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Ultrastrip Systems Inc · 10KSB · For 12/31/01

Filed On 12/27/02 2:21pm ET · SEC File 0-25663 · Accession Number 1116502-2-2053

  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

12/27/02  Ultrastrip Systems Inc            10KSB      12/31/01    2:93                                     Bassett Press Inc/FA

Annual Report -- Small Business · Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Annual Report                                         83    430K 
 2: EX-10.18    Sterner Consulting Agreement                          10     51K

10KSB · Annual Report
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (RTF, XML, et al.) Certain Relationships and Related Transactions Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Description of Business Description of Property Directors, Executive Officers, Promoters and Control Persons Executive Compensation Exhibits, Lists and Reports on Form 8-K Financial Statements Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Market for Common Equity and Related Stockholder Matters Security Ownership of Certain Beneficial Owners and Management Submission of Matters to A Vote of Security Holders
1	1st Page
3	Item 1. Description of Business
18	Item 2. Description of Property
"	Item 3. Legal Proceedings
19	Item 4. Submission of Matters to A Vote of Security Holders
"	Item 5. Market for Common Equity and Related Stockholder Matters
20	Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations
31	Item 7. Financial Statements
"	Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"	Item 9. Directors, Executive Officers, Promoters and Control Persons
37	Item 10. Executive Compensation
44	Item 11. Security Ownership of Certain Beneficial Owners and Management
45	Item 12. Certain Relationships and Related Transactions
78	Item 13. Exhibits, Lists and Reports on Form 8-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 2001

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________ to __________

Commission file number 000-25663
---------

UltraStrip Systems, Inc.
--------------------------------------------------------------------------------
(Name of small business issuer in its charter)

Florida 65-0841549
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

3515 S.E. Lionel Terrace, Stuart, Florida 34997
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Issuer's telephone number (772) 287-4846
-----------------------

Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered

------------------------------ --------------------------------------

Securities registered under Section 12(g) of the Exchange Act:

Common Stock $0.01 par value
--------------------------------------------------------------------------------
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 No X .

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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year. $1,708,077

The aggregate market value of the voting and nonvoting common equity of the
issuer held by non-affiliates was $24,928,899(1).

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 42,542,394 shares of Common Stock,
$0.01 par value, as of September 30, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Transitional Small Business Disclosure Form (check one):

Yes No X
---- ----

(1) The aggregate market value was computed by reference to the price at which
Common Stock was sold by the Company in June and September 2002, the only
Company sales of Common Stock in 2002, and which was the same price of Common
Stock as reflected in the fair value analysis prepared by the Company as of June
15, 2002. The Company's Common Stock is not listed on any public exchange or
established trading market.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

COMPANY OVERVIEW
----------------

UltraStrip Systems, Inc., (the "Company") a Florida corporation with executive
and sales offices in Stuart, Florida, was incorporated in April 1998. The
Company designs, develops and assembles an innovative automated hydro-blasting
system that uses ultra-high water pressure to remove coatings from steel
surfaces, such as the hulls of large cruise and cargo ships and the exterior
surfaces of above-ground storage tanks. The system consists of a robotic vehicle
that magnetically attaches to steel surfaces, an ultra-high pressure pump, a
vacuum system designed to aid in the capture and containment of waste, and a
waste filtration system.

The Company believes that this proprietary system, the subject of two U.S.
patents, offers benefits over existing coatings removal methods, including
increased efficiency and speed, as well as facilitating environmental compliance
by the Company's customers. The Company believes that hydro-blasting is a
commercially viable alternative to grit blasting, the current industry standard,
and over time can become the primary method for coating and rust removal for
steel surfaces.

The Company initially has targeted the ship maintenance and repair market,
including shipyards with major dry-docking and repair facilities, and the
above-ground storage tank maintenance market, specifically storage tank farms in
close proximity to major petroleum refineries. The Company believes that its
current automated technology also may have potential applications for use in
other markets, including automotive coatings removal.

COMMERCIALIZATION STEPS IN 2001. During 2001, the Company recognized revenues
significantly higher than those recognized in prior years since its formation
through equipment sales and service contracts:

Equipment Sales. In September 2001, the Company signed a five-year
distribution agreement with Robotic Environmental Services, LLC ("RES")
for the sale of the Company's patented automated hydro-blasting systems
in Louisiana and Texas. In connection with the distribution agreement,
RES purchased its first UltraStrip automated hydro-blasting system,
which was delivered to RES in September 2001.

Service Contracts. The Company performed three major service contracts
involving ship surface preparation during 2001 including work on the
USS EISENHOWER, a U.S. Navy Nimitz-class aircraft carrier, dry-docked
in Norfolk, Virginia, the USS COLE, a U.S. Navy guided missile
destroyer, dry-docked in Pascagoula, Mississippi, and multiple vessels
dry-docked at the Lisnave shipyard.

From February 26, 2001 to March 16, 2001, the Company performed
subcontractor services for Corrosion Engineering Services, Inc.
whereby it removed the non-skid coating from the flight deck of the
USS EISENHOWER. During August 2001, the Company removed the coatings
from approximately 16,000 square feet of the hull and sides of the USS
COLE. The USS COLE, which was attacked in Yemen in October 2000, was
under repair at the Ingalls Shipbuilding facility in Pascagoula,
Mississippi.

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During 2001, the Company also entered into a contract with Tecor
- Tecnologia Anti-Corrosao, S.A. of Setubal, Portugal ("Tecor"), the
surface preparation contractor for the Lisnave shipyard. Pursuant to
the contract with Tecor, in October 2001, the Company began a
four-month systems performance demonstration in the Lisnave shipyard in
Setubal, Portugal. The Company provided two automated hydro-blasting
systems and a crew to demonstrate the operation and effectiveness of
its new technology. In January 2002, at Tecor's request, the Company
extended the term of this agreement for one additional month to March
31, 2002. The Company's automated hydro-blasting systems were used for
surface preparation work on seven different vessels in the Lisnave
shipyard, ranging from crude oil carriers to cruise ships.

The Company believes that the completion of the USS EISENHOWER and USS COLE
service contracts, the equipment purchase by RES, and the successful performance
of the Tecor contract represent significant steps toward full implementation of
the Company's business plan. On May 13, 2002, the Company entered into an
agreement with Metro Machine Corporation of Norfolk, Virginia for the sale of a
prototype automated hydro-blasting system for $2,000,000. A deposit of $500,000
was received on May 14, 2002. Spare parts and accessories were subsequently
added to the order, increasing the purchase price to $2.3 million. $1.5 million
was paid on August 21, 2002, upon delivery and testing of the equipment at the
buyer's shipyard. The balance was paid on September 25, 2002. In June 2002, the
Company demonstrated its automated hydro-blasting system for Atlantic Dry Dock
Corporation in Jacksonville, Florida, by removing coatings from the outside hull
of the USS DOYLE, a U.S. Navy guided missile frigate. Revenues from this
demonstration were $22,223. While the Company currently has no pending orders
for new service contracts and does not anticipate any equipment rental
contracts, the Company believes future service contracts, rental contracts or
equipment purchases may be likely from its customer base. Future service
contract work, plus paid demonstrations and trial periods, will increase
marketplace visibility.

