<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 October 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 charter)
New Jersey 22-2603175
- ---------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Gateway Center, 25th floor Newark, New Jersey 07102
- --------------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
Issuers's telephone number, including area code: (973) 297-5400
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 - 55,452,489 shares outstanding
as at January 31, 2000.
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
October 31, 1999
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 627,121
Accounts receivable, net of allowance for
doubtful accounts of $117,422 6,679,753
Prepaid expenses and other assets 1,137,016
------------
Total current assets 8,443,890
------------
Property, plant and equipment, net 21,577,755
------------
Other assets
Customer contract rights, net 25,574,407
Other intangible assets, net 1,133,020
Other assets 91,933
------------
Total other assets 26,799,360
------------
$ 56,821,005
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Short-term debt $ 553,848
Long-term debt, current portion 19,730,219
Due to related parties 9,963,321
Accounts payable 6,472,671
Accrued expenses 4,470,156
------------
Total current liabilities 41,190,215
------------
Long-term debt 6,182,642
See accompanying notes to consolidated financial statements
F-1
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
October 31, 1999
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT (CONTINUED)
Redeemable Preferred and Common stock, no par value
Series A, 169,000 shares authorized, issued,
and outstanding (liquidation value of $17,155,000) $ 7,335,559
Series B, 400,000 shares authorized, issued,
and outstanding (liquidation value of $1,240,000) 1,240,000
Series C, 91,000 shares authorized, issued,
and outstanding (liqiuidation value of $12,171,562) 4,611,316
Series D, 8,771 shares authorized, issued,
and outstanding (liquidation value of $877,100) 387,018
Redeemable common stock, no par value; 553,386 shares issued
and outstanding (liquidation value of $1,770,836) 1,770,836
-------------
Total redeemable Preferred and Common stock 15,344,729
=============
Stockholders' equity (deficit)
Preferred stock, no par value; 25,000,000 shares authorized Preferred 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;
55,397,114 shares issued and outstanding 45,005,321
Additional paid-in capital 14,127,222
Common stock to be issued, no par value; 1,275,000 shares
issued and outstanding 255,000
Accumulated deficit (62,076,624)
Deferred compensation (1,785,000)
Treasury stock, 1,150,000 common shares, at cost (1,425,000)
-------------
Total stockholders' capital (5,896,531)
-------------
$ 56,821,005
=============
See accompanying notes to consolidated financial statements
F-2
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 7,020,402 $ 6,091,272 $ 13,465,864 $ 11,741,535
------------- ------------- ------------- -------------
Cost and expenses
Operating 4,929,893 4,043,426 9,354,433 8,197,390
Selling, general and administrative 1,523,397 3,053,014 2,844,044 5,112,468
Depreciation and amortization 1,079,329 1,112,124 2,324,147 2,233,477
Compensation for stock options 148,750 148,750 297,500 297,500
------------- ------------- ------------- -------------
7,681,369 8,357,314 14,820,124 15,840,835
------------- ------------- ------------- -------------
Operating loss (660,967) (2,266,042) (1,354,260) (4,099,300)
------------- ------------- ------------- -------------
Other income (expense)
Interest expense (859,304) (897,778) (2,446,806) (1,891,379)
Interest income 719,970
Loss in equity in joint venture (12,300) (25,550)
------------- ------------- ------------- -------------
Loss before income tax (expense)
benefit (1,520,271) (3,176,120) (3,081,096) (6,016,229)
Income tax (expense) benefit (339) 709,787 (146,724) 1,630,245
============= ============= ============= =============
Net loss (1,520,610) (2,466,333) (3,227,820) (4,385,984)
Preferred stock dividends (2,864,622) (384,371) (3,177,219) (884,470)
Accretion on preferred stock (717,175) (616,816) (1,399,666) (1,204,224)
------------- ------------- ------------- -------------
Net loss available to common
stockholders $ (5,102,407) $ (3,467,520) $ (7,804,705) $ (6,474,678)
============= ============= ============= =============
Net loss per common share
Basic $ (0.10) $ (0.09) $ (0.16) $ (0.17)
============= ============= ============= =============
Diluted $ (0.10) $ (0.09) $ (0.16) $ (0.17)
============= ============= ============= =============
</TABLE>
F-3
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended October 31,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,227,820) $ (4,385,984)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 1,182,120 2,475,081
Depreciation 1,142,027
Deferred compensation 297,500 297,500
Deferred income taxes (1,630,245)
Loss in equity in joint venture 25,550
Stock issued for professional services 15,081 2,302,618
