<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, 2000
[ ] 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 - 58,665,228 shares outstanding
as at February 29, 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
January 31, 2000
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets
Cash and cash equivalents $ 1,174,252
Accounts receivable, net of allowance for doubtful accounts of $117,422 5,251,611
Prepaid expenses and other assets 1,151,768
-----------
Total current assets 7,577,631
-----------
Property, plant and equipment, net 21,154,291
-----------
Other assets
Customer contract rights, net 25,078,110
Other intangible assets, net 1,124,530
Other assets 30,615
-----------
Total other assets 26,233,255
-----------
$54,965,177
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Short-term debt $ 566,192
Long-term debt, current portion 19,944,894
Due to related parties 11,148,613
Accounts payable 5,515,702
Accrued expenses 6,844,507
-----------
Total current liabilities 44,019,908
-----------
Long-term debt 5,706,533
</TABLE>
See accompanying notes to consolidated financial statements
F-1
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
January 31, 2000
(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 $17,576,000) 7,648,617
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 $9,464,000) 5,035,958
Series D, 8,771 shares authorized, issued,
and outstanding (liquidation value of $912,184) 403,146
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 16,098,557
-----------
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;
54,898,103 shares issued and outstanding 45,013,151
Additional paid-in capital 14,127,222
Accumulated deficit (66,941,444)
Deferred compensation (1,636,250)
Treasury stock, 1,150,000 common shares, at cost (1,425,000)
-----------
Total stockholders' capital (10,859,821)
-----------
$ 54,965,177
===========
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 Nine Months Ended
January 31, January 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 5,821,300 $ 4,948,256 $ 19,287,164 $ 16,689,791
------------ ------------ ------------ ------------
Cost and expenses
Operating 3,905,367 3,583,211 13,259,800 11,780,601
Selling, general and administrative 2,913,309 4,724,193 5,757,353 9,836,661
Depreciation and amortization 1,068,237 995,807 3,392,384 3,229,284
Compensation for stock options 148,750 148,750 446,250 446,250
------------ ------------ ------------ ------------
8,035,663 9,451,961 22,855,787 25,292,796
------------ ------------ ------------ ------------
Operating loss (2,214,363) (4,503,705) (3,568,623) (8,603,005)
Other income (expense)
Interest expense (1,076,506) (2,756,566) (3,523,312) (6,425,445)
Interest income 781,875 719,970 2,559,375
Loss in equity in joint venture (14,750) (40,300)
------------ ------------ ------------ ------------
Loss before income tax (expense)
benefit (3,290,869) (6,493,146) (6,371,965) (12,509,375)
Income tax (expense) benefit 1,697,848 (146,763) 3,328,093
------------ ------------ ------------ ------------
Net loss (3,290,869) (4,795,298) (6,518,728) (9,181,282)
Preferred stock dividends (820,084) (676,428) (3,997,303) (1,560,898)
Accretion on preferred stock (753,828) (647,873) (2,153,494) (1,852,097)
------------ ------------ ------------ ------------
Net loss available to common
stockholders $ (4,864,781) $ (6,119,599) $(12,669,525) $(12,594,277)
============ ============ ============ ============
Net loss per common share
Basic $ (.09) $ (0.14) $ (.24) $ (0.31)
============ ============ ============ ============
Diluted $ (.09) $ (0.14) $ (.24) $ (0.31)
============ ============ ============ ============
</TABLE>
F-3
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,518,728) $ (9,181,282)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,392,384 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 446,250 446,250
Deferred income taxes (3,393,473)
Loss in equity in joint venture 40,300
Stock issued for professional services 22,911 2,681,156
Stock options issued for services 168,383
Non-cash interest 590,767
Increase (decrease) in cash and cash equivalents attributable
to changes in operating assets and liabilities:
Restricted cash (311,414)
Accounts receivable, net 188,529 (682,029)
Prepaid expenses and other current assets (638,903)
Other assets 223,794 35,718
Accounts payable 475,968 1,552,067
Accrued expenses 685,267 (201,090)
Due to related parties 503,785
------------ ------------
Net cash used in operating activites (627,976) (3,021,785)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (336,339) (3,262,073)
Advances to joint venture (68,669)
------------ ------------
Net cash used in investing activities (336,339) (3,330,742)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 1,500,000 22,077,000
Advances from (repayments to) related parties, net 1,740,000 (1,291,577)
Proceeds from notes payable 500,000
Repayment of long-term debt (1,400,443) (11,756,435)
Repayment of notes payable (90,000)
Purchase of treasury shares (3,303,675)
Proceeds from sale of Common stock, net 782,901
------------ ------------
Net cash provided by financing activities 1,839,557 6,918,214
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 875,242 565,687
CASH AND CASH EQUIVALENTS, beginning of period 299,010 388,956
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,174,252 $ 954,643
============ ============
</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>
Nine Months Ended January 31,
2000 1999
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,312,293 $ 651,665
=========== ===========
Cash paid for income taxes $ 146,763 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued for consulting services 31,800 2,681,156
Common stock issued for compost projects costs -- 280,936
Common stock issued for payment of liability -- 25,000
Common stock issued for preferred stock dividends 2,922,219 1,410,086
Common stock issued with debt extension -- 270,000
Conversion of notes payable into common stock 362,548 752,459
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
Accretion of preferred stock 2,153,494 1,852,097
Accrued dividends 1,075,084 --
Redemption of series D preferred stock
for investment in joint venture 872,886 --
Repayment of restricted project bonds payable 91,370,763 --
</TABLE>
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 periods ended
January 31, 2000 and 1999 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
January 31, 2000, the Company had a working capital deficit of
$36,442,277, an accumulated deficit of $66,941,444 and a stockholders'
deficiency of $10,859,821. In addition, as of January 31, 2000, 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 for 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. The Company anticipates a favorable outcome in the above
mentioned litigation which could be a significant source of capital.