RISK FACTORS - "GOING CONCERN". Reference is made to Risk Factors; Cautionary
Statement as to Forward-Looking Statements, beginning on page 14, in addition to
the explanatory paragraph in the Company's independent certified public
accountants' reports on the Company's 2001 and 2000 financial statements
regarding the Company's ability to continue as a going concern. As more fully
described elsewhere, the Company lacks assured available financial resources to
meet its December 31, 2001 working capital deficit of $3,631,759 and future
operating costs and currently does not have cash available to pay its accounts
payable and other liabilities. At September 30, 2002, the working capital
deficit is in excess of $5.5 million. The Company is actively seeking additional
capital. Through September 2002, the Company has successfully generated $1.2
million in net cash from financing activities, $0.4 million from the issuance of
debt and $0.8 million from the issuance of Common Stock and warrants. While
management believes that resources may be available from private sources in 2002
to carry out its business plan, no assurance can be given that the Company will
be able to raise such additional capital. See Item 1 - "Risk Factors"; Item 6 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 to the financial statements.

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INDUSTRY AND MARKET OVERVIEW
----------------------------

The two principal markets for the Company's automated ultra-high pressure
hydro-blasting system are the ship maintenance and repair market and the
above-ground storage tank maintenance market.

SHIP MAINTENANCE AND REPAIR. While there are many transportation modes for the
worldwide distribution of goods, such as truck, rail, and air, according to
Wired.com, as of October 1999, 95% of the world's cargo volume was transported
by ship. The Company believes that the shipping industry is faced with low
margins and high capital requirements, requiring most successful market
participants to focus on operational efficiency. As a result, shipping companies
strive to maximize a ship's time at sea and minimize downtime, from cargo
loading and unloading to routine repair and maintenance work.

Market Dynamics. According to the 2000 publication of World Shipyards,
there are over 3,000 shipyards in the world, and the Company estimates
that at least seventy-five percent of those offer ship repair services.
These shipyards service over 80,000 ships in the world fleet and the
approximately 1,500 new ships that are built each year.

The ship maintenance and repair industry is characterized by oversupply,
which has led to financial difficulties and increased competition within
the industry according to World Shipyards. The Company believes that
reducing costs and remaining price competitive will be critical to
shipyard survival and that shipbuilders and ship repairers will need to
focus on cost-saving innovations to improve profitability. Also, the
Company believes that with the oversupply of shipyard capacity, ship
owners and managers are better positioned to demand high-quality
services, such as quick turn-around times and high performance standards.

In addition, in October 2001, the International Maritime Organization, an
agency of the United Nations with responsibility for the safety of
shipping and the prevention of marine pollution by ships, adopted a
global antifouling convention to ban the application of antifouling
organotin (pesticide) coatings by 2003. The convention also calls for the
complete removal of antifouling organotin coatings from the hulls of all
ships or the application of additional coatings to prevent leaching of
antifouling organotin coatings into the water by 2008.

Challenges of Maritime Coatings Removal. All ships require both periodic
repairs and preventative maintenance. The process of removing coatings
from steel surfaces such as ship hulls historically has been both labor
and time intensive.

A key step in the repair/maintenance process is the stripping of coatings
from the ship's hull. As described in the U.S. Environmental Protection
Agency's November 1997 report, Profile of the Shipbuilding and Repair
Industry, ship hull coatings consist of multiple layers of paints
(typically including conventional and epoxy anticorrosives along with

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pesticide-containing antifoulings). Anticorrosives protect the hull of
the ship from steel corrosion. Pesticide-containing antifoulings kill off
targeted sea life, such as barnacles, algae, and seaweed, which attach to
the hull's surface, cause surface damage and reduce the ship's speed.
These coatings periodically need to be stripped and reapplied to maintain
the integrity of the hull and reinforce the antifouling properties,
thereby maximizing operational efficiency.

Stripping rough, fouled and corroded surfaces helps to ensure a smooth
hull, allowing for the most efficient operation by reducing the friction
created by a ship's movement through the water. Further, the economic
cost sustained by a ship owner when a vessel is out of service for
maintenance can be high. Minimizing the time that a vessel is in dry dock
for maintenance increases a vessel's income producing usage. The Company
anticipates the proper utilization of its automated hydro-blasting system
should decrease dry docking time, thereby increasing fleet and dry dock
capacity without need for new capital investment.

ABOVE-GROUND STORAGE TANK MAINTENANCE MARKET. Above-ground storage tanks
("ASTs") are used for storage of liquid materials such as petroleum and refinery
by-products, chemicals, pulp and paper, municipal water, vegetable and mineral
oils, and other process liquids. The Aboveground Storage Tank Survey, a 1991
technical report by the American Petroleum Institute ("API"), estimated the
number of tanks in use across all segments of the petroleum industry alone at
approximately 700,000. The Company believes its initial target market segment
will be those tanks with shell capacity greater than 1,000 barrels, which
represent approximately 76,000 tanks in the petroleum industry according to the
API report.

Coatings are applied to the metal surfaces of ASTs to inhibit corrosion and
subsequent degradation of the metal structure. These coatings degrade naturally
over time requiring recoating of the steel surfaces. This process requires the
removal of the old coatings before application of the new coatings. As with the
marine coatings removal market, the standard procedure for removing coatings
from ASTs is grit blasting.

Additionally, in the U.S. industrial market, there is concern regarding removal
of lead-based paints from ASTs. Lead abatement is a very costly procedure
requiring:
o 100% encapsulation of the abrasive grit and lead paint while blasting.
This requires scaffolding and tarping the whole tank.
o Protection and monitoring lead levels in the persons performing the
work.
o Hazardous waste disposal of the grit and lead paint after project
completion.

Storage tank owners seek to minimize the idle time their tanks experience while
being cleaned and repainted. Typically, an average tank of 20,000 square feet
(100' x 32') requires approximately 60 days to repaint, including scaffold
installation, tarp placement, blasting and painting, tarp and scaffold removal,
and clean up. The Company estimates that its automated hydro-blasting system can
accomplish this project in 8 to 10 days.