Stock options issued for services 53,883
Settlement of note payable
Non-cash interest 314,416
Increase (decrease) in cash and cash equivalents attributable
to changes in operating assets and liabilities:
Restricted cash (561,000)
Accounts receivable, net (1,239,613) (1,608,999)
Other assets 162,476
Prepaid expenses and other current assets (624,151) 58,722
Accounts payable 1,432,937 1,724,832
Accrued expenses (614,000)
Due to related parties 87,500 897,303
------------- -------------
Net cash used in operating activites (1,071,527) (350,739)
------------- -------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (196,353) (2,113,152)
------------- -------------
Net cash used in investing activities (196,353) (2,113,152)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 1,500,000 10,450,000
Advances from (repayments to) related parties, net 1,235,000 (628,718)
Repayment of notes payable (90,000)
Repayment of long-term debt (1,139,009) (7,441,626)
Proceeds from sale of Common stock, net 782,101
------------- -------------
Net cash provided by financing activities 1,595,991 3,071,757
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 328,111 607,866
CASH AND CASH EQUIVALENTS, beginning of period 299,010 388,956
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 627,121 $ 996,822
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended October 31,
1999 1998
------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
cash paid during the period for interest $ 1,323,921 $ 436,852
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued for consulting services 31,800 2,302,618
Common stock issued for compost projects costs 207,436
Common stock issued for payment of liability
Common stock issued for Preferred stock dividends 3,177,219 733,658
Conversion of not payable into Common stock 362,548 152,459
Common stock options granted on sale of Common stock 161,619
Common stock options granted for consulting services 53,883
Accretion of Preferred stock 1,399,666 884,470
Redemption of Series D Preferred stock
for investment in joint venture 872,886
Repayment of restricted project bonds payable 91,370,763
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Operations
Compost America Holding Company, Inc. (the Company), formerly
known as Alcor Energy and Recycling Systems, Inc. was incorporated
in New Jersey. The Company's initial business plan was to
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 into a peat moss like product
with agronomic benefits. The Company's first two development
projects were to be fully-enclosed composting facilities in
Newark, New Jersey and Dade County, Florida. These development
projects have been altered or delayed due to various situations.
The Newark, New Jersey composting facility project had to be
abandoned due to the Company's inability to remarket New Jersey
Economic Development Authority municipal bonds and lack of
necessary capital. The Company is currently pursuing alternative
uses which would involve using part of the land for a waste
transfer station and leasing the remainder of the land. The Dade
County, Florida composting facility project has been delayed due
to the pending lawsuit between one of the Company's subsidiaries
and the City of Miami. Management believes that the litigation
will prove successful for the Company which would allow for the
continuance of the development of a composting facility. If the
pending litigation does not force adherence to the Company's
contract with the City of Miami, other authorities will be sought
after by the Company.
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 years ended October 31, 1999 and 1998 were generated by
EPIC.
NOTE 2 - Liquidity
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As of October 31, 1999, the Company had a working capital
deficit of $32,746,325, an accumulated deficit of $62,076,624 and
a stockholders' deficiency of $5,896,581. In addition, as of
October 31, 1999, the Company was not in compliance with a
majority of its long-term debt agreements. In addition, the Series
A and Series C Preferred stockholders have certain rights to
exchange their shares of the Company's Preferred and Common stock
of the Common stock of EPIC. 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. In addition, the Newark, New Jersey
composting project has been abandoned due to the inability to
secure the necessary permits and approvals, the inability to
re-market tax free municipal bonds which were issued by The New
Jersey Economic Development Authority and due to the Company's
inability to secure the necessary capital to proceed. The Company
is presently pursuing alternative uses for the Newark site,
primarily a waste transfer station.
F-6
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Liquidity (Continued)
In August 1999, the Company has executed a letter of intent to
sell its wholly-owned subsidiary EPIC to meet its obligations,
complete pending projects and continue as a going concern.
