<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 JANUARY 31, 1999
[ ] 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 chart
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)
Issuer'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 _X___ No_____
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 - 46,037,164 shares outstanding as at February 28, 1999.
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
JANUARY 31, 1999
(UNAUDITED)
<TABLE>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 954,643
Restricted cash 311,414
Restricted project fund trust account 90,337,500
Accounts receivable, net of allowance of $117,422 3,610,056
Prepaid expenses and other 386,319
Deferred income taxes 59,029
---------------
Total current assets 95,658,961
PROPERTY, PLANT AND EQUIPMENT, net 32,172,863
CUSTOMER CONTRACT RIGHTS, net 27,309,564
OTHER INTANGIBLE ASSETS, net 3,185,083
INVESTMENT IN JOINT VENTURE 1,469,828
OTHER ASSETS 399,410
---------------
$ 160,195,709
---------------
---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,368,018
Line of credit 500,000
Restricted project bonds payable 90,337,500
Due to related parties 7,717,780
Accounts payable 4,422,246
Accrued expenses 3,267,710
---------------
Total current liabilities 110,613,254
---------------
LONG-TERM DEBT 16,986,343
---------------
DEFERRED INCOME TAXES 4,779,976
---------------
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) 6,471,764
--------------
SERIES B REDEEMABLE PREFERRED STOCK, no par value; 400,000 shares issued and outstanding
(liquidation value of $1,240,000) 1,240,000
---------------
SERIES C REDEEMABLE PREFERRED STOCK, no par value; 91,000 shares authorized; 3,453,704
91,000 shares issued and outstanding (liquidation value of $11,358,795) ---------------
SERIES D REDEEMABLE PREFERRED STOCK, no par value; 17,500 shares
authorized; 17,500 shares issued and outstanding (liquidation value of $1,971,666) 692,788
REDEEMABLE COMMON STOCK, no par value; 553,386 shares issued and ---------------
outstanding (liquidation value of $1,770,836) 1,770,836
COMMITMENTS AND CONTINGENCIES (Note 10) ---------------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 25,000,000 shares authorized; Series B
Convertible, 5,000,000 shares authorized; 1,000 shares issued
and outstanding 2,500
Common stock, no par value; 100,000,000 shares authorized; 45,213,896 shares
issued 40,271,470
Additional paid in capital 12,692,094
Common stock to be issued, no par value; 984,367 shares to be issued and outstanding 1,048,709
Accumulated deficit (36,015,229)
Deferred compensation (2,231,250)
Treasury stock, 1,150,000 common shares, at cost (1,581,250)
---------------
Total stockholders' equity 14,187,044
---------------
$ 160,195,709
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended January 31 Nine Months Ended January 31
---------------------------------------------------------------------------------
1998 1999 1998 1999
--------------- --------------- --------------- -----------
REVENUES:
<S> <C> <C> <C> <C>
Net sales $ 4,610,289 $ 4,948,256 $ 4,843,157 $ 16,689,791
--------------- --------------- --------------- ---------------
Total revenues 4,610,289 4,948,256 4,843,157 16,689,791
--------------- --------------- --------------- ---------------
COSTS AND EXPENSES:
Operating 3,039,424 3,583,211 3,061,530 11,780,601
Selling, general and administrative 1,115,685 4,724,193 4,399,505 9,836,661
Depreciation and amortization 957,818 995,807 1,072,412 3,229,284
Compensation for stock options -- 148,750 -- 446,250
--------------- --------------- --------------- ---------------
Total operating expenses 5,112,927 9,451,961 8,533,447 25,292,796
--------------- --------------- --------------- ---------------
OPERATING LOSS (502,638) (4,503,705) (3,690,290) (8,603,005)
INTEREST EXPENSE, net of interest income of
$430,362, $781,875, $430,362 and
$2,559,375, respectively 476,822 1,974,691 1,331,404 3,866,070
--------------- --------------- --------------- ---------------
LOSS BEFORE INCOME TAXES (979,460) (6,478,396) (5,021,694) (12,469,075)
INCOME TAX BENEFIT -- 1,697,848 -- 3,328,093
