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, 2001 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 27, 2002 with an aggregate market value of approximately $275,000 (based upon the average of the bid and asked prices of the Common Stock on March 27, 2002 as quoted by the National Association of Securities Dealers, Inc. OTC Bulletin Board). As of March 27, 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, 2001 TABLE OF CONTENTS

~~Year~~Page ~~Ended December 31,~~ ----~~------------------------------------------------------------------------------~~ ~~1996~~PART ~~1997~~I............................................................................................................3 ~~1998~~ITEM ~~1999~~1. ~~2000~~BUSINESS........................................................................................3 ~~----~~General.........................................................................................3 ~~----~~Research ~~----~~and ~~----~~Development........................................................................5 ~~----~~Intellectual ~~Revenue~~Property...........................................................................5 $Environmental Regulation........................................................................5~~,253,000~~ ~~$19,493,000~~Employees.......................................................................................6 ~~$1,632,000~~ITEM ~~$337,000~~2. ~~$66,000~~PROPERTIES......................................................................................6 ~~Net~~ITEM ~~income~~3. ~~(loss)~~LEGAL ~~from~~PROCEEDINGS...............................................................................6 ~~continuing~~ITEM ~~(8,311,000)~~4. ~~(13,507,000)~~SUBMISSION ~~(1,834,000)~~OF ~~(2,950,000)~~MATTERS ~~(7,189,000)~~TO ~~operations~~A ~~Discontinued~~VOTE ~~operations~~OF SECURITY HOLDERS.............................................6 -PART -II...........................................................................................................7 ~~(4,927,000)~~ITEM ~~(946,000)~~5. ~~1,433,000~~MARKET ~~Net~~FOR ~~(loss)~~REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........................7 ~~(8,311,000)~~Market ~~(13,507,000)~~Information..............................................................................7 (Dividend Information............................................................................7 ITEM 6~~,761,000)~~. ~~(3,896,000)~~SELECTED ~~(5,756,000)~~FINANCIAL ~~Net~~DATA.........................................................................8 ~~(loss)~~ITEM ~~per~~7. ~~share~~MANAGEMENT'S ~~from~~DISCUSSION ~~continuing~~AND ~~operations~~ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........9 Overview............. (.~~15) (~~.~~27) (~~.~~03)~~........................................................................9 (Results of Operations.~~05)~~......................................................................... (9 Liquidity and Capital Resources................................................................11) Net ~~(loss)~~Operating ~~per~~Loss ~~share~~Carryforwards...............................................................12 -New ~~continuing~~Accounting ~~and discontinued~~Pronouncements....... (.~~15)~~..........................................................12 (Forward-Looking Statements.~~27)~~....................................................................12 (ITEM 7A.~~11)~~ (QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.~~06)~~.......................................13 (ITEM 8.~~09)~~ ~~Dividends~~FINANCIAL ~~per~~STATEMENTS ~~common~~AND ~~share~~SUPPLEMENTARY DATA....................................................13 -ITEM -9. -CHANGES -IN -AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........13 PART III.........................................................................................................14

i 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 PART IV..........................................................................................................22 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................22 SIGNATURES.......................................................................................................26

ii 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 27, 2002, the Company owned approximately 15% 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% (currentlty 85%) 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 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, Separation had performed a series of on-site demonstrations of SLiM, in which a SLiM unit, in a single feedstream pass through, 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 85% 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 had no ongoing operations since 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. In 1998 the CERASET License, CERASET Business and CERASET Trademark was written down to its estimated recoverable value of $100,000. 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, 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. The Company realized a gain of $1,568,000 from the sale to a related party. 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 and 1999 and the years then ended. 4 The Company was originally incorporated in Utah in 1967. The Company was reincorporated 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 expenditures for the Company and its affiliates including discontinued operations were $0, $122,000 and $748,000 for the years ended December 31, 2001, 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, Separation has decided to abandon the two patent applications covering the sole inventions of Dr. Kilambi. Separation has been issued three US patents to date for using strip dispersion for the separation of radionuclides, heavy metals, and chromium; the sole invention of Dr. W.S. Winston Ho, former Senior Vice President - Technology . Additionally, the Company has filed for one US patent and two foreign patents for using a strip dispersion technique covering the sole inventions of Dr. W.S. Winston Ho. Separation's liquid membrane technology patent applications are based on the selective combination of different known solvents, supports, diluents, carriers and other components to separate a variety of metals, chemicals and other targeted substances. While Separation believes that its technology covers many separation applications, third parties may have developed, or may subsequently assert claims to, certain of these solvents, supports, diluents, carriers or other components for one or more specific applications. In such event, Separation may need to acquire licenses to, or to contest the validity of, issued or pending patents or claims of third parties. To protect its trade secrets and the unpatented proprietary information in its development activities, the Company requires its employees, consultants and contractors to enter into agreements providing for the confidentiality and the Company's ownership of such trade secrets and other unpatented proprietary information originated by such persons while in the employ of the Company. The Company also requires potential collaborative partners to enter into confidentiality and non-disclosure agreements. There can be no assurance that any patents which may hereafter be obtained, or any of the Company's confidentiality and non-disclosure agreements, will provide meaningful protection of the Company's confidential or proprietary information in the case of unauthorized use or disclosure. In addition, there can be no assurance that the Company will not incur significant costs and expenses, including the costs of any future litigation, to defend its rights in respect of any such intellectual property. ENVIRONMENTAL REGULATION 5 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 would be generally limited to the leasing of its specialized technical equipment for use by its customers, there is always the risk of the mishandling of such materials or technological or equipment failures, which could result in significant claims against the Company. Any such claims against 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. Applied maintains, on behalf of itself and its subsidiaries, contractor's pollution liability insurance with limits of $5.0 million per occurrence and $5.0 million in the aggregate. There can be no assurance that such insurance will provide coverage against all claims, and claims may be made against Separation (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, 2001, 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 2007. 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, 2001. 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 27, 2002, 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 2001 First Quarter............................... $0.07 $0.02 Second Quarter.............................. 0.02 0.01 Third Quarter............................... 0.01 0.01 Fourth Quarter.............................. 0.01 0.01 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 DIVIDEND INFORMATION The Company has not, for the last two fiscal years, paid cash dividends in respect to 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, 2001, for the fiscal years ended December 31, 1997, 1998, 1999, 2000 and 2001. During 1998, the Company's investment in Applied fell below 50% and was accounted for under the equity method of accounting until 2001. During 2001, the Company's investment in Applied fell below 20% and is accounted for under the cost 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, 2001. 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:

Year Ended December 31, --------------------------------------------------------------------------------- ~~1996~~ 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---------------------------------------------------------------- ~~Total assets~~Revenue............................ $41 19,~~113~~493,000 $35 1,~~016~~632,000 $8 337,~~029~~000 $ 66,000 $5 0 Net income (loss) from continuing (13,~~134~~507,000) ~~$554~~(1,834,000) ~~Long~~(2,950,000) (7,189,000) 1,260,000 operations Discontinued operations............ -~~term~~ ~~obligations~~(4,927,000) (~~including~~946,000) ~~current~~1,433,000 ~~portion~~- Net income (loss).................. 8(13,~~333~~507,000) (6,~~952~~761,000) 6(3,~~250~~896,000) 6(5,~~279~~756,000) ~~6250~~1,260,000 ~~Redeemable~~Net ~~preferred~~income ~~stock~~(loss) per share from continuing operations........... 0(.27) ~~3,557,000~~(.03) 0(.05) 0(.11) 0.02 Net income (loss) per share - continuing and discontinued..... (.27) (.11) (.06) (.09) .02 Dividends per common share......... - - - - -

Consolidated Balance Sheet Data:

~~Summary~~Year ~~Compensation~~Ended ~~Table~~December ~~Annual~~31, ~~Compensation Long~~-~~Term Compensation~~ --------------------------- -------------------------------------- -------------~~--------------------------------~~ ~~Other~~1997 ~~Securities~~1998 ~~Annual~~1999 ~~Restricted~~2000 ~~Under-~~2001 ~~All Other~~ --------------------------- ~~Compen~~- ~~Stock lying LTIP Compen~~- ~~Name and Principal Salary Bonus sation Award(s) Options Payouts sation Position Year ($) ($) ($) ($) (#) ($) ($)~~ --------------------------- ---- ------ ----- ------ --~~--------~~ ~~----------~~Total ~~------- --------- Bentley J~~assets...................... ~~Blum~~$ ~~2000~~35,016,000 ~~-0-~~$ ~~-0-~~8,029,000 ~~-0-~~$ ~~-0-~~5,134,000 ~~-0-~~$ ~~-0-~~554,000 ~~-0-~~$ ~~Chief~~279,000 ~~Executive Officer 1999~~ Long-0-term ~~-0-~~obligations ~~-0-~~(including ~~-0-~~current ~~-0-~~portion).............. ~~-0-~~6,952,000 ~~-0-~~6,250,000 ~~1998~~6,279,000 ~~-0-~~6,250,000 ~~-0- -0- -0- 4~~2,~~500~~250,000 ~~-0-~~Redeemable ~~-0-~~preferred ~~Paul E~~stock........ ~~Hannesson 2000 -0- -0- -0- -0- -0- -0- -0- Former Chief Executive 1999 -0- -0- -0- -0- -0- -0- -0- Officer 1998 58~~3,~~658(1) -0- 1~~557,~~620(2)~~000 -0- ~~525,705~~ -0- -0- -~~-------------------------------~~

