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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934, for the fiscal year ended April 30, 2000
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934, for the transition period from _____ to ______
Commission File #0-27832
COMPOST AMERICA HOLDING COMPANY, INC.
..............................................................................
(Name of small business issuer in its charter)
New Jersey 22-2603175
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Gateway Center, 25th floor, Newark, New Jersey 07102
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(Address of Principal Executive Office) (Zip Code)
Issuer's telephone number: (973) 297-5400
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
1. Common Shares, no par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
State the issuer's revenues for its most recent fiscal year:
$ 317,848
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days - $ 12,250,000 (approximate as of June
30, 2000).
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 - 60,127,408 shares outstanding as at June 30, 2000
Documents Incorporated By Reference - See Item 13
PLEASE ADDRESS ALL CORRESPONDENCE TO: Mark Gasarch, Esq.
40 West 57th Street
33rd Floor
New York, New York 10019
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PART I
ITEM 1.
DESCRIPTION OF BUSINESS
BACKGROUND
Compost America Holding Company, Inc., (the "Company" or "Compost America"
or "CAHC") was incorporated on August 20, 1981 in the State of New Jersey under
the name Alcor Energy and Recycling Systems, Inc. ("Alcor") for the purpose of
designing, constructing, managing and operating resource recovery facilities. On
January 23, 1995, Alcor acquired all of the outstanding shares of Compost
America Company of New Jersey, Ltd. ("CANJ"), which had been incorporated on
December 17, 1993 in the State of Delaware for similar purposes, and
subsequently changed its name to Compost America Holding Company, Inc. The
Company conducts its business through various development subsidiaries and
through one operating subsidiary; American Soil, Inc., a New York corporation,
incorporated on August 6, 1986. The development subsidiaries include, Newark
Recycling and Composting Company, Inc. ("NRCC"), incorporated in Delaware on May
10, 1994, owned 75% by the Company and 25% by Prince Georges Contractors, Inc.,
d.b.a. Potomac Technologies, Inc. ("PTI"), an unaffiliated company, with NRCC
itself owning 100% of American Bio-Ag; and three wholly-owned subsidiaries,
Monmouth Recycling and Composting Co., Inc., incorporated in Delaware on May 10,
1994 ("MRCINC"); Chicago Recycling and Composting Company, Inc. ("CRCC"),
incorporated in Delaware on August 4, 1995 (presently inactive); and Gloucester
Recycling and Composting Company, Inc., incorporated in Delaware on August 15,
1994 (presently inactive). The Company also owns 80.1% of Miami Recycling and
Composting Company, Inc. ("MRCC"), incorporated in Delaware on November 17,
1995, which itself owns all of the outstanding common stock of Bedminster Seacor
Services Miami Corporation ("Bedminster"), a Florida corporation which is
developing a composting project in southern Florida (the "Florida Composting
Project"). Unless otherwise indicated, references to the Company, or Compost
America, or CAHC, include the Company and all of its subsidiaries.
On June 15, 2000, the Company sold its entire interest in its wholly-owned
subsidiary, Environmental Protection & Improvement Company, Inc. ("EPIC"). EPIC
had generated substantially all of the Company's revenues and net cash from
operations.
The cash proceeds from this sale, plus a loan from a shareholder at
closing, totaling approximately $40 million (excluding an earn-out based upon
EPIC's future performance), will be used primarily to (1) repay long term debt,
(2) increase to approximately 24.73% the Company's ownership interest in
American Marine Rail, LLC ("AMR"),a developer of a proposed 5,200 tons per day
solid waste transfer station in the Bronx, New York, (3) pay EPIC employee
termination costs, (4) repay short-term loans to the Company's Class A and Class
C Preferred shareholders, (5) settle various notes and accounts payable and
other creditors' claims and (6) provide working capital for the Company to
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pursue its business plan. The Company has granted to W-L Associates LLC, an
entity controlled by the holders of its Class A and Class C Preferred Stock,
liens on the earn-out (up to a maximum of $6.2 million) and on its interest in
AMR (up to a maximum of $3 million) in order to secure newly granted redemption
rights in such preferred stock.
The Company's two current development projects are expected to be a solid
waste transfer station in Newark, New Jersey ("Newark Solid Waste Project"), and
a fully enclosed composting facility located in Miami/Dade County, Florida and
serving either or both Dade County and the City of Miami, Florida ("Florida
Composting Project"). Each of these projects is in the planning stage and
neither project has received final regulatory approvals.
The Company's executive offices are located at One Gateway Center, 25th
floor, Newark, New Jersey 07102. The Company's telephone number is (973)
297-5400; fax (973) 297-5454.
OPERATING SUBSIDIARY
AMERICAN SOIL INC.
American Soil, Inc. ("ASI"), an outdoor composting facility located in
Freehold Township, Monmouth County, New Jersey, has been in operation since
September 7, 1988. Compost America purchased ASI in October 1996, and leases
property from Freehold Township for the operation of the composting facility.
ASI currently is permitted to compost leaves, grass and source separated organic
waste ("SSOW") including processed food and soiled paper/coated cardboard waste
from supermarkets and produce terminals. The Company presently is seeking to
sell ASI.
DEVELOPMENT SUBSIDIARIES
NEWARK RECYCLING AND COMPOSTING FACILITY
NRCC is a 75% owned subsidiary of the Company. NRCC anticipates developing
a municipal solid waste transfer station capable of processing approximately
2,500 tons of waste per day on a portion of its 12-acre parcel in Newark, New
Jersey (the "Newark Property"). The current development schedule, subject to
change, is for the completion of permitting, solid waste procurement,
construction, start-up and performance testing leading to commercial operation
no earlier than 2001.