--------------- --------------- --------------- ---------------
LOSS AFTER INCOME TAXES (979,460) (4,780,548) (5,021,694) (9,140,982)
LOSS IN EQUITY IN JOINT VENTURE -- 14,750 -- 40,300
--------------- --------------- --------------- ---------------
NET LOSS (979,460) (4,795,298) (5,021,694) (9,181,282)
PREFERRED STOCK DIVIDENDS 217,822 676,428 217,822 1,560,898
ACCRETION ON PREFERRED STOCK 340,027 647,873 340,027 1,852,097
--------------- --------------- --------------- ---------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (1,537,309) $ (6,119,599) $ (5,579,543) $ (12,594,277)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
NET LOSS PER COMMON SHARE:
Basic $ (0.03) $ (0.14) $ (0.19) $ (0.31)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Diluted $ (0.03) $ (0.14) $ (0.19) $ (0.31)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</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>
Nine Months Ended January 31
-------------------------------------------
1998 1999
-------------- -----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (5,021,694) $ (9,181,282)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 1,072,412 3,229,284
Amortization of debt discount -- 554,879
Amortization of deferred financing costs -- 888,526
Conversion preference on note payable -- 1,150,940
Deferred compensation -- 446,250
Deferred income taxes -- (3,393,473)
Loss in equity in joint venture -- 40,300
Stock issued for professional services 1,509,070 2,681,156
Stock options issued for services -- 168,383
Changes in operating assets and liabilities-
Restricted cash (296,250) (311,414)
Accounts receivable, net (3,635,696) (682,029)
Prepaid expenses and other (1,221,969) 35,718
Accounts payable 3,777,957 1,552,067
Accrued expenses -- (201,090)
-------------- --------------
Net cash used in operating activities (3,816,170) (3,021,785)
-------------- --------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (14,900,109) (3,262,073)
Advances to joint venture -- (68,669)
Acquisition of business (18,946,673) --
-------------- --------------
Net cash used in investing activities (33,846,782) (3,330,742)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds from restricted project bonds payable 90,000,000 --
Increase in restricted project fund trust account (90,000,000) --
Proceeds from long-term debt 9,135,456 22,077,000
Advances from (repayments to) related parties, net 40,000 (1,291,577)
Proceeds from notes payable 2,428,700 500,000
Repayment of long-term debt (2,392,621) (11,756,435)
Repayment of notes payable -- (90,000)
Purchase of treasury shares -- (3,303,675)
Proceeds from sale of Common stock, net 16,803,730 782,901
Proceeds from sale of Preferred stock, net 11,727,500 --
-------------- -------------
Net cash provided by financing activities 37,742,765 6,918,214
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 79,813 565,687
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,012 388,956
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 87,825 $ 954,643
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense $ 637,133 $ 651,665
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
nine months ended January 31, 1999 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>
3. LIQUIDITY:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of January 31, 1999, the Company
had a working capital deficit of $14,954,293 and an accumulated deficit of
$36,015,229. Included in the working capital deficit is $4,368,018 for the
current portion of long-term debt and $7,717,780 for amounts due to related
parties. 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 6)
in order to fund the Company's short-term working capital needs and to repay the
Company's debt obligation which was past due. 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 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
<PAGE>
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.
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.
<PAGE>
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 January 31, 1999 was $311,414 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.