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BUSINESS STRATEGY
-----------------

The Company's near term business strategy is to focus on sales and marketing
efforts to place its automated hydro-blasting systems into use in the ship
maintenance and repair and above-ground storage tank maintenance markets. The
Company believes the most effective marketing effort for its product will be to
conduct live demonstrations at shipyards and storage tank facilities in the
United States and in shipyards throughout the world which are leaders in
environmental protection, thereby introducing the ship maintenance and repair
and storage tank industries to automated hydro-blasting and demonstrating its
superiority to existing surface preparation methods and competitive
technologies.

The Company offers three primary sales options: outright equipment sales,
long-term rental contracts, and contract services. By offering this variety of
alternatives, customers can select the relationship that best matches their
capital allocation plan. In 2002, the Company also intends to increase the focus
of its marketing efforts on the U.S. market. The Company believes that
environmental regulations are currently a very strong influence on shipyard
operations in the United States and may provide an external impetus to shipyards
to carefully consider the Company's products.

For information about the Company's business and financial plan over the next 12
months, including its current cost reduction measures and capital raising
efforts, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

PRODUCTS AND SERVICES
---------------------

The Company has developed and is offering for sale or rental, or as part of a
contract services arrangement, its M2000 automated hydro-blasting system.

The Company's M2000 automated hydro-blasting system is designed to strip
coatings from the hulls of ships in dry dock and from the exterior surfaces of
storage tanks. The titanium and aluminum robot attaches to the hull using an air
gap, rare earth magnetic array and is controlled and monitored via a remote
operator. The paint removal process performed by the automated hydro-blasting
system is accomplished through an ultra high-pressure pump which provides water
to the robot at pressures in excess of 40,000 pounds per square inch, while a
vacuum filtration system captures removed paint chips and water, separates
particulates from the waste water and re-circulates clean water back to the high
pressure pump in a closed loop system. The relatively minimal waste is then
disposed of in sealed drums.

The automated hydro-blasting system consists of three major components:

o The robotic vehicle is controlled by a joystick, enabling remote
controlled mobile hydro-blasting. The M2000's magnetic array adheres to
steel surfaces while its independent suspension permits it to traverse
ship hulls at high speeds. The robotic vehicle cuts a 15- inch swath,
moves 360 degrees, and is capable of removing coatings at a rate of 500
to 2,000 square feet per hour.

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o The ultra high-pressure pump is powered by a large diesel engine, which
propels high volumes of water per minute, at a pressure of 40,000
pounds per square inch or higher.

o The vacuum filtration component is powered by a second, smaller diesel
engine. The filtration component captures the contaminated coatings,
separates particulate contaminants from wastewater and recycles the
water into the pump. The filtration component is a closed loop,
ensuring minimal contaminant discharge.

Operational Advantages. The M2000's magnetic attachment and independent
suspension enable the robotic vehicle to rapidly traverse an entire vessel,
resulting in increased productivity and reduced time spent in dry dock.

o The Company's automated hydro-blasting systems can remove a 15-inch
swath during the stripping process at higher speeds than the 6-12-inch
swath that the Company estimates can be removed by competing systems.

o Competing systems are moved around the vessel or storage tank by cables
and pulleys or a fixed arm attached to a vehicle in the dry dock, which
the Company estimates result in lower overall operational rates.

o The joystick-controlled M2000 minimizes the use of lifts and scaffolds,
which the Company believes reduces the potential for work-related
injuries.

o The Company's products can be tailored to a customer's specialized
needs.

o Shipyards can perform concurrently other repair work on a ship while
operating the M2000. No other repair work can occur on a ship
undergoing grit blasting. Concurrent operation can reduce the duration
of the entire repair and maintenance process and effectively create
additional docking capacity for shipyards and additional shipping
capacity for ship owners.

Environmental Advantages. Paint stripping and application activities in
shipyards represent a source of marine pollution, according to the Environmental
Protection Agency's November 1997 report on the ship repair industry. Paint
stripping in U.S. shipyards is frequently performed using manual hydro-blasting,
a procedure whereby high-pressure water is sprayed onto a steel surface from a
handheld gun. Wastewater from paint stripping contains high levels of metals and
toxins from removed paint. This toxic waste destroys local sea life and
contaminates nearby bodies of water, threatening the health of the world's
oceans.

The Company believes that the self-contained M2000 system represents an
environmentally friendly alternative to other methods of paint stripping,
specifically grit blasting or manual hydro-blasting. In addition, the remote
operation, the closed loop system, and the resulting distance from the stripping
process avoids the operator's contact with grit and toxic paints, thereby
reducing the potential for lung and skin damage associated with grit blasting.

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The Company is also offering to perform hydro-blasting services with its deck
surface automated hydro-blasting system. The deck surface system utilizes
ultra-high pressure pumps and vacuum filtration systems similar to those
utilized by the M2000 system. However, the robotic vehicle utilized by the deck
surface system is designed for performance only on horizontal surfaces and thus
does not require magnetic attachment features.

SALES AND MARKETING
-------------------

The Company currently offers its equipment for sale or rental, and its contract
services principally through its internal sales management team, supported by
its sales and marketing partners, and through a limited number of distributors
and marketing representatives.

The primary distribution method for the ship maintenance and repair industry is
direct sale by the Company. Ship maintenance and repair customers are offered
three primary system arrangements: system sales, long-term system rental
agreements and contract services. These customers can also purchase spare parts
and accessories directly from the Company. Pursuant to the agreement between the
Company and Wallem Shipmanagement Limited ("Wallem"), Wallem has agreed to
provide the field resources necessary to operate the M2000 automated
hydro-blasting system for future short and long-term service contracts. The
Company intends to use its own personnel, with additional personnel from Wallem,
to provide the optimal operating crews for various projects.

For markets outside the ship maintenance and repair industry, the Company plans
to utilize exclusive distributor arrangements as a distribution channel to reach
customers. These arrangements may be employed in select geographic markets where
the use of a local representative would facilitate the Company's market
penetration.

The Company believes that U.S. environmental regulations exert significant
influence on domestic shipyard operators to choose environmentally friendly
paint-stripping processes. Thus, the Company intends to increase the focus of
its marketing efforts on the U.S. market.

TARGET CUSTOMERS. The Company's target customers principally include shipyards,
ship owners and ship managers/operators, storage tank coatings removal
contractors and vehicle stripping contractors.

Shipyards. The Company primarily targets shipyards that provide repair
services for the largest commercial and military ships. The Company
estimates that its initial target market consists of the 150 largest
shipyards in the world.

