396 Value of Series D Convertible Preferred Stock 792 Value of modification warrant 5 --------- Value of consideration given (2,506) --------- Equity contribution on debt restructuring $ 3,154 ========= The value of the 87% interest in and receivables from Separation, Preferred Stock and modification of the warrant were determined by independent appraisal. As of September 28, 1998, the carrying value of Applied's 87% interest in the Common Stock of Separation and Applied's $357 receivable from Separation was $(4,164). Accordingly, a $4,664 contribution to equity (representing the difference between the book value and the fair value of Applied's investment in Separation) on the sale of affiliate was also recorded in connection with the transaction. -------------------------------------------------------------------------------- F-75 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 16. Commitments Operating Leases and Applied and its subsidiaries are committed under non- Contingencies cancelable operating leases for office space and other equipment. Future obligations under the leases are as follows: 2001 $ 258 2002 69 2003 64 2004 64 2005 11 --------- $ 466 ========= Rent expense approximated $403, $332 and $502 in 2000, 1999 and 1998, respectively. Executive Bonus Plan Applied has a five-year Executive Bonus Plan (the "Bonus Plan") under which a number of executives and employees of Applied are entitled to formula bonuses. Applied paid $622 of 1997 executive bonuses in January 1998. No bonuses are accrued at December 31, 2000 and 1999. Litigation Applied has matters of litigation arising in the ordinary course of business which in the opinion of management will not have a material adverse effect on its financial condition or results of operations. Guarantee The Company, along with several other entities, in a prior year guaranteed a performance bond of Separation relating to the Port of Baltimore contract. The Company was notified on June 28, 2000 that the performance bond is being called. It is not known, at this time, the amount, if any, the Company's share will be. The maximum exposure is approximately $390. -------------------------------------------------------------------------------- F-76 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 17. 401(K) The Company has adopted a 401(K) savings plan for all Savings Plan employees who qualify as to age and service. Contributions by the Company are discretionary. The Company made annual contributions to the plan of approximately $48, $91 and $108 during the years ended December 31, 2000, 1999 and 1998, respectively. 18. Segment Using the guidelines set forth in SFAS No. 131, Information "Disclosures About Segments of an Enterprise and Related Information," Applied has identified four reportable segments as follows: 1. CASI, which primarily provides various engineering, legal, sampling and public relations services to Government agencies on a cost plus basis. 2. Solution, which, through CASI, has equipment to treat mixed and hazardous waste through a patented process using sodium and anhydrous ammonia. 3. DRM from August 30, 2000 (date of acquisition) to December 31, 2000, which provides a package of services to help companies recover financial settlements from insurance policies to defray costs associated with environmental liabilities. 4. Separation, from January 1, 1998 to September 28, 1998 (date of sale to Commodore) (see Note 15), which provides water and contaminant separation by use of a patented process. Common overhead costs are allocated between segments based on a record of time spent by executives. Applied evaluates segment performance based on the segment's net income (loss). The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Applied's foreign and export sales and assets located outside of the United States are not significant. Summarized financial information concerning Applied's reportable segments is shown in the following tables. -------------------------------------------------------------------------------- F-77 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued --------------------------------------------------------------------------------

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-------------------------------------------------------------------------------- F-80 COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 20. 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 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-81

COMMODORE ENVIRONMENTAL SERVICES INC /DE/ 10-K