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, as defined. 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 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 a $200,000
debenture 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 was converted into 1,406,593
shares of the Company's Common stock. The difference between the fair value of
the Common stock and the convertible debenture payable of $1,134,065 has been
recorded as an expense (included in selling, general and administrative
expenses) for the conversion preference on the debt. As noted above, as part of
this note agreement the Company is required to utilize $3,000,000 for the
redemption of 1,000,000 shares of the Company's common stock from an affiliate
of the noteholder. Since the redemption of the Company's Common stock was
completed as part of the $10,500,000 note payable transaction, the difference
between the buyback price and the fair value of the Company's Common stock of
$1,625,000 has been recorded as a debt discount. The fair value of the Company's
Common stock repurchased has been recorded as treasury 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. Since the redemption premium
was included as part of the $10,500,000 note payable transaction, the difference
between the redemption price and the carrying value of the Series B Preferred
stock of $960,537 has been recorded as a debt discount. Since these shares of
Series B Preferred stock are now subject to this redemption feature they have
been classified outside of stockholders equity in the accompanying balance
sheet. 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 (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. Since the redemption
premium was included as part of the $10,500,000 note payable transaction, the
difference between the redemption price and the carrying value of the Common
stock of $1,009,930 has been recorded as a debt discount. In addition, given
that these 553,386 shares of Common stock is now subject to this redemption
<PAGE>
feature they have been classified outside of stockholders equity in the
accompanying balance sheet. 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 fair value of these warrants totaling
$1,004,132 has been recorded as a debt discount. As part of the various
transactions and provisions included in this $10,500,000 note payable, a debt
discount of $4,599,599 has been recorded which will be amortized as interest
expense over the term of the note payable.
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>
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 Nine Months Ended
January 31 January 31
-------------------------------------------------------------------
1998 1999 1998 1999
-------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss available for Common stockholders per $ (1,537,309) $ (6,119,599) $ (5,579,543) $ (12,594,277)
statements of operations
Preferred stock dividends not declared -- 458,740 -- 1,371,233
------------ ------------- --------------- ---------------
Net loss available for Common stockholders used
for basic and diluted net loss per Common
share $ (1,537,309) $ (6,578,339) $ (5,579,543) $ (13,965,510)
--------------- ------------- --------------- ---------------
--------------- ------------- --------------- ---------------
Weighted average Common shares outstanding during
period 41,480,344 45,766,639 28,847,418 43,217,732
Dilutive effect of Common stock to be issued for
Preferred stock dividends not declared -- 458,740 -- 1,371,233
--------------- ------------- --------------- ---------------
Weighted average Common and Common equivalent
shares used for basic and diluted net loss
per Common share 41,480,344 46,225,379 28,847,418 44,588,965
--------------- ------------- --------------- ---------------
--------------- ------------- --------------- ---------------
</TABLE>
8. SUPPLEMENTAL CASH FLOW INFORMATION:
The following additional noncash investing and financing activities occurred:
<TABLE>
<CAPTION>
Nine Months Ended
January 31
--------------------------------------
1998 1999
-------------- -----------
<S> <C> <C>
Common stock issued for consulting services $ 1,509,070 $ 2,681,156
Common stock issued for purchase of property, plant and equipment 104,580 --
Common stock issued for business acquisition 3,585,000 --
Common stock issued for compost projects costs -- 280,936
Common stock issued for payment of liability 22,680 25,000
Common stock issued for Preferred stock dividends 217,822 1,410,086
Common stock issued with debt extension -- 270,000
Conversion of note payable into Common stock -- 752,459
Common stock options granted on sale of
Common stock -- 161,619
Common stock options granted for consulting services -- 168,383
Common stock options granted with debt issuance
or extension -- 1,036,154
</TABLE>
<PAGE>
9. 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 Nine Months Ended
January 31, January 31,
-----------------------------------------------------------------------
1998 1999 1998 1999
-------------- -------------- -------------- ----------
Interest Expense on Advances:
<S> <C> <C> <C> <C>
VRH Construction Corporation $ 115,694 $ 130,149 $ 354,257 $ 390,445
Select Acquisitions, Inc. 953 1,028 2,291 2,457
Foundation Systems, Inc. 1,960 2,250 5,513 6,334
President of the Company 1,265 3,884 3,225 8,019
President of EPIC -- -- -- 28,675
Construction Cost to Resource Reclamation,
Inc. and Ouster Corporation Capitalized in
Construction in Progress 191,452 620,00 465,264 1,625,000
Value of Common Stock Granted as Reimbursement
to Select Acquisitons, Inc. -- -- -- 755,000
Fees Related to Personal Guarantee to
President of EPIC -- 150,000 -- 625,000
Salary Deferred in Due to Related Parties
Account for Two Officers 77,500 116,250 232,500 330,000
Advances from President of the Company -- -- 25,000 121,000
Repayment of Advances from President of EPIC -- -- -- 1,676,189
</TABLE>
10. 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 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
<PAGE>
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 October
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 January 31, 1999 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.