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MIAMI RECYCLING AND COMPOSTING FACILITY
MRCC is an 80.1% owned subsidiary of the Company. MRCC's wholly owned
subsidiary Bedminster is developing a composting facility on a 40.1 acre parcel
in Miami/Dade County (the "Florida Composting Project"). However, this project
has been interrupted by a lawsuit (the "Miami Lawsuit") brought by the Company
and Bedminster against the City of Miami to enforce the performance by the City
of Miami of its obligations under a Restated Compost Recycling Agreement (see
"Legal Proceedings" herein).
A number of applications for requisite environmental permits have been
filed with the Miami/Dade County Department of Environmental Resource Management
("DERM"), the Florida Department of Environmental Protection ("FDEP") and the
United States Army Corps of Engineers ("ACOE"). Additional submittals and
subsequent approvals are in abeyance pending the resolution of the Miami
Lawsuit.
AMERICAN MARINE RAIL FACILITY
American Marine Rail, LLC ("AMR") is developing a solid waste transfer
station in Bronx, New York. When and if constructed, AMR's facility will be
capable of receiving waste by barge from New York City's existing marine
transfer station system, compacting the waste and transporting it out of the
City by rail. AMR has responded to a Request for Proposals ("RFP") issued by the
New York City Department of Sanitation ("NYCDOS") for a 20-year contract to
transport and dispose of up to 11,700 tons per day of the Department's
residential solid waste. The RFP was a result of New York City's intent to close
the Fresh Kills Landfill in Staten Island on December 31, 2000.
AMR submitted its permit application to the State of New York in the Fall
of 1997, and expects final permits to be issued by year end 2000. Drafts of a
Negative Declaration of Environmental Impact and a permit were issued to AMR in
December 1999.
Originally, the Company had purchased a 33% interest in AMR and had held an
option to acquire an additional approximately 30% interest (the "Additional
Membership Interest"). However, in July, 1999 the Company transferred its
interest in AMR to AW Compost Partners, LLC ("AW Compost") in exchange for (1)
the payment of $225,000 to AMR by an affiliate of AW Compost to cure certain
funding defaults by the Company, (2) the return to the Company of $860,000 of
its Series D Redeemable Preferred Shares, which AW Compost had purchased for
$860,000 and (3) the cancellation of the "AMR Option" held by AW Compost
Partners (as described in Section 9 of the Company's Series D Certificate of
Designation). By making monthly payments to AMR on behalf of AW Compost from
July 1999 through June 2000 pursuant to a development budget commitment, the
Company re-purchased from AW Compost approximately an 8% interest in AMR. In
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June, 2000, the Company repurchased a 16.73% interest in AMR from AW Compost
Partners for a principal re-purchase price of $1,700,000, giving the Company a
total interest in AMR of 24.73%. The Company retains its right to purchase the
Additional Membership Interest at fair market value at a date in the future
after the second anniversary of the commencement of commercial operations of
AMR's facility.
Notwithstanding the foregoing, as a result of plans announced by New York
City to revise substantially the City's waste disposal plan, there is now some
doubt concerning not only the schedule but also the ultimate completion of AMR's
project in the Bronx, New York, at least as initially envisioned. In light of
this uncertainty, the Company cannot predict the ultimate outcome of this
situation. However, the Company does believe that, in light of New York City's
demonstrable need for trash removal and AMR's progress to date in its permitting
process, the AMR property does have significant value and ultimately will play a
role in the City's waste disposal plans.
EMPLOYEES
The Company and its subsidiaries have 8 full-time employees.
ITEM 2.
DESCRIPTION OF PROPERTY
The Company leases its 1,430 square feet of executive, finance and
accounting offices at One Gateway Center, 25th floor, Newark, New Jersey 07102,
on a month-to-month basis for $3,455.83 per month (excluding utilities and
parking).
In December 1995 NRCC purchased the Newark Property, located in the East
Ward of Newark, New Jersey at the convergence of Routes 78, 1, 9 and the New
Jersey Turnpike on which the Company hopes to locate its Newark Solid Waste
Project. This site is encumbered by mortgages, which are in default, and
foreclosure proceedings have been commenced (see Legal Proceedings, below).
On March 29, 1996 the Company purchased 40.1 acres in northwest Miami/Dade
County, Florida, where it plans to commence construction of its Florida
Composting Facility.
On October 2, 1996 the Company was assigned a lease commitment with the
Township of Freehold, New Jersey for two parcels of land located in the Township
of Freehold, County of Monmouth, State of New Jersey. One parcel consists of
10.462 acres and the second parcel consists of 8.296 acres. The lease is for
approximately an additional 5 years. Should the Company sell ASI, its leasehold
interest would be included in the sale.
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In January 1998 MRCINC purchased approximately 15 acres of real property in
Freehold Township, Monmouth County, New Jersey on which the Company intended to
construct an in-vessel composting facility. This property currently is the
subject of a foreclosure proceeding.
ITEM 3.
LEGAL PROCEEDINGS
The Company is involved in one material legal proceeding as a plaintiff,
regarding the failure of the City of Miami to perform under a Restated Compost
Recycling Agreement of November 30, 1995 (the "Restated Agreement") between
Bedminster, a subsidiary of the Company, and the City of Miami. This lawsuit,
filed in September, 1998 against the City of Miami, is seeking a judgment: (1)
declaring that the Restated Agreement, as amended by the City's Resolution
98-224 of February 24, 1998 constitutes a valid and binding contract between the
City and Bedminster; (2) setting the correct amount of the City's recycling
costs during the term of the two year extension or establishing a fair and
equitable procedure by which that amount shall be calculated; and (3) fixing the
completion date for the composting facility, adjusted to take into account the
period of time that the City has frustrated Bedminster's performance under the
Contract. Depositions have been scheduled in this matter, and this proceeding is
expected to be resolved during the year 2000.
The material legal proceedings in which the Company is involved as a
defendant are as set forth below.