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 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 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. 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 Nine Months Ended
January 31, January 31,
---------------------------------- --------------------------------------
2000 1999 2000 1999
---------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net loss available for Common
stockholders per statements
of operations $ (4,864,781) $ (6,119,599) $ (12,669,525) $ (12,594,277)
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 $ (4,864,781) $ (6,578,339) $ (12,669,525) $ (11,223,044)
============ ============ ============= =============
Weighted average Common
shares outstanding during
period 55,442,440 45,766,639 52,939,968 43,217,732
Dilutive effect of Common
stock to be issued for
Preferred stock dividends
not declared 458,740 429,282 1,371,233
------------ ------------ ------------- -------------
Weighted average Common
and Common equivalent shares
used for basic and diluted
net loss per Common share 55,442,440 46,225,379 53,369,250 44,588,965
============ ============ ============= =============
</TABLE>
F-8
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. Long-term Debt
Through January 31, 2000, 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. The note is presently
secured by a subordinated lien on the EPIC stock.
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.
The Company has entered into an agreement with the holders of
the Series D Preferred stock to extend the option to May 31, 2000
provided the Company moves forward with the sale of EPIC. As of
March 24, 2000, the Company has advanced approximately $154,000
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>
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------------------------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense on advances:
VRH Construction Corporation $ 143,164 $ 130,149 $ 429,490 $ 390,445
Select Acquisitons, Inc. 5,062 1,028 17,125 2,457
Foundation Systems, Inc. 2,994 2,250 8,652 6,334
President of the Company 2,437 3,884 7,712 8,019
President of EPIC 9,000 26,600 28,675
Wasteco 37,022 97,536
Construction cost to Resource
Reclamation, Inc. and Ouster
Corporation capitalized in
project costs 620,000 1,625,000
Fees and settlement amounts paid to
Resource Reclamation, Inc. 75,000 375,000
Value of Common stock granted as
reimbursement to Select Acquisitions,
Inc. 755,000
Fees related to personal guarantee
to President of EPIC 17,947 150,000 144,731 625,000
Salary deferred to related parties
for two officers 116,250 35,000 330,000
Advances from President of the
Company 121,000
Advances from President of EPIC 360,000
Repayment of advances from VRH 75,000
Advances from Wasteco 580,000 1,830,000
Repayment of advances from
President of EPIC 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) whereby the Company would pay the plaintiffs $853,000 to be made
in a lump sum payment on or before April 15, 2000. If the Company
supplies a signed contract for the sale of EPIC, the time to make the
payment will be extended to May 15, 2000. Should these conditions not
be met the matter proceeds to litigation.
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 January 31, 2000, the
Company has recorded approximately $1,066,000 in connection with item
(i), which consists primarily of his compensation.
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. 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. 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.
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 January 31, 2000, the Company has recorded approximately
$192,000 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. Significant 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 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.
NOTE 12. Subsequent Events
Since April 30, 1999, the Company has received loans aggregating
approximately $3,840,000 from shareholders and existing creditors.
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 nine
months ended January 31, 2000 and 1999 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, 2000 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 JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1999
For the three months ended January 31, 2000, total revenues were $5,821,300
compared to $4,948,256 for the three months ended January 31, 1999, an increase
of $873,044. 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 January 31, 2000 total costs and expenses
were $8,035,663 compared to $9,451,961 for the three months ended January 31,
1999, a decrease of $1,416,298. The decrease in total costs and expenses
consists primarily of a decrease in selling, general and administrative expenses
<PAGE>
of $1,810,884, offset by an increase in operating expenses of $322,157. 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.
Net interest expense for the three months ended January 31, 2000 was
$1,076,506, a decrease of $898,185 from the three months ended January 31, 1999.
Net interest expense for the three months ended January 31, 2000 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 $nil for the quarter
ended January 31, 2000, as compared to an income tax benefit of $1,697,848 for
the quarter ended January 31, 1999. The Company has not recorded any income tax
benefit for the quarter ended January 31, 2000. Management, at this time, cannot
determine the probability if this income tax benefit will be realized in future
periods. At January 31, 2000, the Company has significant net operating loss
carry-forwards in excess of $44,000,000, 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 January 31, 2000 the Company recorded
$820,084 in dividends, payable in common stock and cash, relating to its issued
redeemable Preferred Stock, as compared to $676,428 for the three months ended
January 31, 1999. The increase of $143,656 primarily is due to the amount of
dividends to holders of the Company's Series C Preferred shares. During the
three months ended January 31, 2000 the Company also recorded accretion on its
Preferred Stock of $753,828 related to a mandatory redemption feature, as
2
<PAGE>
compared to $647,873 for the three months ended January 31, 1999. This increase
of $105,955 is due to the normal process of accretion to redemption value of the
Redeemable Preferred Stock.