Ship Owners and Ship Managers/Operators. Orders for ship repair are
generally placed by companies that own or manage the ships or by
government agencies. Ship-owning companies potentially may include
commercial shipping companies, passenger and cruise lines, and ferry
companies. U.S. and foreign government agencies are also significant
sources of ship repair orders.

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Coatings Removal Contractors. Coatings removal contractors are
important participants in both the ship maintenance and repair market
and the above-ground storage tank maintenance market. Thus, the Company
plans to market directly to contractors as well.

Automobile and Military Rolling Stock Paint Removal Contractors. The
Company has identified the automotive and military rolling stock
maintenance industries as potential future markets. Through its
relationship with the National Robotics Engineering Consortium (the
"NREC"), the Company is developing a method to use the same automated
hydro-blasting system, in a different format, to strip cars and
military rolling stock, such as Jeeps, trucks, power units and
artillery.

MARKETING ACTIVITIES. The Company reaches its customers primarily through direct
contact, product demonstrations, and the efforts of its sales and marketing
partners. The Company recognizes that almost all new customers will require a
field demonstration before deciding to purchase or lease a system and is taking
steps to ensure potential customers will be able to visit shipyards that have
already installed the automated hydro-blasting system to witness its operation
in real-world conditions.

Trade Shows. In 2001, the Company exhibited at the following trade
shows: the NorShipping Exhibition in Oslo, Norway; the SNAME IMExpo
2001, sponsored by the Society of Naval Architects and Marine Engineers
in Orlando, Florida; and the Ship Repair & Conversion show in London.
In 2002, the Company may return to the Ship Repair & Conversion show in
London.

Public Relations and Advertising. The Company's automated
hydro-blasting system has been featured in industry and trade
publications, including ShipCare (June/July 2001), International
ShipRepair News (July/August 2001), and Shiprepair And Conversion
Technology (Third Quarter). The Company also advertises regularly in
trade publications such as Seatrade, Maritime Reporter and Engineering
News, Marine Engineers Review, and Shipcare. The M2000 system has also
been featured on the National Aeronautics and Space Administration
("NASA") and Ocean Futures Society websites. In 2001, the Company
received the Innovation of the Year award from International Shiprepair
News and was a semi-finalist for the Discover Magazine Awards for
Technological Innovation. The Company was also a finalist for the 2002
Seatrade Award for Countering Marine and Atmospheric Pollution.

Website. The Company also presents critical data on the design and
functionality of its M2000 system on its website at www.ultrastrip.com.
The website is continuously updated to provide the most current
information on the Company's products, services and completed projects.

SALES AND MARKETING PARTNERS. To augment the direct sales efforts of Company
employees, the Company has entered into various third party arrangements to
promote the marketing, sale or use of the Company's automated system, including
arrangements with Wallem, Carnival Cruise Lines and Robotic Environmental
Services.

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Wallem Shipmanagement Limited. In 2000, the Company executed a
strategic alliance agreement with Wallem, a global company with offices
serving Asia, Australia, Europe, North and South America, and the
Middle East. Wallem actively engages in ship owning, ship and cargo
brokering, ship management, ship agency, freight forwarding, shipyard
and marine equipment services and industry specific information
technology development. Wallem has agreed to provide all of the
management and marketing for the Company's contract services in the
ship maintenance and repair industry. The agreement provides for a
monthly management fee to be paid to Wallem for each shipyard in which
its management services are used. In addition, the agreement provides
for a commission to be paid to Wallem on revenues generated by its
marketing efforts.

Wallem currently specifies the Company's automated hydro-blasting
process as its preferred surface preparation method in its bid requests
for dry-dock maintenance of its 130-ship fleet. In addition, Wallem
engages in direct marketing of the Company's system to shipyards and
ship owners in the Far East and Europe. To date, Wallem's efforts have
resulted in the use of the Company's automated hydro-blasting systems
on several ships during the demonstration contract with Tecor in the
Lisnave shipyard in Portugal. No sales, additional service contracts or
commitments have resulted from Wallem's efforts or are expected in the
foreseeable future. No assurance can be given that additional shipyard
maintenance providers to Wallem will use the Company's automated
hydro-blasting system.

Carnival Cruise Lines. Carnival Cruise Lines ("Carnival") (NYSE: CCL)
executed a strategic environmental alliance with the Company in
December 2000, pursuant to which Carnival agreed to use the Company's
automated hydro-blasting technology for coatings removal on the hulls
of its vessels where geographically and financially feasible. The
Company is in discussions with Carnival concerning dry-dock
schedules and coordination of surface preparation activity. The Company
has identified eight Carnival ships scheduled for routine maintenance
in the second half of 2002 and in 2003 that may be candidates for
coatings removal with the Company's M2000 system. No assurance can be
given that Carnival will use the Company's automated hydro-blasting
system.

Robotic Environmental Services. In September 2001, the Company signed
an exclusive distributor agreement with Robotic Environmental Services,
LLC (RES) of Baton Rouge, Louisiana for the sale of the Company's
patented automated hydro-blasting systems in Louisiana and Texas and
the purchase of one automated hydro-blasting system. The distribution
agreement is for a term of five years and establishes minimum purchase
requirements and other terms necessary to maintain RES' exclusivity in
the two states. RES also received an option from the Company to acquire
the exclusive distribution rights in Venezuela. To exercise this option
RES was required to purchase four additional automated hydro-blasting
systems by June 30, 2002, which it has failed to do. RES also failed to
meet certain contract requirements under this distribution agreement in
March 2002. The Company informed RES that it no longer holds exclusive
distributor status in Louisiana and Texas. While the foregoing default

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may materially affect the Company's future sales to RES, it also
provided the Company with an opportunity to recover the distribution
rights to the exclusive territories and afforded greater flexibility in
negotiating with future customers and distributors. The Company is in
discussion with RES to explore ways to facilitate the sale of its
automated hydro-blasting systems.

In addition, in October 2000 the Company entered into a consulting agreement
with T.A.S.T. Corporation, which is a representative in the U.S. and Canada for
many international shipyards for sales and marketing services. Furthermore, in
January 2001 the Company entered into a long- term joint venture agreement with
Global Technology Holdings, Inc. to form a joint venture in the United Arab
Emirates to engage in sales and marketing in the Middle East and Africa on an
exclusive basis. This joint venture agreement, which is not terminable without
the consent of both parties, provides for the Company's grant to the joint
venture entity of an exclusive royalty-free license to the technology
encompassing the Company's M2000 automated hydro-blasting system for the
duration of the venture. To date, no sales or service contracts related to the
Company's automated hydro-blasting system have been entered into under either of
these arrangements.