PAYROLL TAXES
The Company is in arrears for prior and current year's payroll taxes to federal
and state taxing authorities of $265,164, of which $163,401 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.
<PAGE>
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.
<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 and nine months
ended January 31, 1999 and 1998 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 three and nine months ended January 31, 1999 may not be indicative of
results expected during the other quarters or for the entire fiscal year ending
April 30, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1998
For the three months ended January 31, 1999, total revenues were $4,948,256
compared to $4,610,289 for the three months ended January 31, 1998, an increase
of $337,967. The increase was attributable to a slight increase in tonnage
handled by the Company's wholly owned subsidiary, EPIC, which was acquired on
November 3, 1997.
For the three months ended January 31, 1999 total costs and expenses were
$9,451,961 compared to $5,112,927 for the three months ended January 31, 1998,
an increase of $4,339,034. The increase in total costs and expenses consists of
increases in operating expenses of $543,787, selling, general and administrative
expenses of $3,608,508, depreciation and amortization of $37,989 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
operation. These services were funded as required with cash, issuance of common
stock, issuance of common stock options or a combination of these funding
options. Included in selling, general and administrative expenses for the three
months ended January 31, 1999 is $1,150,940 related to a conversion preference
on certain of the Company's previously outstanding convertible notes payable. In
addition, the increase in selling, general and administrative expenses was
partially due to the operations of EPIC.
<PAGE>
Net interest expense for the three months ended January 31, 1999 was $1,974,691,
an increase of $1,497,869 from the three months ended January 31, 1998. Net
interest expense for the three months ended January 31, 1999 increased due to
additional interest expense, including amortization of debt discount and
deferred financing costs, related to an increase in the Company's debt to
finance its ongoing activities.
The Company recorded an income tax benefit of $1,697,848 for the three months
ended January 31, 1999 which reflects an effective tax rate of 26%. 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,
management has determined that it is more likely than not that this income tax
benefit will be realized in future periods. At January 31, 1999, the Company has
net operating loss carryforwards of approximately $22,000,000 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 three months ended January 31 1999, the Company recorded $676,428 in
Preferred Stock dividends, payable in common stock, as compared to $217,822 for
the three months ended January 31, 1998. During the three months ended January
31, 1999 the Company also recorded accretion on its Preferred Stock of $647,873
as compared to $340,027 for the three months ended January 31, 1998 related to a
mandatory redemption feature.
NINE MONTHS ENDED JANUARY 31, 1999 COMPARED TO NINE MONTHS ENDED JANUARY 31,
1998
For the nine months ended January 31, 1999, total revenues were $16,689,791
compared to $4,843,157 for the nine months ended January 31, 1998, an increase
of $11,846,634. The increase reflects a full nine months of operations as
compared to only three months of operations for the Company's wholly owned
subsidiary, EPIC, which was acquired on November 3, 1997.
For the nine months ended January 31, 1999 total costs and expenses were
$25,292,796 compared to $8,533,447 for the nine months ended January 31, 1998,
an increase of $16,759,349. The increase in total costs and expenses consists of
increases in operating expenses of $8,719,071, selling, general and
administrative expenses of $5,437,156, depreciation and amortization of
$2,156,872 and compensation for stock options of $446,250. These significant
increases are mainly attributable to a full nine months of operations as
compared to only three months of operations for the prior period of the
Company's wholly owned subsidiary EPIC. 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. Included in selling, general and administrative expenses for the nine
months ended January 31, 1999 is $1,150,940 related to a conversion preference
on certain of the Company's previously outstanding convertible notes payable. In
addition, the
<PAGE>
increase in selling, general and administrative expenses was partially due to
the operations of EPIC.
