<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended July 31, 1998
[ ] Transition Report Under Section 13 or 15(d) of the Exchange
Act; For the transition period from to
Commission File #0-27832
COMPOST AMERICA HOLDING COMPANY, INC.
................................................................
(Exact name of small business issuer as specified in its charter)
New Jersey 22-2603175
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Hadley Road South Plainfield, New Jersey 07080
- --------------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
Issuers's telephone number, including area code: (908)668-9335
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____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
1. Common Stock - 42,543,661 shares outstanding as at August 31, 1998.
Transitional Small Business Disclosure Format (check one):
Yes_____ No_X____
PLEASE ADDRESS ALL CORRESPONDENCE TO: Mark Gasarch, Esq.
40 West 57th Street
33rd Floor
New York, New York 10019
<PAGE>
PART I. - FINANCIAL INFORMATION
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JULY 31, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 16,099
Restricted cash 821,000
Restricted project fund trust account 92,769,375
Accounts receivable, net of allowance of $117,422 4,166,916
Prepaid expenses and other 359,030
Deferred income taxes 56,078
---------------
Total current assets 98,188,498
PROPERTY, PLANT AND EQUIPMENT, net 31,065,665
CUSTOMER CONTRACT RIGHTS, net 28,302,158
OTHER INTANGIBLE ASSETS, net 2,624,768
INVESTMENT IN JOINT VENTURE 1,463,151
OTHER ASSETS 390,635
---------------
$ 162,034,875
---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,785,949
Restricted project bonds payable 92,769,375
Due to related parties 7,510,639
Accounts payable 3,179,335
Accrued expenses 4,802,667
---------------
Total current liabilities 112,047,965
---------------
LONG-TERM DEBT 15,006,977
---------------
DEFERRED INCOME TAXES 7,252,992
---------------
MINORITY INTEREST --
---------------
SERIES A REDEEMABLE PREFERRED STOCK, no par value; 169,000 shares authorized; 169,000 shares
issued and outstanding (liquidation value of $17,688,667) 5,953,657
---------------
SERIES C REDEEMABLE PREFERRED STOCK, no par value; 91,000 shares authorized;
91,000 shares issued and outstanding (liquidation value of $10,595,890) 2,760,899
---------------
SERIES D REDEEMABLE PREFERRED STOCK, no par value; 17,500 shares
authorized; 17,500 shares issued and outstanding (liquidation value of $1,901,666) 639,011
---------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 25,000,000 shares authorized Series B
Convertible, 5,000,000 shares authorized; 401,000 shares issued
and outstanding 281,963
Common stock, no par value; 100,000,000 shares authorized; 40,754,347 shares issued and
outstanding 35,584,438
Additional paid in capital 10,509,129
Common stock to be issued, no par value; 631,179 shares to be issued and outstanding 954,704
Accumulated deficit (26,428,110)
Deferred compensation (2,528,750)
---------------
Total stockholders' equity 18,373,374
---------------
$ 162,034,875
---------------
---------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31
---------------------------------------
1997 1998
<S> <C> <C>
REVENUES:
Net sales $ -- $ 5,650,263
Other 137,836 --
--------------- ---------------
Total revenues 137,836 5,650,263
--------------- ---------------
COSTS AND EXPENSES:
Operating 14,784 4,153,964
Selling, general and administrative 1,461,360 2,059,454
Depreciation and amortization 57,297 1,121,353
Compensation for stock options -- 148,750
--------------- ---------------
Total operating expenses 1,533,441 7,483,521
--------------- ---------------
OPERATING LOSS (1,395,605) (1,833,258)
INTEREST EXPENSE, net of interest income of $888,500 in 1998 304,291 993,601
--------------- ---------------
LOSS BEFORE INCOME TAXES (1,699,896) (2,826,859)
INCOME TAX BENEFIT -- 920,458
--------------- ---------------
LOSS AFTER INCOME TAXES (1,699,896) (1,906,401)
LOSS IN EQUITY IN JOINT VENTURE -- (13,250)
--------------- ---------------
NET LOSS (1,699,896) (1,919,651)
PREFERRED STOCK DIVIDENDS -- 500,099
ACCRETION ON PREFERRED STOCK -- 587,408
--------------- ---------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (1,699,896) $ (3,007,158)
--------------- ---------------
--------------- ---------------
NET LOSS PER COMMON SHARE:
Basic $ (0.07) $ (0.07)
--------------- ---------------
--------------- ---------------
Diluted $ (0.07) $ (0.07)
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31
------------------------------
1997 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,699,896) $ (1,919,651)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 57,297 1,238,972
Deferred compensation -- 148,750
Deferred income taxes -- (920,458)
Loss in equity in joint venture -- 13,250
Stock issued for professional services 489,950 659,059
Stock options issued for services -- 42,993
Changes in operating assets and liabilities-
Restricted cash -- (821,000)
Accounts receivable, net (10,332) (1,238,889)
Prepaid expenses and other 28,513 71,782
Accounts payable 290,439 309,156