The Company also has developed a relationship with the Ocean Futures Society
("Ocean Futures"), an international nonprofit organization founded by
Jean-Michel Cousteau and wireless communications pioneer, Craig McCaw, dedicated
to improving the understanding of the global water ecosystem and preserving
marine habitats. In exchange for promoting the benefits of the Company's
automated hydro-blasting system and to further the Ocean Futures' mission, the
Company has committed to remit two percent of its annual gross revenues directly
to Ocean Futures. These funds will be used to protect the oceans from
environmental contaminants and hazardous substances, and, in 2001, this
commitment generated $34,162 for Ocean Futures. Mr. Cousteau is a member of the
Company's Board of Directors.

COMPETITION
-----------

Coatings removal within the ship maintenance and repair market and the
above-ground storage tank maintenance market is highly competitive. Significant
competitive factors include price of coatings removal equipment compared to
contract services or other service arrangements, the cost-effectiveness of
existing coatings removal methods, equipment performance, customer support,
financial viability of the vendor and environmental/regulatory compliance.

The Company has identified two predominant industry practices as its primary
sources of competition, as well as certain competitive products.

EXISTING INDUSTRY PRACTICES.

Grit Blasting. The Company views grit blasting, the current industry
standard practice for steel surface preparation, as the main competitor
of automated hydro-blasting. Historically, bottom paint has been
stripped using grit blasting or "sandblasting", a process in which
laborers with sandblasting guns are positioned on a lift that is
maneuvered around the hull of the ship as workers manually strip paint.

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The Company believes that this technique has a number of disadvantages.
For example, according to the EPA's November 1997 report on the ship
repair industry, grit blasting creates toxic dust and grit which must
be properly removed from the worksite and properly disposed. During the
grit blasting process, toxic pesticide coatings and used grit medium
are released into the air and oceans surrounding the dry dock,
adversely affecting reefs and marine life. Furthermore, as noted in the
August 1999 edition of the Journal of Protective Coatings and Linings,
airborne paint and grit media resulting from grit blasting can damage a
worker's lungs.

Despite these operational and environmental disadvantages, grit
blasting remains the primary method of stripping the hulls of ships,
largely because of low capital requirements and pre-established vendor
relationships.

Manual Hydro-Blasting. Some shipyards have shifted from grit blasting
to a process known as manual hydro-blasting. In this process, workers
spray ultra-high pressure water from handheld guns to remove paint from
steel surfaces. Manual hydro-blasting offers some advantages over grit
blasting in that it creates little or no toxic dust, and it avoids the
expense of acquiring, removing, and properly disposing of toxic grit.

However, manual hydro-blasting also has several limitations, including
time, worker efficacy, and wastewater collection and removal. A worker
with a hydro-blasting tool generally takes longer to strip a given
amount of surface area than a worker with a sandblasting tool. In
addition, efforts to increase production rates by increasing the water
flow rate or pressure thrust from a hydro-blasting tool make it
difficult for the average worker to control the tool. Lastly, with
manual hydro-blasting, used water falls to the dry dock floor.
Historically, collection of the wastewater at the hull of a ship has
proven difficult, making it hard to prevent the toxic chemicals present
in the removed paint from contaminating surrounding seawater.

COMPETITIVE PRODUCTS. The Company's automated hydro-blasting system also faces
competition from established companies, which are both larger and financially
stronger than the Company. The companies that manufacture and market
semi-autonomous technologies include:

o FLOW INTERNATIONAL (NASDAQ: FLOW) of Kent, Washington manufactures a
vehicle marketed as the Hydrocat, which uses vacuum suction to adhere
itself to vessels and ultra-high pressure water to remove coatings. The
vacuum attachment feature of the Hydrocat permits limited capture of
wastewater; however, this feature also prohibits the machine from
moving quickly and freely across the steel surface being cleaned. Flow
International also manufactures and markets its own line of ultra-high
pressure pumps that are sold in combination with the vacuum crawlers
and as separate product offerings. Flow's strategy has been to sell
their equipment to both shipyards and contractors. While this vacuum
technology has made meaningful penetration into the U.S. ship
maintenance and repair market, particularly with small contractors, the
Company believes this system is not suitable for use on large vessels.

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o HAMMELMANN of Oelde, Germany manufactures the Dockmaster, which is a
large motorized vehicle that uses an arm to move the stripping system
along the surface of a ship. This system also uses ultra-high pressure
water to remove the coatings but is not designed to capture the
wastewater. The Company believes that the arm on the Dockmaster lacks
mobility and makes it incapable of stripping the underside and portions
of the flat sides of a ship, and as a result, the Company does not view
the Dockmaster as a whole product solution. Hammelmann also
manufactures and markets its own line of ultra-high pressure pumps that
are sold in combination with the Dockmaster and as separate product
offerings. To date, the Company believes that the Dockmaster has failed
to achieve significant market penetration in the ship maintenance and
repair market.

o JET EDGE of Minneapolis, Minnesota manufactures a smaller magnetic
track vehicle, called the Hydro-Crawler. This product features a low
production rate, a lack of mobility, and an inability to adhere to
thick marine coatings. This product has not been heavily marketed in
the ship maintenance and repair market, and the Company believes that
it is not suitable for use on large vessels. Jet Edge also manufactures
and markets ultra-high pressure pumps that are sold in combination with
their crawlers and as separate product offerings.

o OCEANEERING INTERNATIONAL, INC. (OI) (NYSE:OII), based in Houston,
Texas, is an advanced applied technology company providing engineering
services and hardware to customers who operate in marine, space and
other harsh environments. OI supplies diverse technical services to
various industries and is focused on three business segments,
specifically Oilfield Marine Services, Offshore Field Development and
Advanced Technologies. While OI does not currently market a product
that competes with the Company's system, OI possesses deep expertise in
the field of remotely operated vehicles (ROV) that utilize robotic
technologies and operate in harsh environments.

The following product comparison of the Company's automated hydro-blasting
system versus other existing products was prepared by the NREC as of July 2001.