In the event of a sale of EPIC, under the terms presently
contemplated, the Series A and Series C Preferred shareholders
have indicated that no portion of the Series A and Series C
Preferred Stock will be redeemed. Simultaneous to the sale, the
Series A and Series C Preferred shareholders will waive their
right to exchange various securities for the stock of EPIC.
There is no assurance that the Company will be able to obtain
sufficient debt or equity financing on favorable terms if at all
or that the EPIC sale will be completed in a timely manner, if at
all, or on terms acceptable to the Company. If the Company is
unable to secure additional financing, attain future profitable
operations, and complete the EPIC sale, 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. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 3 - Risk and Uncertainties:
The Company has elements of 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, nor a transfer station, 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
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.
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.
F-7
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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,
1999. The results of operations for the interim periods presented
are not necessarily indicative of the results for the full year.
NOTE 5 - Net Loss Per Common Share
Earnings (loss) per common shares is based on the weighted average
number of common shares outstanding.
The Company complies with Statement of Financial Accounting
Standards ("SFAS") 128, "Earnings Per Share", which requires dual
presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average
common shares outstanding for the year. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net loss available for Common
stockholders per statements
of operations $ (5,102,407) $ (3,467,520) $ (7,804,705) $ (6,474,678)
Preferred stock dividends
not declared (182,000) (458,740) (364,000) (912,493)
------------ ------------ ------------ ------------
Net loss available for Common
stockholders used for basic
and diluted net loss per
Common share $ (5,284,407) $ (3,926,260) $ (8,168,705) $ (7,387,171)
============ ============ ============ ============
Weighted average Common
shares outstanding during
period 52,335,406 43,135,600 51,676,255 41,943,279
Dilutive effect of Common
stock to be issued for
Preferred stock dividends
not declared 1,564,422 194,926 1,066,782 345,175
------------ ------------ ------------ ------------
Weighted average Common
and Common equivalent shares
used for basic and diluted
net loss per Common share 53,899,828 43,330,526 52,743,037 42,288,454
============ ============ ============ ============
</TABLE>
F-8
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-term Debt
Through October 31, 1999, the Company has issued notes payable to
a certain party aggregating $1,500,000. The notes payable bear
interest at 10% and are due upon the sale of EPIC In the event
that the EPIC sale is not consummated, the note is collateralized
by the Miami property.
NOTE 7 - Restricted Project Bonds Payable
On December 30, 1997, the New Jersey Economic Development
Authority (the Authority), issued $90,000,000 of Solid Waste
Disposal Facility Revenue Bonds (the Bonds) to finance the costs
of constructing the Company's Newark, New Jersey composting
project. The Bonds were issued with an initial term ending on the
earlier of December 15, 1998 or such earlier date as permitted
under the Bond Agreement and bore interest at a rate of 3.95% per
annum during the initial term.
On December 15, 1998, the Bonds were remarketed with an initial
term ending on the earlier of June 15, 1999 or such earlier date
as permitted under the Bond Agreement and bore interest at a rate
of 3.0% per annum during the initial term. During the initial
terms, a trustee held the $90,000,000 plus the interest earned.
On June 15, 1999, the Company elected not to remarket the bonds.
Accordingly, the escrowed funds were repaid to the bondholders.
NOTE 8 - Redeemable Preferred Stock
In July 1999, the holders of Series D Preferred (i) provided
$225,000 to the Company; (ii) exchanged 8,729 shares of their
Series D Preferred Stock in the Company for the Company's 28.72%
equity interest in American Marine Rail, LLC (AMR); and (iii) gave
up their AMR Option as discussed in Section 9 of the Series D
Certificates of Designation. The holders of Series D Preferred
then granted an option to the Company, which option expires on
March 31, 2000, to repurchase the 28.72% equity interest in AMR
for a cash payment of $1,750,000, less any future payments made to
AMR by the Company, up to $400,000. As of October 31, 1999, the
Company has advanced $29,173 to AMR.