Accrued expenses -- 1,215,883
-------------- ---------------
Net cash used in operating activities (844,029) (1,200,153)
-------------- ---------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (201,898) (1,155,082)
-------------- ---------------
Net cash used in investing activities (201,898) (1,155,082)
-------------- ---------------
FINANCING ACTIVITIES:
Proceeds from notes payable 25,000 --
Proceeds from long-term debt 67,500 10,150,000
Advances from (repayments to) related parties, net 50,000 (1,498,718)
Repayment of notes payable -- (90,000)
Repayment of long-term debt (50,000) (7,170,804)
Deferred financing costs (39,193) --
Proceeds from sale of Common stock, net 7,500 591,900
Proceeds from sale of Series B Preferred stock, net 1,000,000 --
-------------- ---------------
Net cash provided by financing activities 1,060,807 1,982,378
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,880 (372,857)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,012 388,956
-------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,892 $ 16,099
-------------- ---------------
-------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense $ 46,820 $ 197,488
Cash paid for income taxes $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
Compost America Holding Company, Inc. (the Company), formerly known as Alcor
Energy and Recycling Systems, Inc., was incorporated in New Jersey. The Company
will construct or acquire, manage and own indoor compost manufacturing plants.
Composting is a method of converting the organic portion of municipal solid
waste and sewage sludge into a peat moss like product with agronomic benefits.
The Company will be paid a "tipping fee," just as landfills and incinerators are
paid, for receiving and processing the municipal solid waste and biosolids. The
Company also will receive revenues from the sale of the compost it produces. The
Company anticipates that it will be competitive with other waste management
options by conveniently locating its plants to urban centers, thus eliminating
the need to use local transfer stations and reducing the transportation costs
associated with hauling waste to distant out-of-state landfills. The Company's
first two development projects will be a fully enclosed composting facility in
Newark, New Jersey, which is 75% owned by the Company and 25% owned by Prince
George's Contractors, Inc., d/b/a Potomac Technologies, Inc., and a fully
enclosed composting facility in Dade County, Florida, which is 80.1% owned by
the Company and 19.9% owned by a local businessman.
The Company was previously considered a development stage company; however, in
November 1997, the Company acquired an operating business, Environmental
Protection and Improvement Company (EPIC). EPIC is in the business of
transporting biosolids to approved land application sites and transporting ash,
municipal solid waste and contaminated soils to approved landfills by intermodal
truck and/or rail hauling. Substantially all of the Company's revenues for the
three months ended July 31, 1998 were generated by EPIC.
2. BASIS OF PRESENTATION:
The condensed financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These statements include all adjustments that, in the opinion of
management, are necessary to provide a fair statement of the results for the
periods covered. These financial statements should be read in conjunction with
the audited financial statements and the notes thereto included in the Company's
Form 10-KSB for the year ended April 30, 1998. The results of operations for the
interim periods presented are not necessarily indicative of the results for the
full year.
<PAGE>
-2-
3. LIQUIDITY:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of July 31, 1998, the Company had a
working capital deficit of $13,859,467 and an accumulated deficit of
$26,428,110. Included in the working capital deficit is $3,785,949 for the
current portion of long-term debt and $7,510,639 for amounts due to related
parties. In addition, as of July 31, 1998, the Company was not in compliance
with one of its long-term debt agreements. This loan was repaid with the
proceeds from a new loan in November 1998 and, as a result, has been classified
as a long-term debt as of July 31, 1998. In addition, the Series A and Series D
Preferred stockholders have certain rights to exchange their shares of the
Company's Preferred and Common stock for the Common stock of EPIC and the
Company's investment in American Marine Rail, LLC. In connection with the
financing needed for the project costs incurred and the funding of operating
expenses, the Company has incurred indebtedness with relatively short repayment
schedules. In addition, the Company has incurred losses since its inception and
is subject to those risks associated with companies in the early stages of
development. The Company's growth and development strategy will also require the
approval of certain permits from regulatory authorities and substantial
financing will be required to finance construction and development of Compost
projects, for working capital and for capital expenditures.