8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS ------- OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ------------------------------------------------- Overview As a result of several private placements by the Company and acquisitions and share issuances by Applied since 1997, the Company's ownership interest in Applied decreased to below 20% and therefore the Company accounts for its investment in Applied under the cost method. At December 31, 2001 the Company's investment in Applied is valued at the lower of cost or market. 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, 2001, 2000, 1999 and 1998 and for the period since the acquisition. Results of Operations Year ended December 31, 2001 compared to year ended December 31, 2000 For the years ended December 31, 2001 and December 31, 2000, the Company recorded a gain on sale of Applied's stock of $2,576,000 and $523,000. In February 2001, the Company satisfied a portion of its bond payable with the transfer of 6,000,000 shares of Applied common stock. The gain for 2001 represents the excess of the market value of the stock over the Company's recorded basis in the stock. The gain for 2000 represents a gain from the sale of 1,000,000 shares of Applied stock to a group of investors relating to an Applied financing. There were no revenues for the year ended December 31, 2001. Revenues for the year ended December 31, 2000 were $66,000. Such revenues for 2000 consisted of Separation's revenues which were consolidated with that of the Company. Cost of sales for the year ended December 31, 2000 were $111,000, which related to Separation. Cost of sales include direct labor and fringes, subcontractor costs, travel related expenses and material purchases. There were no research and development costs in 2001. Research and development costs were $122,000 for the year ended December 31, 2000. The 2000 results consisted of Separation's research and development costs. The decrease was that in 2000, Separation terminated its business activities. General and administrative expenses were $936,000 for the year ended December 31, 2001 as compared to $1,403,000 for the year ended December 31, 2000. In 2001, $95,000 of general and administrative expenses related to Separation's results as compared to $320,000 for the year ended December 31, 2000. In 2001, 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 had 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 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 9 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. The losses are primarily attributable to Applied. Minority interest's share of the loss in consolidated subsidiaries was $319,000 in 2000, which was attributable to the Company's ownership in Applied. 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 discontinued 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, 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. 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. 10 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 discontinued operations of $1,433,000 in 2000 and a loss from discontinued operations of $946,000 in 1999, relating to Polymer. LIQUIDITY AND CAPITAL RESOURCES 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 was extended from December 3, 1998 to December 4, 2000. The bonds were secured by 16,800,000 shares of the Company's Common Stock and 6,000,000 shares of Applied's common stock that the Company owns. The bonds were 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 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 took possession of the shares pledged to secure the bonds. 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. The Company recorded a gain of $2,576,000 on the transfer of Applied shares to satisfy the indebtedness. The gain represents the excess of the market value of the Applied stock over the Company's recorded basis in the Applied stock. In March 2000, 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. This reduced the Company's liabilities by approximately $1,600,000. 11 The Company has sustained income and losses of $1,260,000, $(5,756,000) and $(3,896,000) for the years ended December 31, 2001, 2000 and 1999. At December 31, 2001 and 2000, the Company had a working capital deficit of $6,042,000 and $8,378,000, respectively, and a Stockholders' Deficit of $8,061,000 at December 31, 2001 and $10,329,000 at December 31, 2000. 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 $25,000,000, which expire in the years 2002 through 2020. 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 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. NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 144, "Accounting for the Impairment of Long Lived Assets." This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This statement supercedes FASB Statement 121 and APB Opinion No. 30. This statement retains certain fundamental provisions of Statement 121, namely; recognition and measurement of the impairment of long-lived assets to be held and used, and measurement of long-lived assets to be disposed of by sale. The Statement also retains the requirement of Opinion No. 30 to report discontinued operations separately from continuing operations. The Statement also amends ARB No. 151 to eliminate the exception of consolidation for a temporarily controlled subsidiary. The provisions of this Statement are effective for financial statements issued for the fiscal years beginning after December 15, 2001. The Company is currently assessing the impact of this statement. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for financial statements issued for the fiscal years beginning after June 15, 2002. This statement addresses financial accounting and reporting for the disposal of long-lived assets. Management does not expect the adoption of SFAS No. 143 to have a significant impact on the financial position or results of operations of the Company. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangibles." These statements are effective July 1, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The statement also establishes specific criteria for recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. SFAS No. 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The Statement requires that goodwill and indefinite lived intangible assets no longer be amortized and be tested for impairment at least annually. The amortization period of intangible assets with finite lives will no longer be limited to 40 years. Management does not expect the adoption of SFAS No. 141 and 142 to have a significant impact on the financial position or results of operations of the Company. FORWARD-LOOKING STATEMENTS 12 Certain matters discussed in this Annual Report are "forward-looking statements" intended to qualify for the safe harbors from liability established by Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such statements may address future events and conditions concerning, among other things, the Company's results of operations and financial condition; the consummation of acquisition and financing transactions and the effect thereof on the Company's business; capital expenditures; litigation; regulatory matters; and the Company's plans and objectives for future operations and expansion. Any such forward-looking statements would be subject to the risks and uncertainties that could cause actual results of operations, financial condition, acquisitions, financing transactions, operations, expenditures, expansion and other events to differ materially from those expressed or implied in such forward-looking statements. Any such forward-looking statements would be subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally. Such assumptions would be based on facts and conditions as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond the Company's control. Further, the Company's business is subject to a number of risks that would affect any such forward-looking statements. These risks and uncertainties include, but are not limited to, the ability of the Company to commercialize its technology; product demand and industry pricing; the ability of the Company to obtain patent protection for its technology; developments in environmental legislation and regulation; the ability of the company to obtain future financing on favorable terms; and other circumstances affecting anticipated revenues and costs. These risks and uncertainties could cause actual results of the Company to differ materially from those projected or implied by such forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. -------- ----------------------------------------------------------- Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------- -------------------------------------------- The consolidated financial statements of the Company are included on pages F-1 through F-29 of this Annual Report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ------- ON ACCOUNTING AND FINANCIAL DISCLOSURE. --------------------------------------- Not applicable. 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 27, 2002, are as follows: Name Age Position ---- --- -------- Bentley J. Blum 60 Chairman of the Board, President and Chief Executive Officer Jerry Karlik 48 Vice President and Director Andrew P. Oddi 40 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, 2001, and upon a review of Forms 5 and amendments thereto furnished to the Company with respect to the year ended December 31, 2001, or upon written representations received by the Company from certain reporting persons that 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, 2001. 15 ITEM 11. EXECUTIVE COMPENSATION. ------- ----------------------- SUMMARY COMPENSATION The following table sets forth the amount of compensation paid by the Company and/or its affiliates paid in excess of $100,000 and allocated to the Company's operations for services rendered during each of 2001, 2000, and 1999 to the Company's Chief Executive Officer at December 31, 2001.

~~Aggregated~~Summary ~~Option~~Compensation ~~Exercises~~Table ~~In Last Fiscal Year and Fiscal Year~~-~~End Option Values~~ ------------------------------------------- ------------------------------------- Annual Compensation Long-Term Compensation -------------------------------------------- ------------------------------------- ~~Number~~Other OfSecurities ~~Value~~- OfAnnual ~~Securities~~Restricted ~~Unexercised~~Under- ~~Underlying~~All InOther Compen-~~The-Money~~ ~~Unexercised~~Stock ~~Options~~lying ~~Options~~LTIP AtCompen- ~~Fiscal~~Name ~~Year-~~and ~~Shares~~Principal ~~Value~~Salary AtBonus ~~Fiscal~~sation ~~Year-End~~Award(#s) ~~End($)~~Options ~~Acquired~~Payouts Onsation ~~Realized~~Position ~~Exercisable/~~Year ~~Exercisable/~~($) ~~Name~~($) ~~Exercise~~ (#$) ($) (1#) ~~Unexercisable~~($) ~~Unexercisable~~(2$) ---- -------------- ---- ------ ----- ------- ---------- ---------- ------- --------- Bentley J. Blum 2001 -0- -0- ~~4,500,000/~~-0- -0-/ -0- ~~Jerry Karlik~~ -0- -0- ~~50,000/~~Chief Executive Officer 2000 -0- -0-/ -0- -0- -0- -0- -0- 1999 -0- -0- -0- -0- -0- -0- -0--

________________________________ 16 STOCK OPTIONS No stock options were granted during the year ended December 31, 2001 or 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, 2001. 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, 2001 by the individuals listed in the Summary Compensation Table.

~~Number~~Aggregated ofOption ~~Shares~~Exercises ~~Percentage~~In ofLast ~~Outstanding~~Fiscal ofYear ~~Common Stock Common Stock Name~~ and ~~Address~~Fiscal ofYear-End ~~Beneficial~~Option ~~Owner(1)~~Values ~~Beneficially Owned(2) Beneficially Owned~~ ------------------- -------------------- ---------------------- ----------- ---------------------- ~~Bentley~~Number J.Of ~~Blum.............................~~Value ~~34,979,737(3)~~Of ~~41.0%~~Securities ~~Paul~~Unexercised E.Underlying ~~Hannesson...........................~~In-The-Money ~~6,325,705(4)~~Unexercised ~~7.8%~~Options ~~Credit~~Options ~~Agricole~~At ~~Deux~~Fiscal ~~Sevres.................~~Year- ~~16,800,000(5)~~Shares ~~20.1%~~Value ~~Jerry~~At ~~Karlik................................~~Fiscal ~~250,000~~Year-End(6#) *End($) ~~All~~Acquired ~~executive~~On ~~officers~~Realized ~~and~~Exercisable/ ~~directors~~Exercisable/ asName aExercise ~~group~~(#) (2$)(1) ~~persons~~Unexercisable Unexercisable(2)~~.......................~~ ~~35,229,737~~---------------- ~~41.1%~~------------ --------- ---------------------- ------------------ Bentley J. Blum -0- -0- 4,500,000/-0- -0-/-0- Jerry Karlik -0- -0- 50,000/-0- -0-/-0-

_______________________ (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, 2001, 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 2001, 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. 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 2001, 2000 and 1999 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 2001, 2000 or 1999. 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. 18 Conclusion The Compensation Committee believes that the quality of executive leadership significantly affects the long-term performance of the Company and that it is in the best interest of the stockholders to compensate fairly executive leadership for achievement meeting or exceeding the high standards set by the Compensation Committee, so long as there is a corresponding risk when performance falls short of such standards. A primary goal of the Compensation Committee is to relate compensation to corporate performance. Based on the Company's performance in 2001, the Compensation Committee believes that the Company's current executive compensation program meets such standards and has contributed, and will continue to contribute, to the Company's and its stockholders' long-term success. 19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. -------- --------------------------------------------------------------- The following table sets forth certain information, as of December 31, 2001, 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.