F-9
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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>
October 31, October 31,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense on advances:
VRH Construction Corporation $ 143,163 $ 130,148 $ 286,326 $ 260,296
Select Acquisitons, Inc. 6,032 1,028 12,063 1,429
Foundation Systems, Inc. 2,894 2,250 5,658 4,084
President of the Company 2,735 3,585 5,275 4,135
President of EPIC 9,000 17,600 28,675
Wasteco 30,890 60,514
Construction cost to Resource
Reclamation, Inc. and Ouster
Corporation capitalized in
construction in progress 505,000 1,005,000
Fees to Ouster 300,000
Value of Common stock granted as
reimbursement to Select Acquisitions,
Inc. 755,000 755,000
Fees related to personal guarantee
to President of EPIC
period 76,784 225,000 126,784 475,000
Salary deferred to due to related parties
account for two officers 106,875 35,000 213,750
Advances from President of the
Company 36,000 121,000
Advances from President of EPIC 360,000
Repayment of advances from VRH 75,000
Advances from Wasteco 125,000 1,250,000
Repayment of advances from
President of EPIC 36,000 1,676,189
</TABLE>
NOTE 10 - Contingencies
The Company, along with the Company's wholly-owned subsidiary,
EPIC and the Company's former President, have been named as
defendants in the Superior Court of New Jersey, Law Division,
Essex Vicinage in an action brought against it by unrelated
parties (the "Plaintiffs"). In the action, the Plaintiffs seek
recovery of approximately $3 million claimed due under a
consulting agreement and amendments thereto (the "Agreement"),
together with interest, attorneys' fees and costs of suit and
related relief. The Plaintiffs' claims are based upon breach of
contract, fraud, misrepresentation and quantum meruit. The
Plaintiffs claim that the Agreement, executed on the Company's
behalf by its former President, entitles the Plaintiffs to a
"success fee" in the amount claimed due, arising from the
performance by EPIC of a 15 year municipal waste disposal contract
with the City of New York. In December 1999, the Company reached a
tentative settlement (see Note 11).
F-10
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Contingencies (Continued)
The Company has been named as a defendant in the Superior Court of
New Jersey, Law Division, Essex Vicinage in an action brought
against it by its former President. The former President seeks (i)
damages for alleged accrued salary of $1.5 million under an
employment agreement with interest and loans claimed due from the
Company of approximately $265,000 with interest, (ii) the award of
930,000 "replacement shares" of the Company's stock, (iii) an
accounting for the disbursement of Company funds during the period
January 1, 1999 to present, (iv) damages resulting from the
Company's alleged bad faith in dealing with the former President
and (v) related relief. At October 31, 1999, the Company has
recorded approximately $1,066,000 in connection with item (i),
which consists primarily of his compensation through October 31,
1999.
The Company has filed an answer, affirmative defenses and
counterclaims against the former President. The Company's legal
counsel has indicated that the ultimate outcome of this litigation
cannot presently be determined. Accordingly, no further provision
for liability to the Company that may result upon adjudication has
been made in the accompanying consolidated financial statements.
The parties are currently negotiating for the settlement of these
claims. An unfavorable outcome of this matter could have a
material adverse effect on the Company's consolidated financial
position, results of operations and cash flows and its ability to
continue as a going concern.
The Company is in dispute with a member of its Board of Directors
and Audit Committee (hereinafter referred to as the "Board
Member"). The Board Member claims that the Company owes him and
Select Acquisitions, Inc. ("Select"), a company of which the Board
Member is President, amounts substantially in excess of amounts
recorded in the accompanying consolidated financial statements.
Specifically, the Board Member claims the Company owes Select
408,640 shares of the Company's registered common stock and
$308,073 in cash plus accrued interest and that the Company owes
the Board Member 1,000,000 shares of the Company's registered
common stock, options to purchase 300,000 shares of the Company's
registered common stock and $1,680,000 in cash. Of the $308,073
which the Board Member asserts is owed to Select, $210,000 is
claimed as consulting fees for the period between January 1994 and
June 1996, while the remaining $98,073 relates to loans made to
the Company in 1995 and 1996. The Board Member claims for himself
$870,000 in consulting fees for the period between July 1996 and
July 1999 and $810,000 in closing fees, related to certain Company
transactions which closed between November 1997 and November 1998.
The Board Member indicates that the 408,640 shares of the
Company's registered common stock claimed on behalf of Select
allegedly were transferred by Select in order to facilitate a
November 1997 Company transaction closing. The Board Member also
claims that the options to purchase 300,000 shares of the
Company's registered common stock at $.01 per share were due him
as a board member in connection with the closing of a November
1997 Company transaction. Finally, the Board Member claims the
1,000,000 shares of the Company's registered common stock as an
equity bonus. These claims are based upon alleged agreements
entered into between the Board Member and the former President of
the Company.