On November 5, 1998, the Company issued a term note for $10,500,000 (see Note
12) in order to fund the Company's short-term working capital needs and to repay
the Company's debt obligation which was past due as of July 31, 1998. The
Company expects that adequate financing will be available to fund the Company's
working capital needs and to fund the required debt payments. However, there is
no assurance that the Company will be able to obtain sufficient debt or equity
financing on favorable terms or at all. If the Company is unable to secure
additional financing, its ability to implement its growth strategy will be
impaired and its financial condition and results of operations are likely to be
materially adversely affected. These matters, among others, raise substantial
doubt about the Company's ability to continue as a going concern.
4. RISK AND UNCERTAINTIES:
The Company is both a development company and an operating company. The planned
composting facilities are subject to all of the risks inherent in the
establishment of a new business enterprise, including the absence of an
operating history, lack of market recognition for its products and the need to
develop new banking and financial relationships. The Company has not yet
demonstrated an ability to profitably operate any in-vessel compost facilities,
including those of the type proposed to be built by the Company.
The waste management industry in which the Company operates as a processor of
municipal solid waste, sewage sludge and commercial organic waste, is highly
competitive and has been traditionally dominated by several large and well
recognized national and
<PAGE>
-3-
multinational companies with substantially greater financial resources than
those available to the Company. The Company will be competing with such other
companies for a share of the available market and no assurance can be given that
in the future it will be able to obtain an adequate commercial customer base to
implement its operating plan.
The Company's planned operations are subject to substantial regulation by
federal, state and local regulatory authorities. Specific regulations vary by
state and locality. Local siting approvals require differing levels of design
documentation and process definition, usually requiring public approvals in one
or more public hearings. Following local approval, the Company must apply for
and receive air, water, and solid waste and sewage sludge processing permits
from state environmental protection agencies. These permits will generally
include specific limits within which the facilities must operate. In the case of
air and water permits, these include limits on offsite emission and discharge
releases. Compost product composition may also be regulated, requiring continual
monitoring to assure compost product quality. Continued compliance with this
broad federal, state and local regulatory network is essential and costly.
Additionally, there can be no assurance that additional, more restrictive
regulations will not be enacted in the future or that the Company will be in a
position to comply with such new regulations. Consequently, management is unable
to predict the effect upon its future operations of such regulations except the
failure to comply with such regulations might have a material adverse effect on
the Company and its operations in the future.
There can be no assurances that the Company will be able to obtain the permits
necessary to operate its organic recycling compost manufacturing plants
presently under development. If and when these permits are issued, the Company
must then operate the plants in conformance with the permits. Further,
management is unable to predict the amount of time which will be required to
obtain all necessary permits. Any delays in such process will delay the
Company's ability to begin commercial operations and may have an adverse impact
upon the Company's future operations.
The Company plans to contract for and to process, municipal solid waste and
sewage sludge that meets the Company's specifications. It is possible that some
of the wastes accepted at a company facility may contain contaminants which
could cause environmental damage and result in liabilities. The receipt and
disposal of contaminated wastes could have a materially adverse effect on the
Company and its operations in the future.
5. RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform to the current
year presentation.
<PAGE>
-4-
6. LONG TERM DEBT:
On June 17, 1998, EPIC issued a note for $10,000,000, of which $8,528,586 was
used to repay existing notes, including interest and repayment penalties. The
new note is payable in 36 monthly installments of $215,540 followed by 60
monthly installments of $95,811, which amounts include interest at 10% per year.
The note is collateralized by substantially all of the assets of EPIC and is
guaranteed by the Company. The note agreement contains covenants and
restrictions including, among others, restrictions on the transfer of funds from
EPIC to other entities including the Company and no defaults at EPIC under other
agreements with amounts due in excess of $100,000. The agreement required EPIC
to obtain a line of credit for at least $2,000,000, which was obtained on June
8, 1998. The former owner of EPIC and current President of EPIC has personally
guaranteed the line of credit.
In June 1998, EPIC obtained a $11,800,000 surety bond which was required by the
New York City Department of Environmental Protection contract which EPIC
obtained in September 1997 and commenced on July 1, 1998. As part of the terms
of the surety bond, the former owner and current President of EPIC has
personally guaranteed $3,000,000 on EPIC's behalf and in return the former owner
has required that the Company place a portion of the proceeds from the
$10,000,000 loan discussed above in an escrow account as security. The required
escrow balance as of July 31, 1998 was $821,000 which is included in restricted
cash on the accompanying balance sheet. The required escrow balance is subject
to reduction based on certain events as described in the agreement. The
President of EPIC will be compensated on a monthly basis for this personal
guarantee.