1. Equity Investments of Delaware, Inc., Plaintiff v. Compost America Holding
Company, Inc. and Newark Recycling and Composting Company, Inc., Defendants,
filed in May, 1999 in the Superior Court of New Jersey for Essex County. On
May 15, 1999, the Company, as Borrower, defaulted in the payment of a
$1,000,000 Acquisition Refinancing Promissory Note, plus an additional
$150,000 in accrued interest and penalties, payable to Equity Investments of
Delaware, Inc., as Lender. The Lender also is the holder of a $2,000,000
Convertible Term Loan Promissory Note of the Borrower, due November 1, 2000.
Both Notes are secured by a first mortgage on the Newark Property, owned by
NRCC, which the Company intends to develop. The Lender obtained a default
judgment against the Company in September 1999 for approximately $1,300,000
and in January 2000 commenced foreclosure proceedings, which are being
contested by the Company. These foreclosure proceedings, if successful,
would prevent the Company from developing the Newark Property.
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2. Bio-Services, Inc., Plaintiff, v. Compost America Holding Company, Inc.
Monmouth Recycling and Composting Company, Inc., Defendants, filed on
September 4, 1998 in the Superior Court of New Jersey, Chancery Division,
Monmouth County, Docket No. MONC 224-28.
This is a claim for alleged breach of contractual obligations, seeking
damages of approximately $333,125, plus 12,500 shares of the Company's
common stock, plus interest and expenses. The Company has filed an answer
denying all liability as asserted in the Complaint. A motion by the
Plaintiff for summary judgment was granted by the Court in October 1999. The
Company has made a settlement offer, and has filed a motion for
reconsideration.
3. Brownfield Partners, Plaintiff, v. Compost America Holding Company, Inc.,
Defendant, filed on March 12, 1999 in the Superior Court, Law Division,
Monmouth County, State of New Jersey, Docket No. MON-L-1248-89.
These are two actions, one to collect a $200,000 mortgage note, secured by a
first lien on the Company's 15 acre property in Freehold, New Jersey (the
"Freehold Property"), and the second to foreclose on the Freehold Property.
The Plaintiff was granted summary judgment on its action to foreclose and
the suit to collect the mortgage note was dismissed.The Company is
attempting to negotiate a settlement of this matter.
4. Kaplan Gottbetter & Levenson, LLP and Adam S. Gottbetter, Plaintiffs v.
Compost America Holding Company, Inc., Defendant, filed on December 14, 1998
in the United States District Court, Southern District of New York.
This is an action alleging breach of a consulting agreement and seeking
compensatory damages of approximately $872,000, plus interest, costs and
expenses. This matter was settled in September 1999 for $350,000, and the
Company is making settlement payments, with the balance due down to
$120,000 as at July 1, 2000.
5. NuCentury Auto, Inc., Plaintiff, v. Compost America Holding Company, Inc.
and Chicago Recycling and Compost Company, Inc., Defendants, filed on
February 28, 1998 in the Circuit Court of the Twelfth Judicial Circuit, Will
County, State of Illinois, Docket # 99 L 129.
This is a claim against the Company for $266,256 for site development work
performed on behalf of the Company in Riverside, Illinois. The Company has
filed an answer in this matter, and is defending this matter vigorously.
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6. Kaysons International Corp., Plaintiff, v. Compost America Holding Company,
Inc., Defendant, filed in November, 1999 in the Supreme Court of New York,
County of Westchester. This is an action for payment of a note in default in
the amount of $150,000 plus interest at 10% plus penalty shares. Summary
Judgment in the amount of $150,000 plus interest and costs was entered for
the Plaintiff on March 3, 2000, which has been paid by the Company. However,
the issue of penalty shares is still in controversy.
7. Kenny Nachwalter Seymour Arnold Critchlow & Spector, Plaintiff, v. Compost
America Holding Company, Inc., Miami Recycling and Composting Company, Inc.
and Bedminster Seacor Services Company, Inc., Defendants, filed in August
1999 with the American Arbitration Association in Miami, Florida. This is an
arbitration action for approximately $154,000 in unpaid legal fees. This
matter was settled for $100,000, with $30,000 paid on May 1, 2000, $25,000
on June 1 and July 1, 2000 and $20,000 payable on August 1, 2000.
8. B. Michael Pisani, Plaintiff, v. Compost America Holding Company, Inc.,
Defendant, filed January, 2000 in the Superior Court of New Jersey, Essex
County. This is a claim by B. Michael Pisani for $175,000 plus interest,
costs and legal fees based upon an alleged breach by the Company of his
consulting agreement. The Plaintiff has moved for Summary Judgment. The
Company intends to defend this matter vigorously.
9. Wragg & Casas Public Relations, Inc., Plaintiff, v. Compost America Holding
Company, Inc., Defendant, filed March, 2000 in the Circuit Court for the
11th Judicial District, Miami-Dade County, Florida. This is a claim for
public relations services rendered in the amount of $47,717.18 plus
interest, costs and attorneys' fees. The Company is defending this matter.
10. Charles Lanktree and The 5 L's Partnership, LLP, Plaintiff, v. Compost
America Holding Company, Inc., Defendant, filed June, 2000 in the Superior
Court of New Jersey, Essex County. This is a claim for breach of contract
seeking damages of $323,000 plus interest, plus 690,000 shares of the
Company's common stock, based upon an alleged breach of contract by the
Company. The Company intends to defend this matter vigorously.
The status of other material claims involving the Company is as follows:
11. Internal Revenue Service. The Internal Revenue Service ("IRS") has noticed
the Company of its claim for $61,000 in penalties and interest and $20,000
in back taxes. The Company contends that it already has paid the $20,000 in
back taxes. The IRS is demanding payment and the Company is seeking to
appeal this demand.