~~COMMODORE~~Number ~~ENVIRONMENTAL~~of ~~SERVICES,~~Shares ~~INC.~~Percentage ~~AND~~of ~~SUBSIDIARIES~~Outstanding ~~----------------------------------------------------------------------------------------------------------~~of ~~2000~~Common ~~1999~~Stock ~~----------------------------------~~Common ~~Assets~~Stock ~~------~~Name ~~Current assets: Cash~~ and ~~cash~~Address ~~equivalents $ 22 $ 30 Accounts receivable - 10 Restricted cash and certificates~~ of ~~deposit~~Beneficial ~~233~~Owner(1) ~~270~~Beneficially ~~Inventory~~Owned(2) -Beneficially ~~519~~Owned ---------------------------------- Total current assets 255 829 Other receivables 100 321 Investments 154 3,085 Property and equipment, net 27 736 Other assets: Patents and completed technology, net of accumulated amortization of $213 and $26, respectively - ~~145 Other assets 18 18~~ ---- ---------------------~~---------~~ ~~Total other assets 18 163~~ --------------------------~~--------~~ ~~Total~~Bentley ~~assets~~J. $Blum............................. ~~554~~34,979,737(3) $41.0% 5Paul E. Hannesson........................... 6,~~134~~325,705(4) ~~----------------------------------~~7.8% ~~----------------------------------------------------------------------------------------------------------~~Credit ~~The~~Agricole ~~accompanying~~Deux ~~notes~~Sevres................. ~~are~~16,800,000(5) an20.1% ~~integral~~All ~~part~~executive ofofficers ~~these~~and ~~consolidated~~directors ~~financial~~as ~~statements~~a group (2 persons)....................... 34,979,737 41.1%

___________________________________ (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. (5) Consists of the number of shares of Company Common Stock owned. 20 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 and 1999. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -------- --------------------------------------------------------------- The following documents are filed as part of this Annual Report:

~~COMMODORE~~Page ~~ENVIRONMENTAL~~No. ~~SERVICES,~~Financial ~~INC~~Statements. ~~AND SUBSIDIARIES Consolidated Balance Sheet December 31, 2000 and 1999 (Amounts in thousands, except shares and per share data)~~ --------~~--------------------------------------------------------------------------------------------------~~ ~~Liabilities~~Commodore ~~and~~Environmental ~~Stockholders' Deficit 2000 1999 ------------------------------------- -------------------------------- Current liabilities: Accounts payable $ 449 $ 531 Due to related parties 2~~Services,~~660~~ ~~2,911~~Inc. ~~Other~~Independent ~~accrued~~Auditor's ~~liabilities~~Report...................................................... F-1~~,261~~ ~~1,180~~Consolidated ~~Unearned~~Balance ~~revenue~~Sheets ~~263~~as ~~263~~of ~~Bonds~~December ~~payable - current 4~~31,~~000~~ ~~4,000~~2001 ~~--------------------------------~~and ~~Total~~2000...................... ~~current liabilities 8,633 8,885~~ F-~~------------------------------- Promissory note to related party~~ 2~~,250~~ ~~2,250~~Consolidated ~~Net~~Statements ~~liabilities~~ of ~~discontinued~~Operations ~~operations~~for -the 29years ~~--------------------------------~~ended ~~Total~~December ~~liabilities 10~~31,~~883~~ 112001,~~164~~ ~~--------------------------------~~2000 ~~Minority~~and ~~interests~~1999......................................... ~~in consolidated subsidiaries~~ F-3 ~~319~~Consolidated ~~Commitments~~Statements ~~and~~of ~~contingencies - -~~ Stockholders' ~~deficit:~~Equity ~~Preferred~~(Deficit) ~~Stock,~~for ~~par~~the ~~value~~years ~~$.01~~ended ~~per share, 10,000,000 shares authorized, 3,312,202, shares and 3,912,202 shares issued and outstanding at~~ December 31, ~~2000 and 1999~~2001, ~~respectively 33 39 Common Stock, par value $.01 per share, 100,000,000 shares authorized, 63,996,476 shares and 62,796,476 shares issued and outstanding at December 31,~~ 2000 and 1999,......................................... ~~respectively 640 628 Additional paid~~F-in4 ~~capital~~Consolidated ~~48,480~~Statements ~~46,710 Accumulated deficit (59,457) (53,701) -------------------------------- (10,304) (6,324) Less 506,329 common shares~~ of ~~treasury~~Cash ~~stock~~Flows atfor ~~cost~~the ~~(25)~~years ~~(25)~~ended ~~--------------------------------~~December ~~Total stockholders' deficit (10~~31,~~329)~~ (62001,~~349)~~ ~~--------------------------------~~2000 ~~Total liabilities~~ and ~~stockholders'~~1999......................................... ~~deficit $ 554 $~~ F-5~~,134~~ ~~--------------------------------~~Notes ~~----------------------------------------------------------------------------------------------------------~~to ~~The~~Consolidated ~~accompanying~~Financial ~~notes are an integral part of these consolidated financial statements~~Statements........................................ F-27

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, 2001 and 2000 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 2001, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commodore Environmental Services, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 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. TANNER + CO. Salt Lake City, Utah February 21, 2002 F-1

COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Consolidated ~~Statement~~Balance ofSheet ~~Operations Years Ended~~ December 31, ~~2000,~~2001 ~~1999~~ and ~~1998~~2000 (Amounts in thousands, except shares and per share data) ---------------------------------------------------------------------------------------------------------- ~~2000~~Assets ~~1999~~2001 ~~1998~~2000 ------ --------------------------------~~------~~ ~~Revenues~~Current assets: ~~Contract~~Cash ~~revenues~~and $cash 66equivalents $ ~~337~~48 $ ~~1,251~~22 ~~Other~~Restricted ~~operating~~cash ~~income~~and -certificates -of ~~381~~deposit -~~-------------------------------------------~~ ~~Total~~233 ~~revenues 66 337 1,632~~ --------------------------------~~------------~~ ~~Costs~~Total ~~and~~current ~~expenses:~~assets ~~Cost~~48 of255 ~~sales~~Other ~~111~~receivables ~~541~~100 ~~961~~100 ~~Research~~Investment ~~and~~90 ~~development~~154 ~~122~~Property ~~338 303 General~~ and ~~administrative 1~~equipment,~~403~~ ~~1,672~~net ~~7,443~~23 ~~Depreciation~~27 ~~and~~Other ~~amortization~~assets ~~239~~18 ~~547~~18 ~~528~~ --------------------------------~~------------~~ Total ~~costs~~assets ~~and~~$ ~~expenses~~279 ~~1,875~~$ ~~3,098~~554 ~~9,235~~ -------------------------------- ------------ ~~Loss from operations: (1,809) (2,761) (7,603) Interest income 16 23 523 Gain on sale of stock 523~~ - ~~7,623 Interest expense (755) (520) (616) Impairment loss (949)~~ - - ~~Equity in losses of unconsolidated affiliate (4,534) (1,478) (2,229)~~ -------------------------------------------- ~~Loss before income taxes, minority interests, and discontinued operations (7,508) (4,736) (2,302) Income tax benefit~~ - - - -------------------------------------------- ~~Net~~Liabilities ~~loss before minority interests~~ and ~~discontinued~~Stockholders' ~~operations~~Deficit ~~(7,508) (4,736) (2,302) Minority interests in consolidated subsidiaries 319 1,786 468~~ -------------------------------------~~-------~~ ~~Loss~~Current ~~from~~liabilities: ~~continuing~~Accounts ~~operations~~payable ~~(7,189)~~$ ~~(2,950)~~474 ~~(1,834)~~$ ~~Discontinued~~449 ~~operations:~~Due ~~Loss~~to ~~from~~related ~~discontinued~~parties ~~operations~~3,989 ~~(135) (946) (4~~2,~~927)~~660 ~~Gain~~Other onaccrued ~~sale~~liabilities of1,574 ~~discontinued~~1,261 ~~operations~~Unearned torevenue a53 ~~related~~263 ~~party~~Bonds ~~1,568~~payable - current - 4,000 --------------------------------~~------------~~ 1Total current liabilities 6,~~433~~090 ~~(946)~~8,633 (4Promissory note to related party 2,~~927)~~250 2,250 --------------------------------~~------------~~ ~~Net~~Total ~~loss~~liabilities ~~$ (5~~8,~~756)~~340 ~~$ (3~~10,~~896)~~883 ~~$ (6,761)~~ -------------------------------- Minority interests in consolidated subsidiaries - - Commitments and contingencies - -~~--------~~ ~~Net~~Stockholders' ~~loss~~deficit: Preferred Stock, par value $.01 per share, -10,000,000 ~~basic~~shares authorized, 3,312,202 shares issued and ~~diluted~~outstanding -at ~~continuing~~December ~~operations~~31, $2001 ~~(.11)~~and $2000 ~~(.05)~~33 $33 ~~(.03)~~Common ~~Net~~Stock, ~~income~~par ~~(loss)~~value $.01 per share, -100,000,000 ~~basic~~shares authorized, 80,796,476 shares and ~~diluted~~63,996,476 shares issued and outstanding at December 31, 2001 and 2000, respectively 808 640 Additional paid-in ~~discontinued~~capital ~~operations~~49,320 ~~.02~~48,480 Accumulated deficit (~~.01~~58,197) (~~.08~~59,457) --------------------------------~~------------~~ ~~Total~~(8,036) ~~loss~~(10,304) ~~per~~Less ~~share~~506,329 $common ~~(.09)~~shares $of treasury stock at cost (~~.06~~25) $ (~~.11~~25) -------------------------------- Total stockholders' deficit (8,061) (10,329) ------------ ~~Number of weighted average shares outstanding 62,905 62,796 61,981~~ -------------------- Total liabilities and stockholders' deficit $ 279 $ 554 -------------------------------- ---------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-32

COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Consolidated Statement of ~~Stockholders'~~Operations ~~(Deficit) Equity~~ Years Ended December 31, ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999 (Amounts in thousands, except per share data) ---------------------------------------------------------------------------------------------------------- 2001 2000 1999 -------------------------------------------- ~~Total~~Contract ~~Preferred~~revenues ~~Stock~~$ ~~Common~~- ~~Stock~~$ ~~Additional~~66 ~~Common~~$ ~~Stockolders'~~337 -------------------------------------------- ~~Paid~~Costs and expenses: Cost of sales -In ~~Accumulated~~111 ~~Stock~~541 ~~Held~~Research ~~Equity~~and ~~Shares~~development ~~Amount~~- ~~Shares~~122 ~~Amount~~338 ~~Capital~~General ~~Deficit~~and Inadministrative ~~Treasury~~936 ~~(Deficit)~~1,403 1,672 Depreciation and amortization 4 239 547 -------------------------------------------- Total costs and expenses 940 1,875 3,098 --------------------------------------------~~---~~ ~~Balance,~~Loss ~~January~~from 1,operations: ~~1998~~(940) 4(1,~~309,577~~809) ~~$ 43 59,233,583 $ 592 $ 46,074 $~~ (432,~~044~~761) $Interest ~~(25)~~income $4 ~~3,640~~16 ~~Equity~~23 ~~gains~~Gain on ~~changes~~sale of ~~interest~~stock in2,576 ~~subsidiary~~523 - -Interest -expense -(380) ~~720~~(755) -(520) Impairment loss - ~~720~~(949) ~~Issuance~~- ofEquity ~~Common~~in ~~Stock~~losses ~~for~~of ~~services~~unconsolidated -affiliate - ~~500~~(4,~~000~~534) 5(1,478) 50 - - ~~55 Issuance of stock options for services~~ - - - - ~~164~~ - - ~~164 Issuance of Common Stock~~ - ~~exercise of options and warrants~~ - - ~~591,143 6 33~~ - - ~~39 Issuance of Common Stock~~ - ~~conversion of Preferred Stock (397,375) (4) 2,471,750 25 (21)~~ - - - ~~Dividends on Preferred Stock~~ - - - ------------------------ Income (~~279~~loss) -before -income ~~(279)~~taxes, ~~Net~~minority ~~loss~~interests, -and -discontinued -operations -1,260 -(7,508) (64,~~761~~736) -Income tax (~~6,761~~provision) benefit - - - -------------------------------------------- Income (loss) before minority interests and discontinued operations 1,260 (7,508) (4,736) Minority interests in consolidated subsidiaries - 319 1,786 -------------------------------------------- ~~Balance,~~Income ~~December~~(loss) ~~31,~~from ~~1998~~continuing ~~3,912,202~~operations ~~39 62~~1,~~796,476~~260 ~~628 46,741~~ (497,~~805~~189) (~~25) (~~2,~~422~~950) ~~Equity~~Discontinued ~~losses~~operations: onLoss ~~changes~~from ofdiscontinued ~~interest~~operations ~~in subsidiary~~ - -(135) ~~- -~~ (31946) -Gain -on ~~(31)~~sale ~~Net~~of ~~loss~~discontinued -operations -to -a -related party - (31,~~896)~~568 - ~~(3,896)~~ -------------------------------------------- - 1,433 (946) ---------------------------------------------- ~~Balance~~Net ~~December~~income ~~31, 1999 3,912,202 39 62,796,476 628 46,710~~ (~~53,701~~loss) ~~(25)~~$ ~~(6,349) Conversion of preferred stock to common stock (600,000) (6)~~ 1,~~200,000~~260 12$ (~~6) - - - Equity gains on changes of interest in subsidiary - - - - 1,776 - - 1,776 Net loss - - - - - (~~5,756) -$ (53,~~756~~896) -------------------------------------------- Net income (loss) per share - basic and diluted - continuing operations $ .02 $ (.11) $ (.05) Net income (loss) per share - basic and diluted - discontinued operations - .02 (.01) -------------------------------------------- ~~Balance~~Total ~~December~~income ~~31,~~(loss) ~~2000~~per ~~3,312,202~~share $ 33.02 ~~63,996,476~~ $ ~~640 $ 48,480 $~~ (~~59,457~~.09) $ (25.06) ~~$ (10,329)~~ -------------------------------------------- Number of weighted average shares outstanding 79,086 62,905 62,796 --------------------------------------------~~---~~ ----------------------------------------------------------------------------------------------------------~~--------------------------~~ The accompanying notes are an integral part of these consolidated financial statements. F-43

COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Consolidated ~~Statements~~Statement of ~~Cash~~Stockholders' ~~Flows~~Deficit Years Ended December 31, ~~2000~~2001, ~~1999,~~2000 and ~~1998~~1999 (Amounts in thousands, except shares and per share data) ---------------------------------------------------------------------------------------------------------- ~~December 31,~~ ---------------------- Preferred Stock Common Stock Additional Common Total -------------------------------------- ~~2000~~Paid-In ~~1999~~Accumulated ~~1998~~Stock Held Stockholders' Shares Amount Shares Amount Capital Deficit In Treasury Deficit --------------------------------------------------------------------------------------------- ~~Cash~~Balance, ~~flows~~January ~~from operating activities: Net loss $ (5~~1,~~756)~~ $1999 (3,~~896)~~912,202 $ (639 62,~~761)~~796,476 ~~Loss~~$ ~~from~~628 ~~discontinued~~$ ~~operations 135 946 4~~46,~~927~~741 ~~Gain~~$ ~~on disposal of discontinued operations~~ (149,~~568~~805) -$ ~~- Adjustments to reconcile net loss to cash used in operating activities: Minority interests in losses of subsidiaries~~ (~~319~~25) $ (12,~~786~~422) ~~(468)~~Equity ~~Depreciation~~losses ~~and~~on ~~amortization~~changes ~~239~~of ~~547~~interest ~~528 Equity~~ in ~~losses of unconsolidated~~ subsidiary ~~4,534~~- ~~1,478~~- ~~2,229~~- ~~Accrued~~- ~~interest~~(31) ~~on loan receivables~~ - - (~~110~~31) ~~Provision~~Net ~~for~~loss ~~related~~- ~~party~~- ~~bad debt 242~~ - ~~921 Provision for investment in, and receivables from, related party~~ - - ~~4,694 Gain on sale of subsidiary stock~~ (~~523~~3,896) - (73,~~623~~896) ~~Issuance of common stock and stock options for services~~ - - ~~219 Impairment of inventory, and patents and completed technology and equipment 949~~ - - ~~Other non~~-~~cash charges~~ - - ~~(131) Changes in assets and liabilities, net of acquisitions: Accounts receivable 10 (9) 138 Other receivables~~ - - ~~163 Inventory~~ - ~~166 (181) Restricted cash 37 (10) 153 Prepaid and other assets~~ - - ~~127 Other assets~~ - - ~~(75) Accounts payable (82) 453 (724) Other accrued liabilities and deferred revenue 143 (294) (62)~~ ------------------------------------------------------------------------------- ~~Net~~Balance ~~cash~~December ~~used~~31, in1999 ~~continuing~~3,912,202 ~~operations~~39 62,796,476 628 46,710 (153,~~959~~701) (225) (6,~~405~~349) Conversion of preferred stock to common stock (2600,~~036~~000) ~~Net~~(6) ~~cash~~1,200,000 ~~used~~12 (6) - - - Equity gains on changes of interest in ~~discontinued~~subsidiary ~~operations~~- - - - 1,776 - - 1,776 Net loss - - - - - (~~817~~5,756) - (~~561~~5,756) ---------------------------------------------- ~~Net cash used in operating activities (1,959) (3,222) (2,597)~~ ---------------------------------------------- ~~Cash flows from investing activities: Payments on notes receivables 221~~ - ~~869~~Balance ~~Purchase~~December of31, ~~property~~2000 ~~and~~3,312,202 ~~equipment~~33 -63,996,476 ~~(81)~~640 ~~(40)~~48,480 ~~Purchase of patents and completed technology~~ (4259,457) (925) ~~- Increase in investments and advances - -~~ (~~779~~10,329) ~~Proceed~~Exchange ~~from sale~~ of ~~investment~~debt 98for ~~- - Proceeds from sale of subsidiary's~~ common stock 36- - 516,~~450~~800,000 ~~Loans~~168 to840 ~~(repayments from) related party~~ - - (41,~~641)~~008 ~~Deconsolidation~~Net ofincome ~~subsidiary~~- ~~owned~~- ~~cash~~- - - ~~(11~~1,~~060)~~260 ~~Cash~~- ~~acquired~~1,260 ~~in subsidiary's acquisition~~ - - ~~715~~ ------------------------------------------------------------------------------------------- ~~Cash~~Balance ~~for~~December ~~investing~~31, ~~activities~~2001 -3,312,202 ~~continuing~~$ ~~operations~~33 ~~313 (90) (9~~80,~~486)~~796,476 ~~Cash~~$ ~~for~~808 ~~investing~~$ ~~activities~~49,320 -$ ~~discontinued~~(58,197) ~~operations~~$ -(25) -$ (~~530~~8,061) ---------------------------------------------- ~~Net cash provided by (used in) investing activities 313 (90) (10,016)~~ ----------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------~~----~~ The accompanying notes are an integral part of these consolidated financial statements. F-54

COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows ~~Continued~~Years Ended December 31, 2001, 2000 and 1999 (Amounts in thousands, except shares and per share data) ---------------------------------------------------------------------------------------------------------- December 31, ---------------------------------------------- 2001 2000 1999 ~~1998~~ ---------------------------------------------- Cash flows from ~~financing~~operating activities: ~~Proceeds~~Net ~~from~~income ~~exercise~~(loss) of$ ~~options~~1,260 ~~and~~$ ~~warrants~~(5,756) -$ (3,896) Loss from discontinued operations - 39135 ~~Repayments~~946 Gain on ~~line~~disposal of ~~credit~~discontinued operations - (1,568) - Adjustments to reconcile net income (~~130~~loss) ~~Proceeds~~to ~~from~~cash ~~long~~used in operating activities: Minority interests in losses of subsidiaries -~~term~~ (319) (1,786) Depreciation and amortization 4 239 547 Equity in losses of unconsolidated subsidiary - 4,534 1,478 Provision for related party bad debt - 242 - 7Gain ~~Payments~~on sale of subsidiary stock (2,576) (523) - Interest accrued on ~~long~~related party payables 380 341 253 Impairment of inventory, equipment, and patents and completed technology -~~term~~ ~~debt~~949 - Changes in assets and liabilities: Accounts receivable - 10 (69) ~~Preferred~~Inventory ~~stock~~- - 166 Restricted cash ~~dividends~~233 -37 -(10) Accounts payable 25 (~~127~~82) ~~Borrowings~~453 ~~from~~Other ~~related~~accrued ~~parties~~liabilities ~~1,638~~and ~~2,630~~deferred -revenue (249) 143 (294) ---------------------------------------------- ~~Cash~~Net ~~from~~cash ~~financing~~used ~~activities~~in - continuing operations (923) (1,~~638~~618) (2,~~630 (217~~152) ~~Cash~~Net ~~from~~cash ~~financing~~used ~~activities~~in - discontinued operations - - -(817) ---------------------------------------------- Net cash ~~provided by (~~used in) ~~financing~~operating activities (923) (1,~~638~~618) (2,~~630 (217~~969) ---------------------------------------------- ~~Decrease~~Cash inflows ~~cash~~from investing activities: Payments on notes receivables - 221 - Purchase of property and ~~cash~~equipment ~~equivalents~~- ~~(8)~~- (~~682~~81) ~~(12,830)~~Purchase ~~Cash~~of patents and ~~cash~~completed ~~equivalents,~~technology ~~beginning~~- of(42) ~~year~~(9) 30Proceed ~~712~~from ~~13,542~~sale of investment -~~---------------------------------------------~~ ~~Cash~~98 ~~and~~- ~~cash~~Proceeds ~~equivalents,~~from ~~end~~sale of ~~year~~subsidiary's $common 22stock $- 3036 $- ~~712~~ ---------------------------------------------- ~~Supplemental~~Cash ~~disclosure~~from ofinvesting ~~cash~~activities ~~flow~~- ~~information:~~continuing ~~Interest~~operations ~~paid~~- $313 ~~255~~(90) $Cash ~~340~~from $investing ~~526~~activities - discontinued operations - - - ---------------------------------------------- ~~Income~~Net ~~taxes~~cash ~~paid~~provided $by -(used $in) -investing $activities - -313 (90) ---------------------------------------------- ~~(See Note 15 for non~~-~~cash investing and financing activities)~~ ---------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-65

COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES ~~Notes~~Consolidated toStatements ~~Consolidated~~of ~~Financial~~Cash ~~Statements~~Flows Continued ---------------------------------------------------------------------------------------------------------- ~~2000~~December ~~Corporate~~31, ---- ~~Overhead& Total Separation Polymer Other~~ ------------------------------------------ 2001 2000 1999 --------------------- ~~Revenue $ 66 $ 66 $~~ - $ - ----------------------- Cash flows from financing activities- borrowings from related parties 949 1,297 2,377 --------------------------------------- ~~Costs and expenses: Cost of sales 111 111~~ - ------ ~~Research~~Cash ~~and~~from ~~development~~financing ~~122~~activities ~~122~~ - -continuing ~~General~~operations ~~and~~949 ~~administrative~~ 1,~~403~~297 ~~320~~2,377 -Cash ~~1,083~~from ~~Depreciation~~financing ~~and~~activities ~~amortization~~- ~~239~~discontinued ~~235~~operations - 4- - ----------------------------------------------~~----------------~~ ~~Total~~Net ~~costs~~cash ~~and~~provided ~~expenses~~by ~~1,875~~financing ~~788~~activities -949 1,~~087~~297 2377 ----------------------------------------------~~-----------------~~ ~~Loss~~Increase ~~from operations~~ (~~1,809~~decrease) ~~(722)~~in -cash ~~(1,087)~~and ~~Interest~~cash ~~income~~equivalents 1626 ~~13 - 3 Gain on sale of subsidiary stock 523 - - 523 Interest expense~~ (~~755~~8) ~~- -~~ (~~755~~682) ~~Impairments~~Cash ofand ~~assets~~cash ~~(949)~~equivalents, ~~(949)~~beginning ~~- - Equity in losses~~ of ~~unconsolidated~~year ~~subsidiary~~22 ~~(4,534)~~30 -712 - ~~(4,534) Minority interest 319 319~~ - - ~~Income taxes~~ - - - - ~~Income from discontinued operations 1,433~~ - ~~1,433~~ - -------------------------------------~~--------------------------~~ ~~Net~~Cash ~~loss~~and $cash (5equivalents,~~756)~~ end of year $ ~~(1,339)~~48 $ ~~1,433~~22 $ ~~(5,850)~~30 ----------------------------------------------~~-----------------~~ ~~Total~~Supplemental ~~assets~~disclosure $of ~~554~~cash flow information: Interest paid $ ~~234~~85 $ -255 $ ~~320~~340 ----------------------------------------------~~-----------------~~ ~~Expenditures~~Income ~~for~~taxes ~~long-lived~~paid ~~assets~~ $ - $ - $ - $ - --------------------------------------------- (See Note 14 for non-~~-----------------~~cash investing and financing activities) ---------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-376

COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001 and 2000 (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 16, 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, 2001: Applied Separation ------- ---------- January 1, 1999 35 percent owned by 87 percent owned by Commodore and accounted for Commodore and under the equity method consolidated with Commodore 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 and accounted for Commodore and under the equity method consolidated with Commodore. August 2000 Applied issued 15,500,000 shares of common stock reducing Commodore's ownership to 32 - percent -------------------------------------------------------------------------------- F-7 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 1. Background Applied Separation Continued ------- ---------- November 2000 Commodore sold 1 million shares of its Applied stock to a third party 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 February 2001 Commodore exchanges 6,000,000 shares of applied stock - for satisfaction of indebtedness During 2001 Ownership at 85% as - preferred stockholders convert 58,900 shares to common stock December 31, 2001 15 percent owned by 85 percent owned by Commodore and accounted for Commodore and consolidated under lower of cost or market with Commodore method 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. Investments in affiliates owned by less than 20% are accounted for using the lower of cost or market 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. In February 2001 Commodore's investment fell below 20% and has been accounted for under the lower of cost or market method (see Note 16). In September 1998, Commodore acquired an 87% ownership of Commodore Separation Technologies, Inc. ("Separation"). Accordingly, Separation is included in the consolidated financial statements of Commodore as of December 31, 2001, 2000 and 1999 (see Note 16). -------------------------------------------------------------------------------- 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) through March 6, 2000 (date Policies of disposition). The Company sold Polymer effective Continued March 6, 2000 to an entity with common majority ownership, recognizing a gain on disposal of discontinued operations (see Notes 13, 16 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 consisted of $233, held in an interest bearing deposit accounts as collateral for a performance bond. Restricted cash and certificates of deposit are classified according to the term of their restriction. Inventory 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 of Separation was less than 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 Impairment of Long-Lived Assets Significant Commodore reviews its long-lived assets for impairment Accounting whenever events or changes in circumstances indicate Policies that the carrying amount of the assets may not be Continued 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 Company recognized impairment losses on its inventory, property and equipment, and technology of $519, $256 and $174, respectively Deposits Separation has deposits of $53 and $263 at December 31, 2001 and 2000, related to the contracts described in the revenue recognition policy. Revenue Recognition 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, 1999, Separation had begun work on the first contract, however it had not yet commenced work on the second contract and accordingly, had not recorded revenue related to the second 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 2001 and 2000 related to these contracts. 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. Research and Development Research and development expenditures are charged to operations as incurred. -------------------------------------------------------------------------------- F-10 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 18. -------------------------------------------------------------------------------- F-11 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. There are no material Continued differences between the fair value of financial instruments and the recorded book value as of December 31, 2001 and 2000. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain balances in the years of 2000 and 1999 have been reclassified to conform with the year 2001 presentation. 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, 2001, 2000 and 1999, Commodore has incurred substantial losses from operations and net cash outflows from operating activities. At December 31, 2001 and 2000, Commodore also has a net stockholders' deficit. -------------------------------------------------------------------------------- F-12 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. Investment Investment consists of Commodore's investment in Commodore Applied Technologies recorded at $90 and $154 at December 31, 2001 and 2000, respectively. As described in notes 1, 2, and 16, the Company accounted for Applied on the equity method at December 31, 2000 and on the lower of cost or market method at December 31, 2001. At December 31, 2000 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. At December 31, 2001 and 2000 the Company owns 8,382,000 shares and 14,382,000 shares representing 17% and 30% of Applied, respectively. Condensed financial statements for Applied at December 31, 2000 and for the years ended December 31, 2000 and 1999 are as follows: December 31, 2000 ------------------ Current assets $ 7,141 ------------------ Non-current assets $ 30,332 ------------------ Current liabilities $ 24,017 ------------------ Equity - preferred and other $ 7,322 ------------------ Equity - common $ 533 ------------------ -------------------------------------------------------------------------------- F-13 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 4. Investment Continued Years Ended December 31, ----------------------------------- 2000 1999 ----------------------------------- Revenues $ 20,631 $ 18,147 Expenses 32,072 22,132 ----------------------------------- Net loss $ (11,441) $ (3,985) ----------------------------------- 5. Property Property and equipment consist of the following: and Equipment December 31, ------------------------------- 2001 2000 ------------------------------- Furniture, fixtures, and equipment $ 100 $ 100 Less: accumulated depreciation (73) and amortization (77) ------------------------------- Net property and equipment $ 23 $ 27 ------------------------------- 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. 6. Other Other accrued liabilities consist of the following: Accrued Liabilities 2001 2000 ------------------------------- Warrants issued for purchase of Applied Common Stock (see Note 7) $ 992 $ 992 Loss reserve (see Note 8) 400 - Interest payable - 85 Other 182 184 ------------------------------- $ 1,574 $ 1,261 ------------------------------- -------------------------------------------------------------------------------- F-14 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 7. Warrant In 1997 Commodore issued five-year warrants to purchase Liability 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 were reset to $0.82 per share effective August 18, 1998, and again reset to $0.34 per share effective October 1998. During the year ended December 31, 2000 options were exercised to purchase 74,375 shares of Applied for an aggregate amount of $26. The Company reduced its investment in Applied and reduced its liability recorded in connection with the warrants and recognized a gain on sale of subsidiary stock of $77. -------------------------------------------------------------------------------- F-15 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 carried an interest rate of 8.5% payable Debt quarterly, and matured on December 4, 2000. The bonds were 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 were 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 were redeemable at Commodore's option at the face amount thereof plus accrued interest when the bid price of Commodore's Common Stock exceeded $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. In February 2001 the bond holders took the collateral securing the bonds and the Company issued to the bondholders 16,800,000 shares of its common stock and transferred to the bondholders 6,000,000 shares of Applied's common stock owned by the Company. The Company recorded a gain of $2,576 upon the transfer of Applied shares which represents the excess of the market value of the stock over the Company's recorded basis in the stock. The Company's Common Stock issued and the Applied Common Stock issued were valued at the market trading price. The fair market value of the collateral assets taken by the bond holders totaled approximately $3,648. The Company has $352 included as a reserve for resolving all issues and costs related to the bonds and the collateral. 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, 2001 and 2000, and is due in 2006. The note is unsecured and requires interest only payments until maturity. Accrued and unpaid interest is $708 and $528 as of December 31, 2001 and 2000, respectively, and is included in amounts due to related parties. -------------------------------------------------------------------------------- F-16 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 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. The provision for income taxes results in an effective tax rate which differs from federal income tax rates as follows for the years ended December 31: 2001 2000 1999 --------------------------------------- Expected tax expense (benefit) at federal statutory rate $ 428 $ (1,957) $ (1,325) State income taxes, net of federal income tax expense (benefit) 75 (345) (234) Expiration of net operating loss 2,761 - Loss from unconsolidated subsidiary - 1,814 591 Change in valuation allowance (3,264) 488 963 Other - - 5 --------------------------------------- Income tax expense (benefit) $ - $ - $ - --------------------------------------- The components of the net deferred income tax are as follows as of December 31: 2001 2000 -------------------------- Net operating loss carryforward and impairment losses $ 8,500 $ 11,764 Less: valuation allowance (8,500) (11,764) -------------------------- Total $ - $ - -------------------------- 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 2001 and 2000, Commodore has established a valuation allowance for the entire amount of net deferred tax assets. -------------------------------------------------------------------------------- F-17 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, 2001 of approximately $25,000 which Continued includes the NOL of Separation, and expire in the years 2002 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 February 2001 the Company issued 16,500,000 shares of common stock for satisfaction of a liability. Preferred Stock Commodore has authorized 3,000,000 shares of Series AAA Preferred Stock, par value $.01 per share. The Series AAA 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 AAA 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 ratio of two shares of Common Stock for each share of Preferred. In 2000, 600,000 shares of Series AAA Preferred Stock were converted into 1,200,000 shares of Commodore Common Stock. The Series AAA 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, 2001 and 2000, 1,925,000 shares of Series AAA Preferred Stock remained outstanding. Commodore has authorized 1,600,000 shares of Series B 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. At December 31, 2001 and 2000, 1,387,202 shares of Series B Preferred Stock remained outstanding. -------------------------------------------------------------------------------- F-18 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 10. Stockholders' Commodore has authorized 1,500,000 shares of Series C Equity Preferred Stock, par value of $.01 per share. The Series Continued C Preferred Stock does not pay dividends. At December 31, 2001 and 2000 there were no shares of Series C Preferred Stock outstanding. 11. 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, 1999 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 Granted - - - Exercised - - - Expired/Forfeited (1,560,000) (3,382,000) 0.10 - 1.13 ------------------------------------------- Outstanding December 31, 2001 7,995,000 200,000 $0.10 - 0.29 ------------------------------------------- -------------------------------------------------------------------------------- F-19 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 11. Stock Option Options exercisable are as follows: Plan Continued December 31, ---------------------------- 2001 2000 ---------------------------- Options exercisable 7,955,000 9,555,000 Options available for grant 9,755,000 9,755,000 12. 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 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, --------------------------------------- 2001 2000 1999 --------------------------------------- Net income (loss) - as reported $ 1,260 $ (5,756) $ (3,896) Net income (loss) - pro forma $ 1,243 $ (5,773) $ (3,928) Income (loss) per share - as reported $ 0.02 $ (0.09) $ (0.06) Income (loss) per share - pro forma $ 0.02 $ (0.09) $ (0.06) No option grants were made in 2001, 2000, or 1999. The following table summarizes information about stock options and warrants outstanding at December 31, 2001. Outstanding Exercisable -------------------------------------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercisable Prices Outstanding Life Price Exercisable Price --------------------------------------------------------------------------- $ .10 6,716,000 2.33 years $ 0.10 6,716,000 $ 0.10 .28 - .29 1,479,000 4.32 years 0.29 1,479,000 0.29 $.10 - .29 8,195,000 2.69 years $ 0.13 8,195,000 $ 0.13 --------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-20 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 13. Related Party Due to Related Parties Transactions The Company has a note payable to a related party in the amount of $2,250 at December 31, 2001 and 2000 with accrued interest payable of $709 and $528, respectively (see note 8). The Company has a payable to a company wholly owned by the majority shareholder of Commodore of $3,280 and $2,132 at December 31, 2001 and 2000, respectively, for cash advances and accrued interest on cash advances at 8.5% recorded in due to related parties. The Company had 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, 2001 and 2000, there is no receivable or payable from Applied. Sale of Discontinued Operations The Company in March 2000 sold its investment in Polymer 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. 14. Non-Cash During the years ended December 31, 2001, 2000 and 1999, Investing and Commodore had the following non-cash investing and Financing financing transactions: Activities 2001 ---- o The Company exchanged 16,800,000 of its common stock and 6,000,000 shares of its investment in Applied in exchange for a liability of $4,000. The Company realized a gain of $2,576 on the satisfaction of debt. -------------------------------------------------------------------------------- F-21 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 14. Non-Cash 2000 Investing and ---- Financing o Commodore recorded equity gains on changes of Activities interest in Applied of $1,770 as direct increases in Continued 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). 15. 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. -------------------------------------------------------------------------------- F-22 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 15. Earnings Per Share Continued