7. NET LOSS PER COMMON SHARE:
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" as of April 30, 1998. In accordance with SFAS No. 128,
prior period earnings per share amounts have been restated to conform with SFAS
No. 128. SFAS No. 128 requires basic earnings per share which is computed by
dividing reported earnings available to common stockholders by the weighted
average shares outstanding and diluted earnings per share which reflects the
dilutive effect of Common stock equivalents such as stock options and warrants,
unless the inclusion would result in antidilution. Inclusion of the Common stock
equivalents in the diluted net loss per share calculation would be antidilutive
and, therefore, such shares are not included in the calculation.
<PAGE>
-5-
The net loss and weighted average Common and Common equivalent shares used in
determining the net loss per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31
-----------------------------------
1997 1998
<S> <C> <C>
Net loss available for Common stockholders per statements of
operations $ (1,699,896) $ (3,007,158)
Preferred stock dividends not declared -- 453,753
-------------- --------------
Net loss available for Common stockholders used for basic and
diluted net loss per Common share $ (1,699,896) $ (3,460,911)
-------------- --------------
-------------- --------------
Weighted average Common shares outstanding
during period 22,831,565 40,750,957
Dilutive effect of Common stock to be issued for Preferred stock
dividends not declared -- 150,249
-------------- --------------
Weighted average Common and Common equivalent shares used for basic
and diluted net loss per Common share
22,831,565 40,901,206
-------------- --------------
-------------- --------------
</TABLE>
8. SUPPLEMENTAL CASH FLOW INFORMATION:
The following additional noncash investing and financing activities occurred:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31
-----------------------------------
1997 1998
<S> <C> <C>
Common stock issued for consulting services $ 489,950 $ 659,059
Common stock issued for compost projects costs -- 40,052
Common stock issued for payment of liability 22,680 --
Common stock issued for payment of Preferred stock dividends
-- 57,658
Conversion of note payable into Common stock -- 152,459
Common stock options granted on sale of Common stock
-- 161,205
Common stock options granted for consulting services -- 42,993
</TABLE>
<PAGE>
-6-
9. COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income in a set of financial statements.
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from non-owner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Effective May 1, 1998, the
Company adopted SFAS No. 130 and it had no impact on the financial statements.
10. RELATED PARTY TRANSACTIONS:
The Company has various transactions and activities with certain significant
shareholders, directors, officers and other related parties. A summary of
activity with related parties is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31
------------------------------------
1997 1998
<S> <C> <C>
Interest Expense on Advances:
VRH Construction Corporation $ 117,668 $ 130,148
Select Acquisitions, Inc. 385 401
Foundation Systems, Inc. 1,593 1,834
President of the Company 695 550
President of EPIC -- 28,675
Construction Cost to Resource Reclamation, Inc. and Ouster
Corporation Capitalized in Construction in Progress 66,528 500,000
Fees Related to Personal Guarantee to President of EPIC -- 250,000
Salary Deferred in Due to Related Parties Account for Two Officers 77,500 106,875
Advances from President of the Company 25,000 85,000
Repayment of Advances from President of EPIC -- 1,676,189
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
MIAMI CONTRACT COMMITMENT
In November 1996, the Company made a payment of $1,000,000 to secure performance
of its obligations under the Restated Compost Recycling Agreement dated November
30, 1995 with the City of Miami (the Restated Agreement). Under the terms of
Restated Agreement the commencement date of operations for its Miami Composting
facility was extended to October 1998. On February 24, 1998, a resolution was
proposed and adopted by the City of Miami Commission granting the Company an
additional extension through October 20, 2000
<PAGE>
-7-
if the Company agreed to the additional provisions noted below. The resolution
included provisions that the Company would agree to pay the City an amount equal
to the City's recycling costs for each of the two years of the extension period,
agree that the $1,000,000 previously deposited with the City to guarantee the
Company's performance under the Restated Agreement be released into the City's
general fund for the City's use and posting of a new performance bond or letter
of credit in the amount of $1,000,000 to guarantee the performance of its
obligations under the Restated Agreement. The $1,000,000 previously deposited
payment has been capitalized in customer contract rights as of July 31, 1998. An
amendment agreement including these provisions has been signed by the Company.
The Company was notified by the City of Miami Administration that they refuse to
acknowledge the extension agreement. As a result, the Company has filed suit
against the City of Miami in order to protect its rights under the Miami
contract and to secure the extension of the contract pursuant to the resolution
adopted by the Miami City Commission in February 1998.
This suit against the City of Miami related to the Restated Agreement is still
in the discovery stage. The case has been set for a non-jury trial during the
week of July 26, 1999.
CONTRACTUAL DISPUTES
The Company is currently involved in two disputes with third parties whereby the
third parties have filed lawsuits alleging breach of contractual obligations and
have claimed damages of approximately $300,000 and $1,000,000, respectively.