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12. Loan From Vauxhall '98, L.L.C. On December 30, 1998 the Company borrowed
$500,000 from Vauxhall '98, L.L.C. This loan provided for a maturity date of
November 30, 2000, or earlier if the Company received a series of loans
totalling at least $1,500,000. The Company has received loans totalling in
excess of $1,500,000, and therefore this loan is now due. The Company has
repaid a part of this loan, reducing the balance due down to $387,187.50
and, to date, the lender has not taken any steps to declare an event of
default or to collect the loan.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until October 7, 1999 shares of the Company's common stock had traded on
the Electronic Bulletin Board of the National Association od Securities Dealers,
Inc. ("NASD") under the symbol "CAHC". During the period October 7, 1999 through
June 14, 2000, when the Company was significantly delinquent in its filings with
the Securities and Exchange Commission ("SEC"), this trading was transferred by
the NASD to the "pink sheets" . During the period September 14, 1999 through
October 7, 1999 inclusive, the shares had traded under the symbol "CAHCE" as a
notice that the trading of the shares was being moved from the Electronic
Bulletin Board to the "pink sheets". On June 15, 2000, with the Company again
timely in its filings with the SEC, the trading of its shares resumed on the
Electronic Bulletin Board under the symbol "CAHC".
The following table shows, for the calendar periods indicated, the range of
reported high and low bid quotations for these shares. Such prices necessarily
reflect inter dealer prices, without retail mark up, mark down or commission and
may not necessarily represent actual transactions.
Quarterly Common Stock Price Range
HIGH BID LOW BID
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1998/1999:
Quarter ended 7/31.............. $1.94 $1.25
Quarter ended 10/31............. $1.69 $0.88
Quarter ended 1/31.............. $1.56 $0.63
Quarter ended 4/30.............. $1.44 $0.60
1999/2000:
Quarter ended 7/31............ $0.63 $0.38
Quarter ended 10/31........... $0.38 $0.13
Quarter ended 1/31............ $0.25 $0.13
Quarter ended 4/30............ $0.51 $0.13
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As of June 30, 2000 there were approximately 357 holders of record of the
shares of the Company's Common Stock.
To date, the Company has not paid any cash or other dividends on its Common
Stock and does not anticipate paying dividends in the foreseeable future.
Moreover, the Company's ability to pay dividends on its Common Stock in the
future will be limited by preferred stock issuances and may be limited by future
preferred stock issuances or by lenders.
During the fiscal quarter ended April 30, 2000, the Company issued
3,262,739 shares of its common stock, without registering the securities under
the Securities Act of 1933, as amended, to 17 individuals for dividends on
Preferred Shares paid in common stock in lieu of cash and to 1 individual for
services rendered valued at prices ranging from $0.17 to $0.50 per share. There
were no underwriters involved in the transaction, and no underwriting discounts
or commissions. In light of the small number of purchasers 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.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company continues to incur significant losses from its operations and
development activities. Revenues less operating costs, selling, general and
administrative expenses and net interest expense (interest expense less interest
income) resulted in a net loss of $10,697,201 as at April 30, 2000, as compared
to a net loss of $26,290,252 as at April 30, 1999. Net loss applicable to common
shareholders was $19,323,326 for the fiscal year ended April 30, 2000, as
compared to a loss of $30,850,967 for the fiscal year ended April 30, 1999. The
Company has incurred losses since its inception, with an accumulated deficit of
$73,595,245 as at April 30, 2000 and is subject to those risks associated with
companies in the early stages of development. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
As a result of the sale of EPIC on June 15, 2000, the results of operations
for all years presented have been restated to incorporate the accounting
treatment for discontinued operations.
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For the year ended April 30, 2000 the Company's consolidated revenues were
$317,848, compared to $217,129 for the prior fiscal year. The Company's
operating loss for the fiscal year ended April 30, 2000 was $6,166,405 as
compared to an operating loss of $21,478,566, which included $10,721,161 as a
provision for impairment (primarily the write-off of capitalized project costs).
The Company's net loss from continuing operations before income tax benefit for
the year ended April 30, 2000 decreased by $23,015,738 to $9,781,434 from
$32,797,172 for the prior year due primarily to the aforementioned provision for
impairment of $10,721,161, a decrease of $2,318,879 in selling, general and
administrative expenses, a decrease in net interest expense of $6,441,446 and a
decrease in depreciation and amortization expense of $2,235,629.
EPIC's revenues for the fiscal year just ended were $23,952,073 and it had a net
loss of $915,767, as compared to EPIC's revenues for the year ended April 30,
1999 of $22,032,853 and a net loss of $1,366,540 for that period. However,
EPIC's income before interest, income taxes, compensation for stock options,
depreciation and amortization and impairment of assets was $5,100,385 as
compared to $4,335,301 for the prior fiscal year.
Liquidity and Capital Resources
Since its inception, the Company has continuously met its liquidity needs
primarily from the proceeds of the sale of its Common Stock, loans and advances
made by affiliates, including directors and principal shareholders, and loans
made by unaffiliated individuals and institutions. For the year ended April 30,
2000 the Company secured funding through various loans and advances from related
and unrelated parties, no funding from the sale of common stock, as compared to
$902,001 for the prior fiscal year and $6,270,000 from loans, as compared to
$23,126,563 for the prior fiscal year. For the fiscal year ending April 30, 2001
the Company will be faced with significant cash needs to meet current
obligations, and to provide additional development capital including ongoing
corporate overhead and to refinance existing loans. The Company hopes to meet
its liquidity needs through the sale of ASI, project financing and additional
loans and/or the sale of common and preferred shares as well as income from the
lease of the Newark property. For the period May 1, 2000 through July 15, 2000
the Company secured additional funding of approximately $40,500,000 from loans
from unrelated parties, land lease proceeds and proceeds from the sale of EPIC.