[Enlarge/Download Table]

-------------------------------------- ------------------------- ------------------------ ---------------------
CRITERIA ULTRASTRIP AUTOMATED VACUUM ADHESION BOOM TRUCK VEHICLE
HYDRO-BLASTING VEHICLES
-------------------------------------- ------------------------- ------------------------ ---------------------

Operational applicability Broad Limited Limited
-------------------------------------- ------------------------- ------------------------ ---------------------
Maneuverability/ Controllability Good Poor Poor
-------------------------------------- ------------------------- ------------------------ ---------------------
Productivity/hour (SA 2.5) 1,000 - 2,000 ft 50 - 300 ft 500 - 1,000 ft
-------------------------------------- ------------------------- ------------------------ ---------------------
Sweeping capability (SA 1) Yes Difficult Difficult
-------------------------------------- ------------------------- ------------------------ ---------------------
High speed spot and sweep Yes No No
-------------------------------------- ------------------------- ------------------------ ---------------------
Consistent productivity Yes No No
-------------------------------------- ------------------------- ------------------------ ---------------------
Operational orientation Horizontal/Vertical Vertical Vertical
-------------------------------------- ------------------------- ------------------------ ---------------------
Waste water treatment Complete Minimal Minimal
-------------------------------------- ------------------------- ------------------------ ---------------------

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RESEARCH AND DEVELOPMENT
------------------------

RESEARCH AND DEVELOPMENT ALLIANCE. The Company established a research and
development alliance with the National Robotics Engineering Consortium, or NREC,
and the Robotics Institute, a leading institution in the robotics industry in
1999. The Robotics Institute at Carnegie Mellon University (CMU) was established
to boost the productivity and competitiveness of U.S. businesses within the
global marketplace. The NREC is a cooperative venture among NASA, the City
of Pittsburgh, and the Commonwealth of Pennsylvania and serves as the
commercialization division of The Robotics Institute. The primary goal of the
NREC is to rapidly move robotics technologies, including NASA-developed
technologies, from the laboratories into commercial terrestrial applications.
NASA provides operational funding for the NREC as well as specific project
matching funding in an effort to further NASA's technological goals.

In September 1999, the Company entered into a Development Agreement with the
NREC to develop technologies based on the Company's original robotic coatings
removal concept. Simultaneously, the Company executed the NASA Joint Sponsored
Research Agreement for the Robotics Engineering Consortium along with Articles
of Collaboration, thus securing NASA matching funding for project-related
efforts at the NREC and at NASA's Jet Propulsion Laboratory (JPL) in Pasadena,
California. Under this Agreement, NASA provided to the NREC and JPL matching
funds of $435,000 in federal fiscal year 2000, and $484,600 in federal fiscal
year 2001.

Any technology developed by the Company prior to entering into the Development
Agreement or developed without the NREC's assistance belongs exclusively to the
Company. It is the Company's opinion that any patent application and resulting
patent that is the result of the joint research of the Company and the NREC, and
that constitutes an improvement to the Company's existing technology, will be
owned by the Company. Should patent applications be filed based upon a new
technology or technology that may be used outside the field of ultra high
pressure cleaning, the NREC or its affiliates would be the owner of such rights
and, in view of the Agreement between the Company and the NREC, the Company
would have a right to license the technology if the technology was based on
funds provided by the Company.

During 2001 and 2000, the Company incurred $629,801 and $513,291, respectively,
for research and development activities. In July 2000, the Company entered into
a Development Agreement whereby it agreed to pay CMU up to $1,000,000 to develop
the robotics for the automobile stripping system, of which approximately
$200,000 has been incurred through September 30, 2002. Through its relationship
with the NREC, the Company also intends to pursue a stripping application for
coatings removal in cut-in areas, which are areas adjacent to welds or other
difficult-to-reach surfaces and confined spaces, such as cargo and ballast tanks
in the interiors of ships. Removal of pre-construction primer during the ship
building process presents another potential marine industry stripping
application.

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PATENTS. Dennis McGuire, a founder of the Company and the current Chief
Technology Officer and Director of Sales, developed the base technology for
ultra high-pressure coatings removal between 1990 and 1995. Patent applications
for the base technology were filed in 1995, resulting in the issuance of U.S.
Patent 5,628,271 in 1997, which expires in 2015, and U.S. Patent 5,849,099 in
1998, which expires in 2015. These patents were acquired by and assigned to the
Company in 1999 and relate to the apparatus and methodology for removing
coatings from the hulls of vessels using ultra-high pressure water. Furthermore,
the U.S. Patent Office has allowed Patent Application 08/854,384 which is based
on a filing date of 1995. A pending C-I-P application also claims a 1995 filing
date. The U.S. Patent Office issued patent 6,287,389 in September 2001 to Dennis
McGuire as inventor which was subsequently assigned to the Company. This patent,
which expires in 2020, covers a three-dimensional, ultra-high pressure
automobile paint stripping system and is solely owned by the Company.

CAPITAL EXPENDITURES. The Company continues to develop and refine new
technologies. In the years 2000 and 2001, the Company expended approximately
$1.1 million on the research and development of the technology related to its
automated hydro-blasting system and other research projects. As of December 31,
2001, the Company is committed to expend an additional $695,799 to the NREC for
2002 capital expenditures. The Company's current business plan anticipates the
need for additional funds from debt or equity financing for future research and
development in the amount of $250,000 in 2002, approximately $50,000 of which
has occurred to date. There is no assurance that such funds will be obtained.

MANUFACTURING
-------------

The Company currently outsources the manufacturing of all of the M2000 system's
components to major industry suppliers. The Company has also identified back-up
vendors for all critical components and expects to retain sufficient inventory
of all highly specialized components.

As of September 30, 2002, the Company has three complete M2000 automated
hydro-blasting systems available, as well as two of its automated deck
hydro-blasting systems. The Company currently estimates that it needs 60 to 90
days to complete the manufacture of an M2000 system.

The Company intends to manufacture the robotic vehicle component of the system,
as well as associated spare parts, in a new manufacturing facility adjacent to
its Stuart, Florida headquarters and warehousing facilities when the Company
obtains sufficient resources to permit this capital investment. The Company
believes that bringing the manufacturing of its robot component in-house will
help to ensure product quality and availability and provide it with the ability
to identify and implement product modifications and upgrades quickly and
efficiently. The Company will also perform product testing and failure analysis.
After assembly, the Company plans to store its automated hydro-blasting systems
in the Company's on-site warehouse, which it believes should be sufficient to
accommodate all near-term operations.

ENVIRONMENTAL REGULATION
------------------------

The Company maintains office facilities in Stuart, Florida and is subject to
applicable federal, state and local regulations with respect to such facilities.
The Company does not currently own or operate any manufacturing, operating, or
shipbuilding or repair facilities.

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The Company is not licensed to store or transport any hazardous waste. When
performing contract services for a customer, the Company ensures that the burden
of disposal of all hazardous paint residue remains the responsibility of the
customer. When selling or renting its equipment to a customer, the Company
assumes no liability for compliance with applicable environmental regulations.
The Company believes that it is in substantial compliance with all environmental
laws and regulations applicable to its business as currently conducted.

EMPLOYEES
---------

At September 30, 2002, the Company employed 18 full-time employees and one
part-time employee.