At October 31, 1999, the Company has recorded approximately
$188,000 in notes and accrued interest to Select.
F-11
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Contingencies (Continued)
The Company's legal counsel has indicated and the Company's
management believes that (i) the Company's records do not reflect
any approval (or even discussion) by the Company's Board of
Directors of any consulting, employment or other agreement which
would support the Board Member's claims (except for loans payable
to Select in an amount less than $150,000); (ii) there is no
documentation in the closing binders and official transcripts of
the Company transactions referenced by the Board Member that would
support the Board Member's and/or Select's claims for closing
fees, stock options or shares of the Company's registered Common
stock in connection with any of the transactions for which the
Board Member is claiming consideration is owed and (iii) the
absence of notice by the Board Member as well as lack of any
performance standards by which to judge his work for the Company
as an employee or a consultant would appear to seriously undermine
any quantum meruit claim by the Board Member. Accordingly, based
upon the assessment of the claims by the Company's legal counsel
and management, no further provision for liability of the Company
that may result upon adjudication has been made in the
accompanying consolidated financial statements. An unfavorable
outcome to this matter could have a material adverse effect on the
Company's consolidated financial position, results of operations,
cash flows and its ability to continue as a going concern.
During the year ended April 30, 1999, Select transferred 800,000
shares of its proprietary holdings of Common stock on behalf of
the Company to certain parties (including 665,000 shares to an
affiliate of the $10.5 million noteholder. These shares were
reimbursed to Select during the year ended April 30, 1999.
As a result of the Company's deteriorated financial condition, the
Company is the subject of several other threatened, and certain
actual, legal actions for nonpayment of obligations. The ultimate
liabilities in these matters are not known and the vendors, in
some cases, may seek damages in excess of amounts recorded in the
accompanying consolidated financial statements. The Company
believes, but no assurance can be made, that its liability will
not exceed amounts recorded in the accompanying consolidated
financial statements.
NOTE 11 - Subsequent Events
In November 1999, EPIC received waiver on all current defaults of
a certain debt obligation.
In December 1999, the Series A Preferred shareholders signed an
agreement stating that prior to May 2000 they will not exercise
their EIPC option to the extent that such exercise would result
in, or increase, a stockholders' deficiency after giving effect to
the transaction.
In December 1999, the Company settled an action brought against it
by unrelated parties for $853,000 to be made in a lump sum payment
upon the earlier of the sale of EPIC or April 15, 2000.
In December 1999, the Company entered into a Modification of
Contract and Settlement Agreement with RRS whereby the Company
will pay RRS $425,000 to terminate certain provisions made in the
previous contract which relates to future services RRS was to
provide to the Company.
Since April 30, 1999, the Company has received loans aggregating
approximately $3.7 million from shareholders and existing
creditors. Additionally, since April 30, 1999, the Company has
issued approximately 8.5 million shares of its Common stock
primarily for payment of dividends on Preferred stock.
F-12
<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, 1999 (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 six
months ended October 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 six months ended October 31, 1999 may not be
indicative of results expected during the other quarters or for the entire
fiscal year ended April 30, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1998
For the three months ended October 31, 1999, total revenues were $7,020,402
compared to $6,091,272 for the three months ended October 31, 1998, an increase
of $929,130. The increase is attributable to the revenues of the Company's
wholly owned subsidiary, Environmental Protecton & Improvement Company, Inc.
(`EPIC'). For the three months ended October 31, 1999 total costs and expenses
were $7,681,369 compared to $8,357,314 for the three months ended October 31,
1998, a decrease of $675,945. The decrease in total costs and expenses consists
primarily of a decrease in selling, general and administrative expenses of
$1,529,617, offset by an increase in operating expenses of $886,467. The
increase in operating expenses is attributable to the increase in revenues of
EPIC. The decrease in selling, general and administrative expenses was due
primarily to a reduction in the costs associated with existing projects.
<PAGE>
Net interest expense for the three months ended October 31, 1999 was
$859,304, a decrease of $38,474 from the three months ended October 31, 1998.