Approximately $31,500,000 of these funds were used to pay closing costs,
liabilities assumed from EPIC, related party debt and various notes and accounts
payable of the Company and to purchase membership interests in AMR.
The Company's strategy to reduce and eventually eliminate these deficits
entails (1) the sale of American Soil, Inc., (2) the generation of revenues from
its Florida Property by the construction and operation of the Florida Composting
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Project, (3) the generation of revenues from its Newark Property, either by the
construction and operation of the Newark Solid Waste Project and/or the
development and lease of the property, (4) the acquisition of additional
operating companies and (5) the implementation of stringent controls on
development expenses, which already have been initiated by the Company's Office
of the President. This strategy is dependent upon (1) the sale of ASI, (2)
securing the approvals of certain permits for the Company's Newark and Florida
Projects from various regulatory authorities, (3) receiving substantial
financing for acquisitions and for the construction and development of these
Projects and (4) obtaining loan extensions and/or standstills from the Company's
major creditors.
There can be no assurance that the Company will be able to obtain
sufficient debt or equity financing on favorable terms, if at all. If the
Company is unable to secure additional financing, attain future profitable
operations and complete the ASI sale, its ability to implement its growth
strategy will be impaired and its financial condition, results of operations and
cash flows 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.
Should the Company be able to secure financing for the Newark and/or
Florida Projects, then it is anticipated that some portion of the previously
financed project costs will be repaid to the Company. However, such financings,
if secured, would not be closed until the end of calendar year 2000 at the very
earliest, and future revenues generated from these Projects would not be
anticipated until the fiscal year ended April 30, 2002, at the earliest.
The Company does not incur any significant product research and development
expenses. The sale of EPIC resulted in a reduction in the number of the
Company's employees from 88 down to 8. There are no seasonal aspects that have a
material effect on the financial condition or results of operations of the
Company.
SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS
This Report on Form 10-KSB including, without limitation, this Management's
Discussion and Analysis, contains 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 other similar words.
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 financings; rapid technological change; change in permitting and
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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.
ITEM 7.
FINANCIAL STATEMENTS
(a) Consolidated Balance Sheet as of April 30, 2000
(b) Consolidated Statements of Operations for the fiscal years ended April 30,
2000 and April 30, 1999
(c) Consolidated Statements of Redeemable Preferred and Common Stocks and
Stockholders' Deficiency for the fiscal years ended April 30, 2000 and
April 30, 1999
(d) Consolidated Statements of Cash Flows for the fiscal years ended April 30,
2000 and April 30, 1999
(e) Notes to Consolidated Financial Statements
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's financial statements for its fiscal year ended April 30, 1998
were audited by Arthur Andersen LLP, Certified Public Accountants.
(i) On September 8, 1999 Arthur Andersen LLP resigned as the Company's
independent public accountants.
(ii) The report of Arthur Andersen LLP on the Company's financial statements for
the fiscal year ended April 30, 1998 contained no adverse opinion or disclaimer
of opinion, nor was it modified as to uncertainty, audit scope, or auditing
principles, except that the final paragraph of that report stated:
"The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a significant working
capital deficit and an accumulated deficit, has incurred losses since its
inception and was in default of certain loan and Redeemable Preferred stock
covenants and payments on debt that give the lenders and Redeemable Preferred
stockholders certain rights. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Further, the Company's growth
strategy will require substantial additional funds. Management plans in regard
to these matters are described in Note 2. The accompanying financial statements
12
<PAGE>
do not include any adjustments relating to the recoverability and classification
of liabilities that might result should the Company be unable to continue as a
going concern."
(iii) The decision by the Company to change accountants was approved by the
Company's audit committee of the board of directors and by the board of
directors itself.
(iv)(A) There were no disagreements between the Company and Arthur Andersen LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of Arthur Andersen LLP, would have caused them to make reference to
the subject matter of the disagreement in connection with their report.
(iv)(B) At the time of their resignation, Arthur Andersen LLP had not advised
the Company that:
(1) internal controls necessary to develop reliable financial statements
did not exist; or
(2) information has come to their attention which made them unwilling to
rely upon management's representations, or made them unwilling to be associated
with the financial statements prepared by management; or
(3) the scope of the audit should be expanded significantly, or information
has come to their attention that they have concluded will, or if further
investigated might, materially impact the fairness or reliability of a
previously issued audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the fiscal year ended April
30, 1998.
On September 9, 1999 the Company engaged Rothstein, Kass & Company, P.C. as
its accountants to render its report on the Company's financial statements for
the fiscal year ended April 30, 1999. Rothstein, Kass & Company, P.C. also will
render its report on the Company's financial statements for the fiscal year
ended April 30, 2000.
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The following persons were directors, executive officers and consultants
acting as members of the Office of the President of the Company as at June 30,
2000.
13
<PAGE>
NAME AGE POSITION(S)
---------------- --- ---------------------------------
Christopher J. Daggett 50 Office of the President
Marvin H. Roseman 71 Office of the President; President
of all Subsidiaries, Principal
Financial Officer
Richard L. Franks 56 Vice President and General
Counsel, Secretary
Anthony P. Cipollone 37 Treasurer, Controller;
Principal Accounting Officer
Charles R. Carson 54 Director
Peter Petrillo 40 Director
John T. Shea 50 Director
Christopher R. Smith 35 Director
The Company's by-laws provide that the Directors of the Company shall serve
until the next annual meeting of shareholders and until their successors are
duly appointed and qualified. All officers serve at the pleasure of the Board of
Directors. A Stockholders Agreement and a Director Appointment Agreement among
the Company and certain principal stockholders of the Company requires support
of the election of certain nominees of Wasteco Ventures Limited (currently Peter
Petrillo, John T. Shea and Christopher R. Smith) to the Company's Board of
Directors. The board of directors has an audit committee consisting of Charles
R. Carson (Chairman) and Peter Petrillo.
Since April 1999, the Company has been managed by an Office of the
President, which positions, since August 1999, have been held solely by two
consultants, Christopher J. Daggett and Marvin H. Roseman.