Net interest expense for the nine months ended January 31, 1999 was $3,866,070,
an increase of $2,534,666 from the nine months ended January 31, 1998. Net
interest expense for the nine months ended January 31, 1999 increased due to
additional interest expense, including amortization of debt discount and
deferred financing costs, related to an increase in the Company's debt to
finance its ongoing activities. The Company's debt obligations (including
amounts due to related parties and excluding restricted project bonds payable)
as of January 31, 1999 were $29,572,141 as compared to $22,384,347 as of January
31, 1998.
The Company recorded an income tax benefit of $3,328,093 for the nine months
ended January 31, 1999 which reflects an effective tax rate of 27%. 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,
management has determined that it is more likely than not that this income tax
benefit will be realized in future periods. At January 31, 1999, the Company has
net operating loss carryforwards of approximately $22,000,000 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 nine months ended January 31 1999, the Company recorded $1,560,898 in
Preferred Stock dividends, payable in common stock, as compared to $217,882 for
the nine months ended January 31, 1998. During the nine months ended January 31,
1999 the Company also recorded accretion on its Preferred Stock of $1,852,097 as
compared to $340,027 for the nine months ended January 31, 1998 related to a
mandatory redemption feature. These increases are due primarily to the fact that
the majority of the Preferred Stock was not granted until November 3, 1997.
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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
As of January 31, 1999, the Company has cash and cash equivalents of $954,643
and the Company has a working capital deficit of $14,954,293 and an accumulated
deficit of $36,015,229. Included in the working capital deficit is $4,368,018
for the current portion of long term debt and $7,717,780 for amounts due to
related parties. In addition, the Company has incurred losses since 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 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.
During the nine months ended January 31, 1999 the net cash used in operating
activities was $3,021,785 as compared with cash used in operating activities in
the prior year period of $3,816,170. The decrease in cash used in operating
activities for January 31, 1999 as compared with January 31,1998 is primarily
due to the decreases in accounts receivable and prepaid expenses, the operations
of EPIC, offset by the recording of the income tax benefit for the 1999 period.
During the nine months ended January 31, 1999 the Company utilized cash for
purchases of property, plant and equipment of $3,262,073. These purchases were
primarily related to capital expenditures for the Company's composting projects
in progress and for the EPIC subsidiary.
During the nine months ended January 31, 1999 the Company received net cash from
financing activities of $6,918,214. The cash was received from the sale of
common stock in the amount of $782,901 and net proceeds from long term debt
obligations of $9,438,988 (gross proceeds of $22,577,000 net of repayments of
$13,138,012). In addition the Company utilized cash of $3,303,675 for the
repurchase of treasury shares.
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.
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 January 31, 1999, the
Company issued 2,350,401 shares of its common stock
as follows:
<TABLE>
<CAPTION>
DATE # OF SHARES ISSUED TO FOR PRICE
- -------- ----------- ---------------- --------------- -----------
<S> <C> <C> <C> <C>
11/06/98 1,054,945 private investor note conversion $1.38/share
11/12/98 80,080 five investors exer. options $0.01/share
11/17/98 10,000 consultant services $1.00/share
11/17/98 100,000 consultant services $1.00/share
11/25/98 175,000 consultant services $0.85/share
12/02/98 300,000 private investor services $0.90/share
12/11/98 98,000 consultant services $0.75/share
01/06/99 50,000 consultant services $0.65/share
01/06/99 447,376 four investors dividends $0.65/share
01/11/99 35,000 vendor liability $0.71/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
<TABLE>
<S> <C>
Item 3. - Defaults Upon Senior Securities None
Item 4. - Submission of Matters to a Vote of Security Holders None
Item 5. - Other Information None
Item 6. - (a) Exhibits None
</TABLE>
(b) Reports on Form 8-K
1. A report on Form 8-K dated November 6, 1998 was
filed on November 19, 1998 to report the borrowing by
the Company of $10,500,000, and including various
credit and stock pledge agreements as exhibits. 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: March 17, 1999
COMPOST AMERICA HOLDING COMPANY, INC.