CENTRAL HEADQUARTERS
--------------------

The Company's headquarters and office facilities are located in an industrial
area of Stuart, Florida. The Company currently occupies two buildings at this
site - one building contains administrative offices and warehouse storage space,
while the second building contains space for the Company's eventual expansion of
manufacturing operations. The Stuart office serves as the Company's central
headquarters.

In October 2001, the Company received its ISO 9001:2000 certification for its
quality management system. The Company is committed to consistently providing
quality services that meet or exceed customer expectations, as well as
continually reassessing its internal processes and procedures in order to
maintain its status as an ISO 9001-certified company.

* * * * *

RISK FACTORS; CAUTIONARY STATEMENT AS TO FORWARD-LOOKING STATEMENTS.

The Company faces severe risks and uncertainties of continuing as a going
concern for the following reasons, among others referred to in this report:

o The Company continues to experience losses from operations and
remains dependent on outside sources of funding to continue
its operations.

o The Company faces significant competitive challenges in
commercializing its automated M2000 systems and has had
limited success to date in obtaining contracts from the ship
maintenance and repair market or the above-ground storage tank
market.

o The Company has not generated substantial revenue from
operations to date and may be unable to generate sufficient
cash flow from the sale or lease of its products and services
in the future to meet its current and future obligations, make
necessary capital expenditures and meet other cash needs.

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o The Company incurred a net loss of approximately $5,613,440
and $11,130,286 in 2001 and 2000, respectively, and continues
to incur a net loss in 2002.

o The Company may be unable to raise additional debt capital or
private equity financing to fund its working capital
requirements and capital expenditures. The Company lacks
assured financial resources to meet its year-end 2001 working
capital deficit of $3,631,759 and future operating costs.

o If the Company is unable to obtain the necessary additional
capital, it may be required to change its proposed business
plan and decrease the planned operations which could have a
material adverse effect upon its business, financial
condition or results of operations.

o If the Company is unable to obtain needed sources of funds or
effect sufficient cost reductions, the Company's liquidity
would be materially adversely affected and it is unlikely that
the Company would continue as a going concern.

These factors could materially affect "forward looking statements" (within the
meaning of the Private Securities Litigation Reform Act of 1995) that the
Company may from time to time make, including forward-looking statements
contained in "Item 1. Description of Business" and "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Form 10-KSB.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company leases and occupies 14,700 square feet of space in Stuart, Florida.
The average monthly rent for the space is $8,740. The space is comprised of two
buildings, and the leases on these buildings expire on September 30, 2005 and
August 31, 2006. One building contains sales and corporate administrative
offices, customer support and product engineering, as well as warehouse storage
space for automated hydro-blasting systems and components and serves as the
Company's central headquarters, while the second building contains space for the
Company's potential expansion of manufacturing operations.

ITEM 3. LEGAL PROCEEDINGS.

On December 21, 2001, the Company filed a complaint in the Circuit Court in and
for Palm Beach County, Florida against Mark H. Mirkin and Mirkin & Woolf, P.A.,
the Company's former corporate and securities counsel and transfer agent,
seeking a declaration from the court that a warrant to purchase 1,653,800 shares
of the Company's common stock for $0.625 per share obtained by Mirkin & Woolf,
P.A. in April 1998 is void. In May 2002, the Company amended the complaint to
remove Mr. Mirkin as an individual defendant in the complaint. Mirkin & Woolf
attempted to exercise the warrant in April 2001, but shares have not been issued

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as the exercise is subject to the resolution of the aforementioned action. The
Company is also seeking the return of all corporate books, files and stock
records, including original stock transfer records, which the defendants
continue to hold in their possession. The Company believes, after consultation
with its counsel, that it will prevail in this action and that it will suffer no
materially adverse impact as a result of Mirkin & Woolf's claims with respect to
the warrant.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 2001.

PART II
-------

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

There is no established trading market for the Company's Common Stock. The
Company has not paid any cash dividends and does not anticipate paying cash
dividends in the foreseeable future. Payment of dividends is within the
discretion of our Board of Directors, and will depend, among other factors, upon
earnings, financial condition and capital requirements. As of September 30,
2002, the Company had 1,576 record holders of its Common Stock, 19 record
holders of Series A Redeemable Preferred Stock and 71 record holders of Series B
Redeemable Preferred Stock.

As of September 30, 2002, stock options and warrants to acquire an aggregate of
11,870,310 shares of the Company's Common Stock were outstanding, held by
affiliates and non-affiliates. In addition, as of September 30, 2002, 672,000
shares of Common Stock could be converted from the 28 shares of Series A
Redeemable Preferred Stock issued and outstanding, and 880,090 shares of Common
Stock could be converted from the 1,054 shares of Series B Redeemable Preferred
Stock issued and outstanding.

During the period from January 1, 2001 to March 31, 2001, four holders of an
aggregate of 102 shares of Series B Redeemable Preferred Stock exercised their
conversion rights and were issued 85,170 shares of Common Stock.

Beginning in the first quarter of 2001 and ending April 5, 2001, the Company
issued 625,943 shares of restricted, unregistered Common Stock in a number of
private sales, at approximately $3.00 per share, for aggregate net proceeds of
$1,809,828, which were applied to fund the Company's operations and working
capital needs. Business and financial information about the Company was
furnished to the purchasers in connection with these transactions. Based on
corporate records and documents in the Company's possession relating to these
sales, the Company believes that the sales of such shares under these
circumstances were exempt from registration under the Act by virtue of Section
4(2) thereof.

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On March 31, 2001 the Company issued 50,000 shares of restricted, unregistered
Common Stock in exchange for the provision of sales and marketing services. The
issuances were valued at approximately $144,000 ($2.88 per share), which equals
management's estimate of the fair market value of the services. Also during the
period from January 1, 2001 to March 31, 2001, the Company authorized the
issuance of 725,000 shares of restricted, unregistered Common Stock as part of
the new compensation package for key employees, of which 725,000 shares have
been issued. These obligations were valued at approximately $2,088,000 ($2.88
per share), which equals management's estimate of the fair market value of the
services provided.

Beginning in the second quarter of 2001 and ending in the third quarter of 2001,
the Company commenced a private placement to raise up to $50 million through an
offering of restricted, unregistered shares of its Common Stock, initially at
$5.00 per share. The Company sold 542,426 shares, at an average price of $4.06
per share, and received net proceeds of $2,197,331 during the offering period
ended August 31, 2001. Pursuant to an addendum to the private placement
memorandum, the Company approved sales to a limited number of accredited
purchasers at less than $5.00 per share, taking into account the size of the
investment and other factors deemed relevant by management. The net proceeds of
this offering were applied to fund the Company's operations and working capital
needs. Based on corporate records and documents in the Company's possession
relating to these sales, the Company believes that the sale of these shares in
the private placement was exempt from registration under the Act by virtue of
Rule 506 under Regulation D.