OFFICERS AND DIRECTORS
CHRISTOPHER J. DAGGETT - OFFICE OF THE PRESIDENT
Christopher J. Daggett joined the Company's Office of the President in
April, 1999. Since 1996, Mr. Daggett has been the President of Chadwick
Partners, a firm seeking to acquire, remediate and redevelop or sell
environmentally impaired real estate and environmentally impaired companies.
From 1990 through 1996, prior to forming Chadwick Partners, Mr. Daggett was a
Managing Director of William E. Simon & Sons, a New Jersey based investment
firm.
14
<PAGE>
MARVIN H. ROSEMAN - OFFICE OF THE PRESIDENT; PRESIDENT OF ALL SUBSIDIARIES
Marvin H. Roseman joined the Company's Office of the President in April
1999. From 1994 through the present, Mr. Roseman is the President of Bentley,
King Associates, a business consulting firm located in Las Vegas, Nevada.
RICHARD L. FRANKS - VICE PRESIDENT AND GENERAL COUNSEL, SECRETARY
Richard L. Franks joined the Company in February, 1999. From 1997 through
the present, Mr. Franks has been the Managing Director of Aegis Green Ltd., Isle
of Jersey, U.K., a waste-to-energy company. From 1992 through 1997 he served as
the General Counsel of Waste Solutions, Inc. a Houston, Texas based composting
company, and as the Director of Legal Affairs of L.A. Water Treatment
Corporation, a Los Angeles, California based construction company. Both L.A.
Water Treatment Corporation and Waste Solutions, Inc. are owned by Thames Water
PLC of London, England.
ANTHONY P. CIPOLLONE, CPA - TREASURER; CONTROLLER
Anthony P. Cipollone is the Company's controller and Chief Accounting
Officer. Mr. Cipollone has extensive accounting experience in the construction
industry and for three years, from 1994 through 1997, as controller of VRH
Construction Corp., worked very closely with the Company and its management
before joining the Company in January 1998.
CHARLES R. CARSON - DIRECTOR
Charles R. Carson became a Director of the Company in November, 1997. He
has been a principal of Churchill Capital, Inc. since February 1999. From 1985
through 1999, Mr. Carson was a Partner at Quirk, Carson, Peppet, Inc. ("QCP").
QCP was established in 1985 to serve as investment bankers and management
consultants to small and mid-sized companies (those with annual revenues of
approximately $10 million to $200 million) in the environmental/waste management
industry.
PETER PETRILLO - DIRECTOR
Peter Petrillo has been a Vice President in the merchant banking and direct
equity investments group at Wafra Investment Advisory Group, Inc. since January
1995. From January 1991 to December 1994, Mr. Petrillo was a partner at Claymore
Partners Ltd., a strategic and turnaround consulting firm. He became a Director
of the Company in 1997.
JOHN T. SHEA - DIRECTOR
John T. Shea has been responsible for merchant banking and
15
<PAGE>
direct equity investments at Wafra Investment Advisory Group, Inc.
since 1991. Mr. Shea became a Director of the Company in 1997.
CHRISTOPHER R. SMITH - DIRECTOR
Christopher R. Smith, now Chief Executive Officer of COMC, Inc., a public
company, has been an independent consultant in the telecommunications industry
since August 1999. From 1992 through August 1999 he was a Vice President in the
merchant banking and direct equity investments group at Wafra Investment
Advisory Group, Inc. Mr. Smith became a Director of the Company in 1997.
ITEM 10.
EXECUTIVE COMPENSATION
(b) SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name Annual Compensation All
and Fiscal Other Long- Other
Principal Year Annual Term Compen-
Position Ended Salary Bonus Comp. Comp. sation
---------- ------- ------- ----- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Christopher 4/30/00 $320,000(1) none none none $ 13,371
Daggett, 4/30/99 $ none none none none $ none
Office of 4/30/98 $ none none none none $ none
the President
Marvin H. 4/30/00 $320,000(1) none none none $145,793(2)
Roseman, 4/30/99 $ none none none none $ none
Office of 4/30/98 $ none none none none $ none
the President
Roger E. 4/30/00 $ none none none none $ none
Tuttle, 4/30/99 $225,000 none none none $ 9,210
former Pres. 4/30/98 $350,000 none none none $ 12,488
and CEO
Robert J. 4/30/00 $325,000 none none none $535,000(3)
Longo, 4/30/99 $325,000 none none none $242,200(3)
President 4/30/98 $162,500(4) none none none $ 3,600
of EPIC
Richard L. 4/30/00 $236,307(5) none none none $ 72,000(2)
Franks, 4/30/99 $ none none none none $ none
VP and 4/30/98 $ none none none none $ none
Secretary
Anthony P. 4/30/00 $150,000 none none none $ 3,600
Cipollone, 4/30/99 $126,923 none none none $ none
Treasurer 4/30/98 $ 33,654 none none none $ none
</TABLE>
16
<PAGE>
(1) Paid as a Consulting Fee. Includes $80,000 paid for services rendered
during the prior fiscal year.
(2) Primarily reimbursement for living and related expenses.
(3) Includes a fee of $700,000 for providing a personal indemnification for a
surety bond issued to the Company, and other reimburseable expenses.
(4) Commencing November 3, 1997
(5) Includes $44,307 paid for services rendered during the prior fiscal year.