Net interest expense for the three months ended October 31, 1999 decreased
primarily due to the amortization of deferred finance costs associated with the
Newark bond which previously had been charged to interest expense. These costs
were fully expensed as of June 1999.
The Company recorded an Income Tax expense of $339 for the quarter
ended October 31, 1999, as compared to an income tax benefit of $709,787 for the
quarter ended October 31, 1998. The income tax expense primarily is the result
of the Company's subsidiary EPIC having state taxable income. Certain items that
are deductible for financial reporting are not deductible for income tax
reporting. The Company files consolidated Federal Tax returns for which the
carry-forward losses and current losses exceed any non-deductible items. The
Company has not recorded any income tax benefit for the quarter ended October
31, 1999. Management, at this time, cannot determine the probability if this
income tax benefit will be realized in future periods. At October 31, 1999, the
Company has significant net operating loss carry-forwards in excess of
$46,000,000, which begin to expire in 2008. The Tax Reform Act of 1986 contains
provisions that may limit the net operating loss carry-forwards available to be
used in any given year in the event of significant changes in ownership.
During the three months ended October 31 1999, the Company recorded
$2,864,622 in dividends, payable in common stock, relating to its issued
redeemable Preferred Stock, as compared to $384,371 for the three months ended
October 31, 1998. The increase of $2,480,251 primarily is due to the payment of
dividends to holders of the Company's Series C Preferred shares. During the
three months ended October 31, 1999 the Company also recorded accretion on its
Preferred Stock of $717,175 related to a mandatory redemption feature, as
compared to $616,816 for the three months ended October 31, 1998. This increase
of $100,359 is due to the normal process of accretion to redemption value of the
Redeemable Preferred Stock.
SIX MONTHS ENDED OCTOBER 31, 1999 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1998
For the six months ended October 31, 1999, total revenues were $13,465,864
compared to $11,741,535 for the six months ended October 31, 1998, an increase
of $1,724,329. The increases are attributable to the sales by the Company's
wholly owned subsidiary, EPIC. For the six months ended October 31, 1999 total
2
<PAGE>
costs and expenses were $14,820,124 compared to $15,840,835 for the six months
ended October 31, 1998, a decrease of $1,020,711. This decrease in total costs
and expenses consists of an increase in operating expenses of $1,157,043 and a
decrease in selling, general and administrative expenses of $2,268,424. The
increase in operating expenses was due to the increase in revenues. The decrease
in selling, general and administrative expenses was due primarily to a reduction
in the cost associated with existing projects.
Net interest expense for the six months ended October 31, 1999 was
$1,726,836, a decrease of $164,543 from the six months ended October 31, 1998.
Net interest expense for the six months ended October 31, 1998 decreased due to
notes payable which were converted into common stock of the Company, and the
amortization of deferred finance costs associated with the Newark bond which
previously had been charged to interest expense. These costs were fully expensed
as of June 1999. The Company's long term debt obligations (including amounts due
to related parties) as of October 31, 1999 were $35,876,182 as compared to
$27,202,743 as of October 31, 1998.
During the six months ended October 31, 1999, the Company recorded
$3,177,219 in dividends, payable in common stock, relating to its issued
redeemable Preferred Stock, as compared to $884,470 for the six months ended
October 31, 1998. The increase of $2,292,749 primarily is due to the payment of
dividends to the holders of the Company's Series C Preferred shares. During the
six months ended October 31, 1999 the Company also recorded accretion on its
Preferred Stock of $1,399,666 related to a mandatory redemption feature, as
compared to $1,204,224 for the six months ended October 31, 1998. The increase
of $195,442 is due to the normal process of accretion to redemption value of the
Redeemable Preferred Stock.
The Company recorded an Income Tax expense of $146,724 for the six
months ended October 31, 1999, as compared to an income tax benefit of
$1,630,245 for the six months ended October 31, 1998. The income tax expense
primarily is the result of the Company's subsidiary EPIC having state taxable
income. Certain items that are deductible for financial reporting are not
deductible for income tax reporting. The Company files consolidated Federal Tax
returns for which the carry-forward losses and current losses exceed any
non-deductible items. The Company has not recorded any income tax benefit for
the six months ended October 31, 1999. Management, at this time, cannot
determine the probability if this income tax benefit will be realized in future
periods. At October 31, 1999, the Company has significant net operating loss
carry-forwards in excess of $46,000,000, which begin to expire in 2008. The Tax
Reform Act of 1986 contains provisions that may limit the net operating loss
carry-forwards available to be used in any given year in the event of
significant changes in ownership.