Management plans to vigorously defend itself against these claims and believes
that the recorded liabilities for these matters as of July 31, 1998 are
adequate. Management believes that the ultimate resolution of these matters will
not have a material effect upon the Company's financial position or results of
operations.
GOVERNMENT REGULATIONS
In the normal course of business and, as a result of the extensive governmental
regulations of the solid waste industry, the Company periodically may become
subject to various judicial and administrative proceedings involving federal,
state or local agencies. Certain federal and state environmental laws impose
strict liability on the Company for such matters as contamination of water
supplies or the improper disposal of hazardous waste.
INSURANCE COVERAGE
The Company does not carry insurance coverage for environmental liability. In
the event uninsured losses occur, the Company's results of operations and
financial position could be adversely affected.
<PAGE>
-8-
PAYROLL TAXES
The Company is in arrears for prior and current year's payroll taxes to federal
and state taxing authorities of $173,687, of which $162,698 was from the
acquisition of American Soil, Inc. Interest and penalties have been accrued. The
Company and its officers are at risk for payment of taxes under the trust fund
recovery systems. The Internal Revenue Service can cause liens to be recorded
and judgements to be filed.
LITIGATION
In the normal course of business, the Company is a party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management of the Company, after consultation with legal
counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.
12. SUBSEQUENT EVENTS:
On August 30, 1998 and September 15, 1998, the Company issued 700,000 and
100,000 shares, respectively, of the Company's Common stock to an entity which a
current stockholder and Director is an officer, as consideration for the
transfer of the entity's personal holdings of the Company's Common stock on
behalf of the Company. In connection with these Common stock grants the Company
recorded an expense of approximately $900,000 based on the closing bid price per
share on the date of the transaction. In connection with these 800,000 shares of
Common stock issued, the Company also granted an additional 447,376 shares of
Common stock to the shareholders who acquired the Series A, C and D Preferred in
the year ended April 30, 1998. These additional shares of Common stock were
granted based on management's representation to these new investors that they
were acquiring a specified percentage ownership in the Company and since the
800,000 replacement shares related to a transaction prior to the new investors
the additional 447,376 shares of Common stock would adjust the new investors to
the specified percentage ownership. The fair value of these additional shares
will be recorded as a Preferred stock dividend. Management believes that no
additional Common stock or other equity securities will be issued in the future
based on this representation of the specified percentage ownership.
On November 5, 1998, the Company issued a $10,500,000 note to a company
affiliated with one of the Company's current shareholders and debt holders. The
note bears interest at 10.5% and interest is payable upon the maturity date of
the note which is the lesser of October 30, 2000 or financial closing for the
Miami project. The note agreement includes provisions which restrict the
proceeds for specific uses as follows: $4,612,000 for repayment of a mortgage
note in default, $3,000,000 for the redemption of 1,000,000 shares of the
Company's common stock owned by an affiliate of the lender, $440,000 for fees
associated with the note payable and the remainder for general working capital
and Miami project expenses. In connection with this transaction, the conversion
of the $200,000 debenture
<PAGE>
-9-
payable into 159,670 shares of the Company's common stock in September of 1997
was rescinded. As part of this note agreement, the convertible debenture payable
in the amount of $800,000, including the $200,000 rescinded amount, which is
held by an affiliate of the noteholder will be converted into 1,406,593 shares
of the Company's common stock. In addition, as part of the note agreement the
company affiliated with the note holder has certain rights to convert the
400,000 shares of the Company's Series B Preferred stock which it currently owns
to Common stock on a one for one basis and then the right to put the Common
stock back to the Company at a per share price of $3.10 as of the maturity date
of the note payable. The company affiliated with the noteholder also has the
right to put up to 50% of the shares of Common stock held as of the note closing
date (which is 553,386 shares) back to the Company at a per share price of $3.20
as of the first anniversary of the maturity date of the note payable. The
Company issued warrants to purchase 1,500,000 shares of the Company's common
stock at exercise prices ranging from $1.00 to $2.25 as part of the note
agreement. The note payable bears interest at 10.5% with principal and interest
payable on the earlier of two years from the closing date or the financial
closing for the Miami, Florida compost project, as defined.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
historical financial statements of the Company and related notes thereto
included elsewhere in this Form 10-QSB and the Annual Report on Form 10-KSB for
the year ended April 30, 1998 (the "Form 10-KSB"). This discussion contains
forward-looking statements regarding the business and industry of the Company
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on the current plans and expectations of the Company
and involve risks and uncertainties that could cause actual future activities
and results of operations to be materially different from those set forth in the
forward-looking statements.