(c) OPTIONS/SAR GRANTS TABLE
Number of %age of
Shares Total
Under- Options
lying Granted
Options in Fiscal Exercise or Base Expiration
Name Granted Year Price Per Share Date
------------ --------- --------- ---------------- ----------
C. Daggett none n/a n/a n/a
M. Roseman none n/a n/a n/a
R. Tuttle none n/a n/a n/a
R. Longo none n/a n/a n/a
R. Franks none n/a n/a n/a
A. Cipollone none n/a n/a n/a
(d) AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUE TABLE
Number of Value of
Shares Under Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired Value FY-End; Exer/ FY-End; Exer/
Name On Exerc. Realized non-Exer'able Non-Exer'able (2)
------- --------- -------- ------------ ------------
C. Daggett none none none n/a
M. Roseman none none none n/a
R. Tuttle none none 1,209,875 n/a
R. Longo none none 1,500,000 (1) n/a
R. Franks none none 50,000 n/a
A. Cipollone none none 350,000 n/a
(1) 900,000 shares exercisable, 600,000 shares non-exercisable
(2) The market price of the Company's common stock as at its April 30, 2000
fiscal year end was $0.25 per share, so no options were "in-the-money".
17
<PAGE>
(e) LONG-TERM INCENTIVE PLAN ("LTIP") AWARDS TABLE
None of the persons included in (b) above were covered by any plans.
(f) COMPENSATION OF DIRECTORS
No Director of the Company is compensated for serving as a director.
(g) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS.
None of the persons included in (b) above were covered by any employment
contracts, termination of employment or change-in-control arrangements other
than as set forth in the employment agreement set forth herein.
On May 1, 1997 the Company entered into an amended employment agreement
with its then President, Roger E. Tuttle. His agreement provided for employment
as the Company's President through August 1, 2004 at an initial annual salary of
$350,000 (of which $125,000 was not to be paid until the Company's cash
resources allow payment thereof) with annual increases commensurate with the
growth of the Company, plus a bonus of 5% of the Company's Consolidated Net
Income After Taxes on the first $25,000,000 thereof and 2% thereafter. In
addition, Mr. Tuttle also received options to purchase 1,000,000 shares of the
Company's common stock at $2.50 per share exercisable through August 1, 2004. In
addition, he was to receive a one-time bonus of $500,000 when the Company's
common shares were accepted for listing on The NASDAQ Small Cap Stock Market or
National Market System.
This agreement was further amended effective May 1, 1999 and was terminated
by the Company for cause in August 1999. Mr. Tuttle disputed this termination
for cause and on June 15, 2000 this matter between the Company and Mr. Tuttle
was resolved by mutual agreement, at which time Mr. Tuttle was paid $300,000,
with an additional $600,000 to be paid over 36 months. Mr. Tuttle also was
issued 930,000 shares of the Company's common stock to replace shares previously
distributed by him on behalf of the Company, the exercise price for his
1,000,000 options was reduced to $1.50 and the expiration date for these options
was extended to March 31, 2005.
On November 3, 1997 the Company's wholly owned subsidiary, EPIC, entered
into an employment agreement with Robert J. Longo. His agreement provided for
employment as the President of EPIC, Inc. through September 15, 2002 at an
initial annual salary of $325,000 and a bonus formula, plus options to purchase
1,500,000 shares of the Company's common stock at $1.00 per share exercisable
through September 16, 2002, which options vested 500,000 initially, and 200,000
annually commencing September 15, 1998. EPIC was sold by the Company on June 15,
2000 and this Agreement was terminated, at which time a termination payment of
$900,000 was made to Mr. Longo.
18
<PAGE>
The Company entered into an employment agreement with Richard L. Franks,
the Company's Vice President, Secretary and General Counsel, for a five year
term effective February 1, 1999. The agreement calls for an annual salary of
$192,000, a bonus of $100,000 upon the financial closing of each of the Miami
and Newark Projects and options to purchase 50,000 shares of the Company's
common stock at an exercise price of $1.22 per share for a period of five years.
The Company entered into an employment agreement with Anthony P. Cipollone,
the Company's Treasurer and Controller, in September 1998 through April 2001
which calls for an annual salary of $150,000 plus options to purchase 350,000
shares of the Company's common stock at an exercise price of $1.00 per share for
a period of three years.
Since April 1999, the Company has been managed by an Office of the
President, which positions, since August 1999, have been held solely by two
consultants, Christopher J. Daggett and Marvin H. Roseman. From April 1999
through June 2000, each served on a month-to-month basis, and each was paid
$20,000 per month, plus expenses.
Effective June 29, 2000, the Company entered into a Consulting Agreement
with Bentley King Associates, Inc. which provided for the Company obtaining the
consulting services of its President, Marvin H. Roseman, for a three year term,
during which term Mr. Roseman will be a member of the Company's Office of the
President, for a monthly fee of $20,000, plus options granted to Bentley King
Associates, Inc. to purchase 1,200,000 shares of the Company's common stock at
$0.01 per share for a period of ten years and to purchase an additional
2,000,000 shares, which options will be granted only if certain performance
levels are reached.
Effective June 29, 2000, the Company entered into a Consulting Agreement
with Chadwick Partners, LLC which provided for the Company obtaining the
consulting services of its President, Christopher J. Daggett, for a three year
term, during which term Mr. Daggett will be a member of the Company's Office of
the President, for a monthly fee of $20,000, plus options granted to Chadwick
Partners, LLC to purchase 1,200,000 shares of the Company's common stock at
$0.01 per share for a period of ten years and to purchase an additional
2,000,000 shares, which options will be granted only if certain performance
levels are reached.
(h) REPORT ON REPRICING OF OPTIONS/SARS - None
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Company's only class of voting securities is its Common Stock.
19
<PAGE>
The following table sets forth, as of June 30, 2000, all persons known by
the Company to be a beneficial owner of more than five percent of the Company's
Common Stock and the Common Stock ownership in the Company, directly or
indirectly, by each of its directors and executive officers and by all directors
and executive officers of the Company as a group.