3
<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 October 31, 1999, the Company has cash and cash equivalents of
$627,121 and the Company has a working capital deficit of $32,746,325 and an
accumulated deficit of $62,076,624. Included in the working capital deficit is
$19,730,219 for the current portion of long term debt and $9,963,321 for amounts
due to related parties. 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. 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.
4
<PAGE>
During the six months ended October 31, 1999 the net cash used in operating
activities was $1,071,527 as compared with cash used in operating activities in
the prior year period of $350,739. The increase in cash used in operating
activities for October 31, 1999 as compared with October 31, 1998 is primarily
due to the Company's increased costs attributable to payroll, legal and
consulting expenses, thus using available cash to pay operating expenses, as
opposed to development costs.
During the six months ended October 31, 1999 the Company utilized cash for
purchases of property, plant and equipment of $196,353, as compared to purchases
of $2,113,152 during the six months ended October 31, 1998. The decrease of
$1,916,799 primarily is due to the inactive status of the Company's development
projects during this period.
During the six months ended October 31, 1999 the Company received net cash
from financing activities of $1,595,991. The cash was received from the net
proceeds from long term debt obligations of $360,991 (gross proceeds of
$1,500,000 net of repayments of $1,139,009) and net advances from related
parties of $1,235,000.
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.
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,
5
<PAGE>
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.
6
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings None not Previously
Reported
Item 2. - Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) During the fiscal quarter ended October 31, 1999, the
Company issued 6,123,416 shares of its common stock as follows:
Date # of Shares Issued To For Price
- ---- ----------- --------- --- -----
08/09/99 1,572,093 two investors dividend $0.43/share
08/09/99 4,471,323 two investors dividend $0.61/share
08/09/99 50,000 consultant services $0.26/share
10/29/99 30,000 three noteholders extension $0.19/share
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
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
(b) Reports on Form 8-K
1. A report on Form 8-K dated August 24, 1999
was filed on September 7, 1999 to report
that the Company's Board of Directors (1)
had accepted the resignation of Goldman,
Sachs & Co. from its role as financial
advisor and underwriter to the Company, and
(2) had voted to terminate for cause
<PAGE>
the Second Amended Employment Agreement of
Roger E. Tuttle.
2. A report on Form 8-K dated September 8, 1999
was filed on September 14, 1999 to report
that Arthur Andersen LLP, Certified Public
Accountants had resigned as the Company's
independent public accountants, and that the
Company had engaged Rothstein, Kass &
Company, P.C. as its new independent public
accountants. An amendment to this report on
Form 8-K, prepared on Form 8-K/A, was filed
on September 23, 1999 filing the letter from
Arthur Andersen LLP required by Section 304
of Regulation S-B.
<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.
March 20, 2000 (Registrant)
By /s/ Marvin Roseman
------------------------
Marvin Roseman, Co-Principal
Executive Officer, Principal
Financial Officer
By /s/ Anthony P. Cipollone
------------------------
Anthony P. Cipollone, Controller,
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF COMPOST AMERICA HOLDING COMPANY, INC. FOR THE FISCAL QUARTER ENDED
OCTOBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 627,121
<SECURITIES> 0
<RECEIVABLES> 6,797,175
<ALLOWANCES> 117,422
<INVENTORY> 0
<CURRENT-ASSETS> 8,443,890
<PP&E> 26,359,943
<DEPRECIATION> 4,782,188
<TOTAL-ASSETS> 56,821,005
<CURRENT-LIABILITIES> 41,190,215
<BONDS> 6,182,642
13,573,893
2,500
<COMMON> 61,158,379
<OTHER-SE> (65,286,624)
<TOTAL-LIABILITY-AND-EQUITY> 56,821,005
<SALES> 13,465,864
<TOTAL-REVENUES> 13,465,864
<CGS> 9,354,433
<TOTAL-COSTS> 9,354,433
<OTHER-EXPENSES> 5,465,691
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,446,806
<INCOME-PRETAX> (3,081,096)
<INCOME-TAX> 146,724
<INCOME-CONTINUING> (3,081,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (3,081,096)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
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