The information set forth and discussed below for the three months ended
July 31, 1998 and 1997 is derived from the consolidated financial statements
included elsewhere herein. The financial information set forth and discussed
below is unaudited but, in the opinion of management, reflects all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of such information. The results of operations of the Company for the fiscal
quarter ended July 31, 1998 may not be indicative of results expected during the
other quarters or for the entire fiscal year ended April 30, 1999.
RESULTS OF OPERATIONS
For the quarter ended July 31, 1998, total revenues were $5,650,263 compared
to $137,836 for the quarter ended July 31, 1997, an increase of $5,512,427. The
increase is attributable to the sales by the Company's wholly owned subsidiary,
EPIC, which was acquired on November 3, 1997.
For the quarter ended July 31, 1998 total costs and expenses were $7,483,521
compared to $1,533.441 for the quarter ended July 31, 1997, an increase of
$5,950,080. The increase in total costs and expenses consists of increases in
operating expenses of $4,139,180, selling, general and administrative expenses
of $598,094, depreciation and amortization of $1,064,056 and compensation for
stock options of $148,750. The increases in operating expenses, depreciation and
amortization and compensation for stock options are attributable to the
operations of EPIC which was acquired by the Company on November 3, 1997. The
increase in selling, general and administrative expenses was due primarily to
increased expenses related to legal, financial consulting and other services
related to the further development of the Company's operations. These services
were funded as required with cash, issuance of common stock, issuance of common
stock options or a combination of these funding options. In addition, the
increase in selling, general and administrative expenses was partially due to
the operations of EPIC.
Net interest expense for the quarter ended July 31, 1998 was $993,601, an
increase of $689,310 from the quarter ended July 31, 1997. Net interest expense
for the quarter ended July 31, 1998 increased due to an increase in the
Company's debt to finance its ongoing activities while carrying the interest
cost of the majority of the prior year debt as well. The Company's long term
debt obligations (including amounts due to related parties and excluding
restricted project bonds payable) as of July 31, 1998 were $26,303,565 as
compared to $13,226,119 as of July 31, 1997.
The Company recorded an income tax benefit of $920,458 for the quarter ended
July 31, 1998 which reflects an effective tax rate of 33%. The effective rate is
below the statutory rate primarily due to certain non tax deductible amounts
recorded during the period. Based on the significant deferred income tax
liability which was recorded as part of the acquisition of EPIC and an
assessment of the Company's expected future taxable income, management has
determined that it is more likely than not that this income tax benefit will be
realized in future periods. At July 31, 1998, the Company has net operating loss
carryforwards of approximately $16,000,000 which begin to expire in 2008. The
Tax Reform Act of 1986 contains provisions that may limit the net operating loss
carryforwards available to be used in any given year in the event of significant
changes in ownership.
During the quarter ended July 31 1998, the Company recorded $500,099 in
dividends, payable in common stock, relating to its issued redeemable Preferred
Stock. During the quarter ended July 31, 1998 the Company also recorded
accretion on its Preferred Stock of $587,408 related to a mandatory redemption
feature. No dividends or accretion were recorded in the prior year period since
the Company's Redeemable Preferred Stock was issued in November 1997 and April
1998.
<PAGE>
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporarily
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company does not believe that it has material exposure to the Year 2000
issue with respect to its own information systems since its existing systems
correctly define the year 2000. For this reason the Company does not anticipate
that it will incur any significant expense in effecting year 2000 compliance
with regard to its own information system. The Company at present is unable to
predict the extent to which the year 2000 issue will effect its suppliers, or
the extent to which the Company would be vulnerable to the failure by any of its
suppliers to remediate any Year 2000 issues on a timely basis. The failure of
any major supplier to convert its systems on a timely basis or a conversion that
is incompatible with the Company's systems could have a material adverse effect
on the Company.
LIQUIDITY AND CAPITAL RESOURCES.
As of July 31, 1998, the Company has cash and cash equivalents of $16,099
and the Company has a working capital deficit of $13,859,467 and an accumulated
deficit of $26,428,110. Included in the working capital deficit is $3,785,949
for the current portion of long term debt and $7,510,639 for amounts due to
related parties. Since April 30, 1998, the Company has received extensions for
the original maturity terms to dates after April 30, 1998 on several accounts
payable, accrued expenses and debt obligations, primary amounts due to related
parties, who are also stockholders of the Company, and such extended terms are
reflected in the financial statements. In addition, the Company has incurred
losses since in its inception and is subject to those risks associated with the
companies in the early stage of development. These matters raise substantial
doubt about the company's ability to continue as a going concern.