On April 30, 2001, a warrant holder attempted to exercise an alleged warrant to
purchase 1,653,800 shares of Common Stock (see Item 3).

During the period of September 1, 2001 to October 31, 2001, the Company issued
70,000 shares of restricted, unregistered Common Stock in exchange for the
provision of consulting services. The issuances were valued at approximately
$238,000 ($3.00 - $4.40 per share), which equaled management's estimate of the
fair market value of the services.

On October 19, 2001, the Company issued a promissory note and 100,000 warrants
to purchase shares of the Company's Common Stock to a member of the Company's
Board of Advisors for aggregate proceeds of $1,000,000. The warrants have an
exercise price of $0.07 per share and are exercisable within twenty years from
the issue date.

There has been no change in the rights, preferences or privileges of any
security of the Company during the year ended December 31, 2001.

Please see our filings on Form 10-SB/A, our Form 10-KSB for the year ended
December 31, 1999, and our Form 10-KSB/A for the year ended December 31, 2000,
for information about equity sales prior to our fiscal year 2001 that were not
registered under the Securities Act.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Certain statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward-looking statements that involve
risks and uncertainties. Words such as may, will, should, would, anticipates,
expects, intends, plans, believes, seeks, estimates and similar expressions
identify such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company assumes no obligation to update
these forward-looking statements to reflect actual results or changes in factors
or assumptions affecting forward-looking statements.

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CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60, which was recently released by the U.S.
Securities and Exchange Commission, encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our financial statements include a summary of the
significant accounting policies and methods used in the preparation of our
financial statements.

Management believes the following critical accounting policies affect the
significant judgments and estimates used in the preparation of the financial
statements.

REVENUE RECOGNITION
-------------------
Revenue from sales of equipment is generally recognized when products are
shipped, economic risk of loss has passed to the customer, collection is
probable and any future obligations of the Company are insignificant. Revenue
from hydro-blasting service contracts is recognized ratably over the service
period or as the services are rendered. Payments received in advance of the
performance of services are deferred until the services are performed.

USE OF ESTIMATES
----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates these estimates,
including those relating to the carrying value of inventories and property and
equipment and valuation/amortization periods related to equity instruments
issued in exchange for services rendered to the Company. Actual results could
differ from estimated amounts.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

During the year ended December 31, 2001, the Company recognized significant
revenue for the first time in its history. From its inception in April 1998
through February 25, 2001, the Company operated as a development stage company.
Effective, February 26, 2001, upon entering the contract with Corrosion
Engineering Services to remove coatings from the flight deck of the USS
EISENHOWER, the Company commenced its planned principal operations.

REVENUE
-------
Revenues were $1,708,077 for the year ended December 31, 2001, as compared to
$30,076 for the year ended December 31, 2000. Revenues for 2001 were generated
by two primary lines of business. These primary lines of business include
equipment sales and service contracts. In this connection, the Company had
equipment sales of $850,000 and service contract revenue of $858,077 in 2001,
all of which are described below:

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Equipment Sales
Revenue from the sale of equipment in 2001 was from one customer, Robotic
Environmental Services, LLC (RES). In September 2001, the Company signed an
exclusive distribution agreement with RES for the sale of the Company's
automated hydro-blasting systems in Louisiana and Texas. In connection with the
distribution agreement, RES purchased its first UltraStrip automated
hydro-blasting system. This system was delivered to RES in September 2001.

Service Contracts
In 2001 the Company performed three major service contracts including the USS
EISENHOWER, a U.S. Navy Nimitz-class aircraft carrier, dry-docked in Norfolk,
Virginia, and the USS COLE, a U.S. Navy guided missile destroyer, dry-docked in
Pascagoula, Mississippi, and multiple vessels at the Lisnave shipyard.

From February 26 to March 16, 2001, the Company performed sub-contractor
services for Corrosion Engineering Services, Inc. to remove the non-skid coating
from the flight deck of the USS EISENHOWER. During August 2001, the Company
removed the coatings from approximately 16,000 square feet of the hull and sides
of the USS COLE. The USS COLE, which was attacked in Yemen in October 2000, was
under repair at the Ingalls Shipbuilding facility in Pascagoula, Mississippi.

During 2001, the Company also entered into a major contract with Tecor -
Tecnologia Anti-Corrosao, S.A. of Setubal, Portugal (Tecor), the surface
preparation contractor for the Lisnave shipyards. Pursuant to the contract with
Tecor, in October 2001, the Company began a four-month demonstration with Tecor
in the Lisnave shipyard in Setubal, Portugal. The Company provided two automated
hydro-blasting systems and crews, through Wallem and the Company, to demonstrate
the operation and effectiveness of its new technology. Recent discussions with
Tecor management and Tecor statements in trade magazines and seminars indicate
their satisfaction with the UltraStrip automated hydro-blasting systems. In
January 2002, at Tecor's request, the Company extended the term of this
agreement for one additional month to March 31, 2002. Upon completion of this
contract on March 31, 2002, the Company's automated hydro-blasting equipment had
been used for surface preparation work on seven different vessels in the Lisnave
shipyard, ranging from crude oil carriers to cruise ships.

The Company believes that the completion of the USS EISENHOWER and USS COLE
service contracts, the equipment purchase by RES, and the successful performance
of the contract in Portugal, represent the first steps towards implementation of
the Company's business plan. The Company believes future service contracts,
equipment purchases or planned equipment rental contracts may be likely from its
customer base. The Company also believes that the most effective method of
marketing its technology is to continue to demonstrate the operation of its
systems in shipyards throughout the world. Future service contract work, plus
paid demonstrations and trial periods, will increase marketplace visibility.
However, the Company does not believe the 2001 revenue mix from these lines of
business is indicative of the likely future revenue mix of the Company.

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OPERATING EXPENSES
------------------
Operating expenses were $7,275,515 for the year ended December 31, 2001, as
compared to $11,142,297 for the year ended December 31, 2000. The primary lines
of the business consist of equipment sales and service contracts. In this
connection, the Company had cost of sales relating to equipment sales of
$1,803,219 and service contracts of $1,413,191, selling, general and
administrative costs (excluding non-cash compensation) of $5,803,295, and a
non-cash benefit pertaining to equity-related transactions of $(1,744,190) in
2001, all of which are described below.

Cost of Equipment Sales
Cost of equipment sales exceeded revenues primarily as

Ultrastrip Systems Inc · 10KSB · For 12/31/01

Filed On 12/27/02 2:21pm ET · SEC File 0-25663 · Accession Number 1116502-2-2053

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