~~COMMODORE~~Years ~~ENVIRONMENTAL~~Ended ~~SERVICES,~~December ~~INC.~~31 ~~AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued~~ ---------------------------------- 2001 2000 1999 ----------------------------------~~--------------------------------------~~ ~~1999~~Net ~~Corporate~~income ~~----~~(loss) ~~Overhead&~~applicable ~~Total~~to ~~Separation~~common ~~Polymer~~shareholders ~~Other~~from ~~---------------------------------------------------------------~~continuing ~~Revenue~~operations $ ~~337~~1,260 $ ~~337~~(7,189) $ -(2,950) $Net income (loss) applicable to common shareholders from discontinued operations - 1,433 (946) ----------------------------------~~-----------------------------~~ ~~Costs~~Total ~~and~~net ~~expenses:~~income ~~Cost~~(loss) ofapplicable ~~sales~~to ~~541~~common ~~541~~shareholders -$ ~~- Research and development 338 338 - - General and administrative~~ 1,~~672~~260 ~~755~~$ -(5,756) ~~917~~$ ~~Depreciation~~(3,896) ~~and amortization 547 507~~ - 40 ---------------------------------~~------------------------------~~ ~~Total~~Weighted ~~costs~~average ~~and~~common ~~expenses~~shares 379,~~098~~086,000 262,~~141~~905,000 -62,796,000 ~~957~~outstanding (basic) ----------------------------------~~-----------------------------~~ ~~Loss~~Employee ~~from~~stock ~~operations~~options (~~2,761)~~Note ~~(1,804~~11) - (~~957~~*) ~~Interest~~(*) ~~income~~Series 23AA 18Convertible -Preferred 5Stock ~~Interest expense~~ (~~520~~Note 10) - -(*) (~~520~~*) ~~Equity~~Series inB ~~losses~~Convertible ofPreferred ~~unconsolidated~~Stock ~~subsidiary~~ (~~1,478~~Note 10) - -(*) (~~1,478~~*) ~~Minority~~Series ~~interest~~C ~~1,786~~Convertible ~~1,786~~Preferred -Stock -(Note ~~Income~~10) ~~tax~~- ~~expense~~(*) -(*) -Warrants -issued -in ~~Loss~~connection ~~from~~with ~~discontinued~~various ~~operations~~transactions (~~946~~Note 11) - (~~946~~*) -(*) ----------------------------------~~-----------------------------~~ ~~Net~~Weighted ~~loss~~average $common shares outstanding (3diluted) 79,~~896~~086,000 62,905,000 62,796,000 Net income (loss) $per share - basic and diluted - continuing operations $ .02 $ (~~946~~.11) $ (~~2,950~~.05) Net income (loss) per share -~~--------------------------------------------------------------~~ ~~Total~~basic ~~assets~~and $diluted ~~5,134~~- $discontinued ~~1,908~~operations $ - $ ~~3,226~~(.02) $ (.01) ----------------------------------~~-----------------------------~~ ~~Expenditures~~Total ~~for~~net ~~long-lived~~income ~~assets~~(loss) $per 81share $ 81.02 $ -(.09) $ -(.06) ----------------------------------~~----------------------------- ---------------------------------------------------------------------------------------------------------- F-38~~