The Company's growth and development strategy will also require the approval
of certain permits from regulatory authorities and substantial financing will be
required to finance construction and development of Compost projects, for
working capital and for capital expenditures. The Company expects that adequate
financing will be available to fund the Company's working capital needs and to
fund the required debt payments. However, there is no assurance that the Company
will be able to obtain sufficient debt or equity financing on favorable terms or
at all. If the Company is unable to secure addition financing, its ability to
implement its growth strategy will be impaired and its financial condition and
results of operations are likely to be materially adversely affected.
During the quarter ended July 31, 1998 the net cash used in operating
activities was $1,200,153 as compared with cash used in operating activities in
the prior year period of $844,029. The increase in cash used in operating
activities for July 31, 1998 as compared with July 31,1997 is primarily due to
the operations of EPIC, the recording of the income tax benefit for the 1998
period, offset by an increase in accrued expenses.
During the quarter ended July 31, 1998 the Company utilized cash for
purchases of property, plant and equipment of $1,155,082. These purchases were
primarily related to capital expenditures for the Company's composting projects
in progress and for the EPIC subsidiary.
During the quarter ended July 31, 1998 the Company received net cash from
financing activities of $1,982,378. The cash was received from the sale of
common stock in the amount of $591,900 and net proceeds from long term debt
obligations of $1,390,478 (gross proceeds of $10,150,000 net of repayments of
$8,759,522).
Historically, the Company has satisfied its capital expenditures, working
capital and its acquisition needs primarily through private placements of debt
and equity securities, equipment lease financing and loans from related parties.
The Company has used, and believes that it will likely continue using amounts in
excess of the cash generated from operations to fund the growth components of
its business including acquisitions and capital expenditures. In connection with
the financing needed for the project costs incurred and the funding of operating
expenses, the Company has incurred indebtedness with relatively short repayment
schedules.
<PAGE>
Upon the anticipated financial closing of financing for the construction of
the Company's in-vessel composting facilities in Newark, New Jersey and Miami,
Dade County, Florida, it is anticipated that a portion of the previously
financed project costs will be repaid to the Company, which will be used to fund
future development activities and planned company growth, as well as general and
administrative expenses. The financing should occur when all of the required
permits are obtained, a certain percentage of long-term waste procurement
contracts are executed providing adequate debt coverage ratios, and the final
construction costs contract for these facilities are executed with its general
contractor. It is anticipated that the financing of both the Newark and Miami
Projects can be closed in calendar year 1999. Significant future Company
consolidated revenue generated from in-vessel compost operations is not
anticipated until 2001.
On June 17, 1998, EPIC, issued a note for a loan of $10,000,000, of which
$8,528,586 was used to repay both EPIC and the Company's existing notes,
including interest and repayment penalties. The note is payable as follows; 36
monthly installments of $215,540 followed by 60 monthly installments of $95,811,
which amounts include interest at 10% per year. The note is collateralized by
substantially all of the assets of EPIC and is guaranteed by the Company. The
note agreement contains, among other things, restrictions on the transfer of
funds from EPIC to other entities including the Company, and a requirement that
there are no defaults at EPIC under other agreements with amounts in excess of
$100,000. The loan agreement required EPIC to obtain a line of credit for at
least $2,000,000, which was obtained on June 8, 1998. The former owner of EPIC
and current President of EPIC has personally guaranteed the line of credit.
In June 1998, EPIC obtained a $11,800,000 surety bond, which was required by
the New York City Department of Environmental Protection ("NYC DEP") contract
which commenced on July 1, 1998. As part of the terms of the surety bond, the
Company was required to place approximately $821,000 of the proceeds from the
$10,000,000 loan in an escrow account as security. The President of EPIC will be
compensated on a monthly basis for his personal guarantee
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This quarterly report includes forward looking statements which involve
risks and uncertainties. Such statements can be identified by the use of
forward-looking language such as "will likely result", "may", "are expected to",
"is anticipated", "estimate", "believes", "projected", or similar words. All
statements other than statements of historical fact included in this section,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. The
Company's actual results could differ materially from those anticipated in any
such forward-looking statements as a result of various risks, including, without
limitation, the dependence on a single line of business; the failure to close
proposed financing; rapid technological change; change in permitting and
environmental regulations; inability to attract and retain key personnel; Year
2000 compliance issues; the potential for significant fluctuations in operating
results; and the potential volatility of the Company's common stock.