NINE MONTHS ENDED JANUARY 31, 2000 COMPARED TO NINE MONTHS ENDED
JANUARY 31, 1999
For the nine months ended January 31, 2000, total revenues were $19,287,164
compared to $16,689,791 for the nine months ended January 31, 1999, an increase
of $2,597,373. The increases are attributable to the sales by the Company's
wholly owned subsidiary, EPIC. For the nine months ended January 31, 2000 total
costs and expenses were $22,855,787 compared to $25,292,796 for the nine months
ended January 31, 1999, a decrease of $2,437,009. This decrease in total costs
and expenses consists of an increase in operating expenses of $1,479,200 and a
decrease in selling, general and administrative expenses of $4,079,308 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 nine months ended January 31, 2000 was
$2,803,342 compared to $3,866,070 for the nine months ended January 31, 1999 a
decrease of $1,062,728. Net interest expense for the nine months ended January
31, 2000 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 January 31, 2000
were $36,808,040 as compared to $29,072,141 as of January 31, 1999.
During the nine months ended January 31, 2000, the Company recorded
$3,997,303 in dividends, payable in common stock and cash, relating to its
issued redeemable Preferred Stock, as compared to $1,560,898 for the nine months
ended January 31, 1999. The increase of $2,436,405 primarily is due to the
payment of dividends to the holders of the Company's Series C Preferred shares.
During the nine months ended January 31, 2000 the Company also recorded
3
<PAGE>
accretion on its Preferred Stock of $2,153,494 related to a mandatory redemption
feature, as compared to $1,852,097 for the nine months ended January 31, 1999.
The increase of $301,397 is due to the normal process of accretion to redemption
value of the Redeemable Preferred Stock.
The Company recorded an Income Tax expense of $146,763 for the nine
months ended January 31, 2000, as compared to an income tax benefit of
$3,328,093 for the nine months ended January 31, 1999. 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 nine months ended January 31, 2000 Management, at this time, cannot
determine the probability if this income tax benefit will be realized in future
periods. At January 31, 2000, the Company has significant net operating loss
carry-forwards in excess of $44,000,000, 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.
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.
4
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
As of January 31, 2000, the Company has cash and cash equivalents of
$1,174,252 and the Company has a working capital deficit of $36,442,277 and an
accumulated deficit of $66,941,444. Included in the working capital deficit is
$19,944,894 for the current portion of long term debt and $11,148,613 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.
During the nine months ended January 31, 2000 the net cash used in
operating activities was $677,976 as compared with cash used in operating
activities in the prior year period of $3,021,785. The decrease in cash used in
operating activities for January 31, 2000 as compared with January 31, 1999 is
primarily due to cost reductions associated with the inactive status of the
Company's existing composting projects.
During the nine months ended January 31, 2000 the Company utilized cash for
purchases of property, plant and equipment of $ 336,339 as compared to purchases
5
<PAGE>
of $3,262,073 during the nine months ended January 31, 1999. The decrease of
$2,925,734 primarily is due to the inactive status of the Company's development
projects during this period.
During the nine months ended January 31, 2000 the Company received net cash
from financing activities of $1,839,557. The cash was received from the net
proceeds from long term debt obligations of $99,557 (gross proceeds of
$1,500,000 net of repayments of $1,400,443) and net advances from related
parties of $1,740,000.
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,
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 January 31, 2000, the Company
issued 54,375 shares of its common stock as follows:
Date # of Shares Issued To For Price
- ---- ----------- --------- --- -----
11/02/99 50,000 consultant services $0.19/share
11/02/99 4,375 consultant services $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 - none
<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 27, 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
JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 1,174,252
<SECURITIES> 0
<RECEIVABLES> 5,369,033
<ALLOWANCES> 117,422
<INVENTORY> 0
<CURRENT-ASSETS> 7,577,631
<PP&E> 26,163,987
<DEPRECIATION> 5,009,696
<TOTAL-ASSETS> 54,965,177
<CURRENT-LIABILITIES> 44,019,908
<BONDS> 5,706,533
14,327,721
2,500
<COMMON> 60,911,209
<OTHER-SE> (70,002,694)
<TOTAL-LIABILITY-AND-EQUITY> 54,965,117
<SALES> 19,287,164
<TOTAL-REVENUES> 19,287,164
<CGS> 13,259,871
<TOTAL-COSTS> 13,259,871
<OTHER-EXPENSES> 9,595,986
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,803,342
<INCOME-PRETAX> (6,371,965)
<INCOME-TAX> (146,763)
<INCOME-CONTINUING> (6,518,728)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,518,728)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