(*) Due to Commodore's loss from continuing operations in 2000 and 1999, the incremental shares issuable in connection with these instruments are anti-dilutive and accordingly not considered in the calculation. -------------------------------------------------------------------------------- F-23 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 16. Acquisitions Commodore Applied Technologies, Inc. and Reorgan- At December 31, 2001 and 2000, Commodore owned izations approximately 15% and 30%, respectively, of the Common Stock outstanding of Commodore Applied Technologies, Inc. ("Applied"). Accordingly, Commodore's investment in Applied was accounted for under the lower of cost or market method for February 2001 through December 2001 and under the equity method from January 1999 through February 2001. In November 1999, Commodore converted 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. During 2001 Commodore exchanged 6,000,000 shares of Applied common stock for satisfaction of liabilities. The exchange resulted in a gain from sale of stock of $2,576 during the year ended December 31, 2001. -------------------------------------------------------------------------------- F-24 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 16. Acquisitions Commodore Separation Technologies, Inc. and Reorgan- Effective September 28, 1998, Commodore acquired izations Applied's 87% ownership of Separation, as part of the Continued debt restructuring between Commodore and Applied as previously discussed. Accordingly, Separation is included in the consolidated financial statements of Commodore as of December 31, 2001, 2000 and 1999. During 2000, Separation's Preferred shareholders converted 30,500 shares of Preferred Stock to Separation common stock, reducing the liquidation value of the Preferred Stock to $5,695. During 2001, Separation Preferred shareholders converted 50,900 shares of Preferred Stock to Separation common stock, reducing the liquidation value of the Preferred Stock to $5,186. For the years ended December 31, 2001, 2000 and 1999, Separation did not pay dividends to its Preferred shareholders. Commodore Polymer Technologies, Inc. On March 5, 1998 Commodore incorporated a new company, Commodore Polymer Technologies, Inc. (Polymer), as a wholly-owned subsidiary and transferred the CERASET technology acquired from a related party into Polymer. 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. -------------------------------------------------------------------------------- F-25 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 16. Acquisitions Minority Interests in Consolidated Subsidiaries and Reorgan- Minority interest in the consolidated financial izations statements at December 31, 2001 and 2000 consist of the Continued 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 for 2000 and 2001 were all attributable to Commodore, the majority common shareholder. 17. 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), and for the year ended December 31, 1999: 2000 1999 ---------------------------- Revenues $ - $ 44 Costs and expenses (135) (990) ---------------------------- Net loss before income tax expense (135) (946) Income tax expense - - ---------------------------- Net loss from discontinued operations $ (135) $ (946) ---------------------------- -------------------------------------------------------------------------------- F-26 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 18. Segment Using the guidelines set forth in SFAS No. 131, Information "Disclosures About Segments of an Enterprise and Related Information," Commodore has identified two reportable segments in which it has operations based on the services it provides. The reportable segments are as follows: 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. Effective March 6, 2000, Commodore discontinued the operations of Polymer and accordingly, the information related to Polymer is included as discontinued operations in the financial statements for the years ended December 31, 2000 and 1999. All continuing operations in the consolidated financial statements are those of Separation and overhead expenses. 19. Commitments Rent expense was approximately $95, $197 and $200 in and 2001, 2000 and 1999, respectively. Contingencies 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. -------------------------------------------------------------------------------- F-27 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 20. Recent In August 2001, the Financial Accounting Standards Board Accounting issued Statement of Financial Accounting Standards No. Pronounce- 144 "Accounting for the Impairment of Long-Lived ments Assets." This Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement supercedes FASB Statement 121 and APB Opinion No. 30. This Statement retains certain fundamental provisions of Statement 121, namely; recognition and measurement of the impairment of long-lived assets to be held and used, and measurement of long-lived assets to be disposed of by sale. The Statement also retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations. This Statement also amends ARB No. 151 to eliminate the exception of consolidation for a temporarily controlled subsidiary. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is currently assessing the impact of this statement. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations". This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. This Statement addresses financial accounting and reporting for the disposal of long-lived assets. Management does not expect the adoption of SFAS No. 143 to have a significant impact on the financial position or results of operations of the Company. -------------------------------------------------------------------------------- F-28 COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued -------------------------------------------------------------------------------- 20. Recent In June 2001, the Financial Accounting Standards Board Accounting issued Statements of Financial Accounting Standards No. Pronounce- 141 "Business Combinations" (SFAS No. 141) and No. 142 ments "Goodwill and Other Intangibles" (SFAS No. 142). SFAS Continued No. 141 and No. 142 are effective for the Company on July 1, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The statement also establishes specific criteria for recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary again. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The statement requires that goodwill and indefinite lived intangible assets no longer be amortized and be tested for impairment at least annually. The amortizaiton period of intangible assets with finite lives will no longer be limited to forty years. Management does not expect the adoption of SFAS No. 141 and 142 to have a significant impact on the financial position or results of operations of the Company. -------------------------------------------------------------------------------- F-29 All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and, therefore, have been omitted. 22 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) 23 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) 24 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 25 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: March 27, 2002 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 March 27, 2002 ---------------------- and Chief Executive Officer Bentley J. Blum (principal Executive officer) /s/ Jerry Karlik Director March 27, 2002 ---------------------- Jerry Karlik 26

COMMODORE ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued ---------------------------------------------------------------------------------------------------------- 1998 Corporate ---- Overhead Total Applied Separation Polymer & Other -------------------------------------------------------------------- Revenue $ 1,632 $ 1,251 $ - $ - $ 381 -------------------------------------------------------------------- Costs and expenses: Cost of sales 961 961 - - - Research and development 303 173 130 - - General and administrative 7,443 777 164 - 6,502 Depreciation and amortization 528 96 121 - 311 -------------------------------------------------------------------- Total costs and expenses 9,235 2,007 415 - 6,813 -------------------------------------------------------------------- Loss from operations (7,603) (756) (415) - (6,432) Interest income 523 - - - 523 Gain on sale of subsidiary stock 7,623 - - - 7,623 Interest expense (616) (6) - - (610) Equity in losses of unconsolidated subsidiary (2,229) - - - (2,229) Minority interest 468 - - - 468 Income tax expense - - - - - Loss from discontinued operations (4,927) - - (4,927) - -------------------------------------------------------------------- Net loss $ (6,761) $ (762) $ (415) $ (4,927) $ (657) -------------------------------------------------------------------- Total assets $ 8,029 $ - $ 2,665 $ 100 $ 5,264 -------------------------------------------------------------------- Expenditures for long-lived assets $ 40 $ - $ 5 $ - $ 35 -------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- F-39

2000 1999 ----------------------------------- Assets Current assets: Cash and cash equivalents $ 1,980 $ 1,797 Accounts receivable, net 4,536 3,552 Notes and advances to related parties - 265 Restricted cash - 21 Prepaid assets and other current assets 625 366 ----------------------------------- Total current assets 7,141 6,001 Property and equipment, net 1,983 2,244 Intangible assets: Goodwill, net of accumulated amortization of $419 and $831, respectively 24,676 6,841 Covenants not to compete, net of accumulated amortization of $175 and $0, respectively 2,450 - Patents and completed technology, net of accumulated amortization of $613 and $478, respectively 862 961 ----------------------------------- Total intangible assets 27,988 7,802 Other assets 361 - ----------------------------------- Total assets $ 37,473 $ 16,047 ----------------------------------- ----------------------------------------------------------------------------------------------------------- F-42

COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheet December 31, 2000 and 1999 (Amounts in thousands, except shares and per share data) ----------------------------------------------------------------------------------------------------------- 2000 1999 ------------------------------ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 2,490 $ 1,792 Related party payable 247 - Current portion of long-term debt 2,650 200 Line of credit 1,459 948 Notes payable 14,682 - Other accrued liabilities 2,489 2,440 ------------------------------ Total current liabilities 24,017 5,380 ------------------------------ Long-term debt 5,182 716 ------------------------------ Total liabilities 29,199 6,096 Minority interest in subsidiary 419 - Commitments and contingencies - - Stockholders' Equity: Convertible Preferred Stock, Series E and F, par value $.001 per share, aggregate liquidation value of $7,332,429 and $4,355,000 at December 31, 2000 and 1999, respectively, 12% cumulative dividends, 601,700 shares authorized, 556,700 shares and 335,000 shares issued and outstanding at December 31, 2000 and 1999, respectively 1 - Common Stock, par value $.001 per share, 125,000,000 shares authorized, 48,330,385 and 30,962,938 issued and outstanding, at December 31, 2000 and 1999, respectively 48 31 Additional paid-in capital 66,495 57,168 Accumulated deficit (58,689) (47,248) ------------------------------ Total stockholders' equity 7,855 9,951 ------------------------------ Total liabilities and stockholders' equity $ 37,473 $ 16,047 ------------------------------ ----------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-43

COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Operations Years Ended December 31, 2000, 1999 and 1998 (Amounts in Thousands, Except Shares and Per Share Data) ----------------------------------------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------- Revenue $ 20,631 $ 18,147 $ 17,470 ----------------------------------------- Costs and expenses: Cost of revenues 14,452 16,127 15,421 Research and development 993 1,145 2,722 General and administrative 6,989 4,037 8,118 Depreciation and amortization 1,471 696 1,150 Impairment of goodwill 6,586 - - Minority interest 341 - 300 ----------------------------------------- Total costs and expenses 30,832 22,005 27,711 ----------------------------------------- Loss from operations (10,201) (3,858) (10,241) Interest income 67 39 337 Interest expense (1,307) (166) (1,066) Equity in losses of unconsolidated subsidiary - - (2,383) ----------------------------------------- Loss before income taxes (11,441) (3,985) (13,353) Income tax benefit - - - ----------------------------------------- Net loss $ (11,441) $ (3,985) $ (13,353) ----------------------------------------- Net loss per share - basic and diluted $ (.34) $ (.16) $ (.58) ----------------------------------------- Number of weighted average shares outstanding 35,866 24,819 23,194 ----------------------------------------- ----------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-44

COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity Years Ended December 31, 2000, 1999, and 1998 (Restated) (Amounts in thousands, except shares and per share data) -------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Additional ---------------------------------------- Paid-In Accumulated Shares Amount Shares Amount Capital Deficit -------------------------------------------------------------------- Balance, January 1, 1998 - $ - 22,766,334 $ 23 $ 41,541 $ (29,910) Conversion of Series A Preferred Stock into Common Stock - - 336,866 - 890 - Issuance of Common Stock to satisfy price reset liability - - 599,063 1 1,197 - Equity gains on satisfaction of related party obligations (restated) - - - - 7,818 - Preferred stock dividends - - - - (14) - Warrant issued in connection with early paydown on intercompany note - - - - 340 - Warrant issued in connection with loan from parent - - - - 527 - Change in exercise price of warrant issued in connection with convertible loan from parent - - - - 842 - Change in exercise price of warrant issued in connection with debt restructuring - - - - 5 - Issuance of Series B Convertible Preferred Stock 20,909 - - - 813 - Issuance of Series C Convertible Preferred Stock 10,189 - - - 396 - Issuance of Series D Convertible Preferred Stock 20,391 - - - 792 - Net loss - - - - - (13,353) ----------------------------------------------------------------- Balance December 31, 1998 51,489 - 23,702,263 24 55,147 (43,263) Conversion of series B, C, and D preferred stock into common stock (51,489) - 7,258,533 7 (7) - -------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-45

COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity Continued ---------------------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Additional ---------------------------------------- Paid-In Accumulated Shares Amount Shares Amount Capital Deficit -------------------------------------------------------------------- Issuance of Series E Convertible Preferred Stock at redemption value 335,000 - - - 2,030 - Warrants issued in connection with Series E Convertible Preferred Stock - - - - 60 - Preferred stock dividends - - - - (63) - Exercise of stock options - - 2,142 - 1 - Net loss - - - - - (3,985) ------------------------------------------------------------------ Balance, December 31, 1999 335,000 - 30,962,938 31 57,168 (47,248) Issuance of Series F Convertible Preferred Stock at redemption value 266,700 1 - - 1,770 - Conversion of series E and F preferred stock into common stock (45,000) - 440,581 - - - Warrants issued in compensation with short term note payable to affiliated party - - - - 89 - Issuance of common stock for private placement fee - - 100,000 - - - Issuance of common stock and warrants in acquisition - - 15,500,000 16 7,506 - Preferred stock dividends - - - - (634) - Exercise of stock options - - 1,326,866 1 596 - Net loss - - - - - (11,441) ------------------------------------------------------------------ Balance, December 31, 2000 556,700 $ 1 48,330,385 $ 48 $ 66,495 $ (58,689) --------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-46

COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows Years Ended December 31, 2000, 1999 and 1998 (Amounts in Thousands, Except Shares and Per Share Data) ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------- Cash flows from operating activities: Net loss $ (11,441) $ (3,985) $ (13,353) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,471 696 1,150 Loss on disposition of property and equipment 12 - 601 Interest expense from common stock 333 - - Impairment of goodwill 6,586 - - Equity in losses of unconsolidated subsidiary - - 2,340 Write down of investment in unconsolidated subsidiary - - 43 Provision for related party bad debt 109 - - Minority interest in subsidiary losses 341 - 300 Amortization of debt discount 718 - 695 Other - - 26 Changes in assets and liabilities: Accounts receivable (827) (410) (79) Inventory - - (271) Restricted cash 21 - (21) Prepaid assets 414 (95) 132 Other receivables - - 18 Accounts payable and accrued liabilities 261 889 (776) Other - - 19 --------------------------------------------- Net cash used in operating activities (2,002) (2,905) (9,176) --------------------------------------------- Cash flows from investing activities: Equipment purchased or constructed (114) (353) (2,554) Patents acquired (36) (113) (150) Purchase of Dispute Resolution Management, Inc., net of cash acquired 508 - - Contribution from minority interest in DRM 78 - - Advances to related parties (97) (135) (96) Increase in restricted cash - - 50 Cash held by subsidiary at the time of sale - - (715) Repayment of loans to affiliate, net of advances - - 752 Contributions to affiliate (325) - (2,377) --------------------------------------------- Net cash provided by (used in) investing activities 14 (601) (5,090) --------------------------------------------- ---------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-47

COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows Continued ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------- Cash flows from financing activities: Proceeds from sale of Common Stock 597 1 - Proceeds from sale of Preferred Stock 1,771 2,090 - Preferred stock dividends paid by subsidiary - - (300) Preferred stock dividends (214) (63) - Payments to principal shareholder - - (1,328) Borrowings from principal shareholder - - 5,450 (Repayments)/borrowings under line of credit (256) 587 (838) Borrowings on long term debt and warrants 1,000 1,000 - Payments on long term debt and notes payable (727) (89) (35) Repayment of related party accounts receivable and payable - - (57) ------------------------------------------- Net cash provided by financing activities 2,171 3,526 2,892 ------------------------------------------- Increase (decrease) in cash and cash equivalents 183 20 (11,374) Cash and cash equivalents, beginning of year 1,797 1,777 13,151 ------------------------------------------- Cash and cash equivalents, end of year $ 1,980 $ 1,797 $ 1,777 -------------------------------------------

2000 1999 1998 ----------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------------------------------------------------------ Options outstanding - beginning of year 7,169,747 $ .61 4,155,012 $ 1.08 2,912,375 $ 6.06 Granted 2,243,769 1.05 3,259,323 0.56 3,901,371 0.59 Exercised (1,326,866) .46 (2,142) 0.44 - - Forfeited (557,594) .59 (242,396) 4.86 - - Rescinded - - - (2,658,734) 5.83 ------------------------------------------------------------------- Options outstanding - end of year 7,529,056 $ 0.87 7,169,797 $ 0.61 4,155,012 1.08 ===================================================================

Options Outstanding Options Exercisable ----------------------------------------------------------------------- Weighted Weighted Weighted Range of Average Average Average Exercisable Number Remaining Exercise Number Exercise Prices Outstanding Contractural Life Price Exercisable Price --------------------------------------------------------------------------------------- $ 0.25 - $0.44 2,125,920 8.00 years $0.43 1,456,740 $ 0.44 $ 0.50 - $0.50 2,147,500 2.58 years $0.50 - - $ 0.63 - $1.44 2,898,261 8.00 years $0.96 1,627,004 0.86 $ 2.00 - $6.00 357,375 5.92 years $4.36 357,375 4.86 -------------------------------------------------------------------- 7,529,056 6.36 years $0.87 3,441,119 1.10 ====================================================================

Granted Number of Current 1998 and Granted Granted Warrants Exercise Expiration Prior 1999 2000 2000 Price Date ------------------------------------------------------------------------------------------------ 500,000 - - 500,000 $ 7.20 August 2001 5,750,000 2,547,959 2,001,848 10,299,807 4.69 June 2001 500,000 - - 500,000 13.86 August 2001 7,500,000 3,405,444 2,764,141 13,669,585 5.50 December 2003 19,407 - - 19,407 5.80 August 2002 60,000 - - 60,000 3.68 September 2002 1,000,000 356,092 270,568 1,626,660 3.09 August 2002 514,000 148,267 127,596 789,863 2.93 March 2003 1,500,000 266,861 49,020 1,815,881 1.24 February 2004 - 312,500 - 312,500 1.20 November 2004 - 250,000 - 250,000 1.20 November 2004 - - 25,000 25,000 1.94 March 2005 - - 250,000 250,000 1.94 March 2005 - - 113,475 113,475 1.94 March 2005 - - 100,000 100,000 1.06 September 2002 - - 1,000,000 1,000,000 2.00 August 2005 ----------------------------------------------------------- 17,343,407 7,287,123 6,701,648 31,332,178

Year Ended December 31, ----------------------------------------------- 2000 1999 1998 ----------------------------------------------- Net loss $ (11,441) $ (3,985) $ (13,353) Preferred stock dividends (634) (63) (14) ----------------------------------------------- Net loss available to common shareholders $ (12,075) $ (4,048) $ (13,367) Weighted average common shares outstanding (basic) 35,866,000 24,819,000 23,194,000 Series B Convertible Preferred Stock - - (*) Series C Convertible Preferred Stock - - (*) Series D Convertible Preferred Stock - - (*) Series E Convertible Preferred Stock (*) (*) - Series F Convertible Preferred Stock (*) - - Employee Stock Options (*) (*) (*) Warrants issued in connection with various transactions (*) (*) (*) ----------------------------------------------- Weighted average common shares outstanding (diluted) 35,866,000 24,819,000 23,194,000 =============================================== Net loss per share - basic and diluted $ (.34) $ (.16) $ (.58)

2000 Corporate ---- Overhead Total CASI Solution DRM & Other -------------------------------------------------------------------------------- Revenue $ 20,631 $ 16,786 $ 271 $ 3,574 $ - Costs and expenses: Cost of sales 14,452 13,962 490 - - Research and development 993 - 993 - - General and administrative 6,989 2,355 504 1,761 2,369 Depreciation and amortization 1,471 - 378 12 1,081 Impairment of goodwill 6,586 - - - 6,586 Minority interest 341 - - - 341 -------------------------------------------------------------------------------- Total costs and expenses 30,832 16,317 2,365 1,773 10,377 -------------------------------------------------------------------------------- Income (loss) from operations (10,201) 469 (2,094) 1,801 (10,377) Interest income 67 - - 10 57 Interest expense (1,307) (123) (86) (12) (1,086) Equity in losses of unconsolidated subsidiary - - - - Income taxes - - - - - -------------------------------------------------------------------------------- Net income (loss) $ (11,441) $ 346 $ (2,180) $ 1,799 $ (11,406) -------------------------------------------------------------------------------- Total assets $ 37,473 $ 4,255 $ 1,724 $ 2,562 $ 28,932 -------------------------------------------------------------------------------- Expenditures for long-lived assets $ 302 $ 40 $ 132 $ 130 $ - --------------------------------------------------------------------------------

1999 Corporate ---- Overhead Total CASI Solution & Other ----------------------------------------------------------------- Revenue $ 18,147 $ 17,973 $ 174 $ - Costs and expenses: Cost of sales 16,127 15,865 262 - Research and development 1,145 - 1,145 - General and administrative 4,037 1,428 175 2,434 Depreciation and amortization 696 64 247 385 Minority interest - - - - ----------------------------------------------------------------- Total costs and expenses 22,005 17,357 1,829 2,819 ----------------------------------------------------------------- Income (loss) from operations (3,858) 616 (1,655) (2,819) Interest income 39 - - 39 Interest expense (166) (103) (63) - Equity in losses of unconsolidated subsidiary - - - - Income taxes - - - - ----------------------------------------------------------------- Net income (loss) $ (3,985) $ 513 $ (1,718) $ (2,780) ----------------------------------------------------------------- Total assets $ 16,047 $ 4,108 $ 2,035 $ 11,713 ----------------------------------------------------------------- Expenditures for long-lived assets $ 353 $ 12 $ 337 $ 4 -----------------------------------------------------------------

1998 Separation ---- (Through Corporate September 28, Overhead Total CASI 1998) Solution & Other ------------------------------------------------------------------------------- Revenue $ 17,470 $ 17,346 $ 18 $ - $ 106 Costs and expenses: Cost of sales 15,421 14,986 - 375 60 Research and development 2,722 - 1,169 1,320 233 General and administrative 8,188 1,835 1,896 440 3,947 Depreciation and amortization 1,150 103 287 422 338 Minority interest 300 - 300 - - ------------------------------------------------------------------------------- Total costs and expenses 27,711 16,924 3,652 2,557 4,578 ------------------------------------------------------------------------------- Income (loss) from operations (10,241) 422 (3,634) (2,557) (4,472) Interest income 337 1 94 - 242 Interest expense (1,066) (125) - - (941) Equity in losses of unconsolidated subsidiary (2,383) - - - (2,383) ------------------------------------------------------------------------------- Net (loss) income $ (13,353) $ 298 $ (3,540)$ (2,557)$ (7,554) ------------------------------------------------------------------------------- Total assets $ 15,617 $ 3,506 $ - $ 1,932 $ 10,179 ------------------------------------------------------------------------------- Expenditures for long-lived assets $ 2,704 $ 135 $ 762 $ 1,669 $ 138 -------------------------------------------------------------------------------

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