(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
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC.
SEC FILE NO. 0-2832
REPORT ON FORM 10-QSB FOR THE FISCAL QUARTER ENDED JANUARY 31, 1999
APPENDIX A
FINANCIAL DATE SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE UNAUDITED
FINANCIAL STATEMENTS OF COMPOST AMERICA HOLDING COMPANY, INC. FOR THE FISCAL
QUARTER ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
AS AT
ITEM NUMBER ITEM DESCRIPTION JANUARY 31, 1999
- ----------- ---------------- ----------------
<S> <C> <C>
5-02 (1) cash and cash items $ 954,643
5-02 (2) marketable securities 0
5-02 (3) (a) (1) notes and accounts receivable-trade 3,727,478
5-02 (4) allowances for doubtful accounts 117,422
5-02 (6) inventory 0
5-02 (9) total current assets 95,658,961
5-02 (13) property, plant and equipment 34,764,831
5-02 (14) accumulated depreciation 2,591,968
5-02 (18) total assets 160,195,709
5-02 (21) total current liabilities 110,613,254
5-02 (22) bonds, mortgages and similar debt 16,986,343
5-02 (28) preferred stock-mandatory redemption 13,629,092
5-02 (29) preferred stock-no mandatory redemption 2,500
5-02 (30) common stock 54,012,273
5-02 (31) other stockholders' equity ( 39,827,729)
5-02 (32) total liabilities and stockholders' equity $160,195,709
FOR THE
NINE MONTHS
ENDED
JANUARY 31, 1999
-----------------
5-03 (b) 1 (a) net sales of tangible products $ 16,689,791
5-03 (b) 1 total revenues 16,689,791
5-03 (b) 2 (a) cost of tangible goods sold 11,780,601
5-03 (b) 2 total costs and expenses applicable to
sales and revenues 11,780,601
5-03 (b) 3 other costs and expenses 13,512,195
5-03 (b) 5 provision for doubtful accounts and notes 0
5-03 (b) (8) interest and amortization of debt discount 3,866,070
5-03 (b) (10) income before taxes and other items ( 12,469,075)
5-03 (b) (11) income tax expense ( 3,328,093)
5-03 (b) (14) income/loss continuing operations ( 9,140,982)
5-03 (b) (15) discontinued operations 0
5-03 (b) (17) extraordinary items 0
5-03 (b) (18) cumulative effect-changes in accounting
principles 0
5-03 (b) (19) net income or loss ($ 9,181,282)
5-03 (b) (20) earnings per share-primary ($ 0.31)
5-03 (b) (21) earnings per share-diluted ($ 0.31)
</TABLE>
<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 JANUARY 31, 1999 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> JAN-31-1999
<CASH> $954,643
<SECURITIES> 0
<RECEIVABLES> 3,727,478
<ALLOWANCES> 117,422
<INVENTORY> 0
<CURRENT-ASSETS> 95,658,961
<PP&E> 34,764,831
<DEPRECIATION> 2,591,968
<TOTAL-ASSETS> 160,195,709
<CURRENT-LIABILITIES> 110,613,254
<BONDS> 16,986,343
13,629,092
2,500
<COMMON> 54,012,273
<OTHER-SE> (39,827,729)
<TOTAL-LIABILITY-AND-EQUITY> $160,195,709
<SALES> $16,689,791
<TOTAL-REVENUES> 16,689,791
<CGS> 11,780,601
<TOTAL-COSTS> 11,780,601
<OTHER-EXPENSES> 13,512,195
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,866,070
<INCOME-PRETAX> (12,469,075)
<INCOME-TAX> (3,328,093)
<INCOME-CONTINUING> (9,140,982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ($9,181,282)
<EPS-PRIMARY> ($0.31)
<EPS-DILUTED> ($0.31)
</TABLE>