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings None not Previously
Reported
Item 2. - Changes in Securities
(a) None
(b) None
(c) During the fiscal quarter ended July 31, 1998, the Company
issued 4,284,426 shares of its common stock as follows:
<TABLE>
<CAPTION>
DATE # OF SHARES ISSUED TO FOR PRICE
- ---- ----------- --------- --- -----
<S> <C> <C> <C> <C>
05/05/98 1,627,980 two investors jt. ventre inv. $1.20/share
05/05/98 68,605 four investors converted note $2.00/share
05/18/98 17,586 four consultants services $1.25/share
05/19/98 783,842 two investors cash $1.20/share
05/22/98 500,000 one investor cash $1.00/share
05/22/98 12,000 one consultant services $1.15/share
06/01/98 44,700 consultant services $1.15/share
06/03/98 50,000 consultant services $1.10/share
06/08/98 140,000 five investors exer. options $0.01/share
06/09/98 35,238 two investors dividend $1.10/share
06/11/98 15,000 consultant services $1.05/share
06/12/98 40,000 consultant services $1.10/share
06/12/98 15,000 three consultants services $1.10/share
06/30/98 50,000 consultant services $1.10/share
07/06/98 40,000 two investors cash $1.00/share
07/06/98 4,200 consultant services $1.30/share
07/07/98 50,000 two investors cash $1.00/share
07/09/98 55,000 consultant services $1.30/share
07/10/98 500,000 one investor cash $1.00/share
07/10/98 6,275 consultant services $1.30/share
07/10/98 24,000 one investor converted note $0.63/share
07/14/98 100,000 consultant services $1.15/share
07/28/98 80,000 five investors exer. options $0.01/share
07/31/98 25,000 consultant services $1.15/share
</TABLE>
These shares were issued without registering the securities under the Securities
Act of 1933, as amended. There were no underwriters involved in the transaction,
and no underwriting discounts or commissions. In light of the small number of
recipients and that all securities issued were restricted against subsequent
transfer, the Company believes that this issuance of securities was effected
under an exemption provided by Section 4(2) of the Securities Act of 1933, as
amended, being sales by an issuer not involving a public offering.
(d) not applicable
<PAGE>
Item 3. - Defaults Upon Senior Securities None
Item 4. - Submission of Matters to a Vote of Security Holders
On July 30, 1998 at a special meeting of shareholders the shareholders of the
Company approved a resolution amending the Company's Articles of Incorporation
such that the number of authorized common shares of the Company was increased
from 50,000,000 to 100,000,000. The vote was 24,576,911 in favor, 395,000
opposed, 47,654 abstained from voting and no broker non- votes.
Item 5. - Other Information None
Item 6. - (a) Exhibits None
(b) Reports on Form 8-K
1. A report on Form 8-K dated June 15, 1998 was filed on June
19, 1998 to report amendments to the Designations of Rights
of the Company's Series A Preferred Stock and Series D
Preferred Stock, and the resignation of Robert E. Wortmann
as a Director of the Company. No financial statements were
included in this filing.
2. A report on Form 8-K dated July 20, 1998 was filed on July
22, 1998 to report a change in the Company's certified
public accountants from Zeller Weiss & Kahn, LLP to Arthur
Andersen LLP. No financial statements were included in this
filing.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: COMPOST AMERICA HOLDING COMPANY, INC.
February 18, 1999 (Registrant)
By /s/ Roger E. Tuttle
----------------------------------------------
Roger E. Tuttle, President and Principal
Executive Officer, Principal
Financial Officer and
Treasurer
By /s/ Anthony P. Cipollone
----------------------------------------------
Anthony P. Cipollone, Controller, Principal
Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE UNAUDITED
FINANCIAL STATEMENTS OF COMPOST AMERICA HOLDING COMPANY, INC. FOR THE FISCAL
QUARTER ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JUL-31-1998
<CASH> 16,099
<SECURITIES> 0
<RECEIVABLES> 4,284,338
<ALLOWANCES> 117,422
<INVENTORY> 0
<CURRENT-ASSETS> 98,188,498
<PP&E> 32,760,834
<DEPRECIATION> 1,695,169
<TOTAL-ASSETS> 162,034,875
<CURRENT-LIABILITIES> 112,047,965
<BONDS> 15,006,977
9,353,567
281,963
<COMMON> 47,048,271
<OTHER-SE> (28,956,860)
<TOTAL-LIABILITY-AND-EQUITY> 162,034,875
<SALES> 5,650,263
<TOTAL-REVENUES> 5,650,263
<CGS> 4,153,964
<TOTAL-COSTS> 4,153,964
<OTHER-EXPENSES> 3,329,557
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 993,601
<INCOME-PRETAX> (2,826,859)
<INCOME-TAX> (920,458)
<INCOME-CONTINUING> (1,906,401)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,906,401)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