Amount and
Nature of
Name and Address Beneficial Percent of
of Beneficial Owners (1) Ownership Class
------------------------ ----------- -----------
Bentley King Associates, Inc. 1,200,000 (2) 2.0%
7960 Castle Pines Avenue
Las Vegas, NV 89113
Charles R. Carson 238,334 (3) *
70 Mendota Avenue
Rye, NY 10580
(Director)
Chadwick Partners, LLC 1,259,375 (4) 2.1%
764 Easton Avenue
Somerset, NJ 08873
Anthony P. Cipollone 370,000 (5) *
7 Halley Drive
Pomona, NY 10970
(Treasurer, Controller)
Christopher J. Daggett (4) 0%
96 Deer Ridge Road
Basking Ridge, NJ 07927
(Office of the President)
Richard L. Franks 50,000 (6) *
8821 South Blue Mountain Pl.
Highlands Ranch, CO 80126
(Vice President, General
Counsel, Secretary)
Peter Petrillo none 0%
243 Peachtree Drive
East Norwich, NY 11732
(Director)
Marvin H. Roseman (2) 0%
7960 Castle Pines Avenue
Las Vegas, NV 8913
(Office of the President)
John T. Shea none 0%
94 Emily Road
Far Hills, NJ 07931
(Director)
Christopher R. Smith none 0%
21 Middlesex Road
Darien, CT 06820
(Director)
W-L Associates, LLC 20,506,259 (7) 34.1%
Citco Building, Wickham's Cay
P.O. Box 662
Roadtown, Tortola, BVI
Officers and Directors 23,623,968 (8) 37.4%
As A Group (8 Persons)
20
<PAGE>
-------------------
* Less than 1%
(1) Unless otherwise indicated, each person named in the table exercises sole
voting and investment power with respect to all shares beneficially owned.
(2) Includes 1,200,000 shares which may be acquired by Bentley King Associates,
Inc. within sixty (60) days upon the exercise of options. Marvin H. Roseman is
the President of Bentley King Associates, Inc.
(3) Includes 238,334 shares which may be acquired by Mr. Carson within sixty
(60) days upon the exercise of options.
(4) Includes 4,375 shares owned directly and 1,255,000 shares which may be
acquired by Chadwick Partners, LLC within sixty (60) days upon the exercise of
options. Christopher J. Daggett is the President of Chadwick Partners, LLC.
(5) Includes 20,000 shares owned directly by Mr. Cipollone and 350,000 shares
which may be acquired by Mr. Cipollone within sixty (60) days upon the exercise
of options.
(6) Includes 50,000 shares which may be acquired by Mr. Franks within sixty (60)
days upon the exercise of options.
(7) When authorized, on an item-by-item basis, John T. Shea acts as
attorney-in-fact for Wasteco Ventures Limited and W-L Associates, LLC.
(8) Includes 3,093,334 shares which may be acquired within sixty (60) days upon
the exercise of options and warrants. As at June 30, 2000, the Company had
60,127,408 shares outstanding. An additional 18,934,445 shares were subject to
acquisition within sixty (60) days upon the exercise of options and warrants and
the conversion of notes, for a total of 79,061,853.
21
<PAGE>
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Employment agreements of Roger E. Tuttle, Robert J. Longo, Richard L.
Franks and Anthony P. Cipollone and Consulting Agreements with Bentley King
Associates, Inc. (Marvin H. Roseman) and Chadwick Partners, LLC (Christopher J.
Daggett) and Termination Agreements with Roger E. Tuttle and Robert J. Longo are
set forth in Item 10 above.
During the fiscal year ended April 30, 1999, while serving as a Director of
the Company, Robert J. Longo earned a fee of $700,000 from the Company for
providing a personal indemnification for a surety bond acquired by the Company.
$225,000 of this fee was paid in the fiscal year ended April 30, 1999.
In June 2000, Churchill Capital, Inc., of which Charles Carson, a Director
of the Company, is a principal was paid a fee of $790,000 for their assistance
in arranging for the sale of EPIC. In June 2000, Mr. Carson was paid $72,600,
and is still owed approximately $170,000, for financial advisory services
provided in prior years by Quirk, Carson & Peppet, of which Mr. Carson was a
principal.
ITEM 13.
EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits required by Item 601 of Regulation S-B
2. Plan of Acquisition,
Reorganization, etc. (1), (7)
3. Articles of Incorporation (1), (2), (3), (4), (6)
and By-Laws
4. Instruments defining the (1), (2), (3), (4), (5),
Rights of Security Holders (7)
9. Voting Trust Agreement (2), (3), (7)
10. Material Contracts (2), (8)
11. Statement re Computation of Per Share Earnings - See Note 4 to
Consolidated Financial Statements
13. Annual or Quarterly Reports none
16. Letter on Change in none
Certifying Accountant
18. Letter on Change in none
Accounting Principles
21. Subsidiaries of the see Part I, Item 1,
Registrant Background, herein
22. Published Report Regarding none
Matters Submitted to Vote
23. Consents of Experts and not applicable
Counsel
24. Power of Attorney none
27. Financial Data Schedule filed electronically
99. Additional Exhibits None
22
<PAGE>
(1) Incorporated by Reference to Registration Statement on Form S-1; File No.
333-1592; effective June 7, 1996
(2) Incorporated by Reference to Report on Form 8-K dated November 3, 1997 and
filed November 17, 1997
(3) Incorporated by Reference to Report on Form 8-K dated December 12, 1997 and
filed December 24, 1997
(4) Incorporated by Reference to Report on Form 8-K dated April 27, 1998 and
filed May 4, 1998
(5) Incorporated by Reference to Report on Form 8-K dated June 15, 1998 and
filed June 19, 1998
(6) Incorporated by Reference to Report on Form 8-K dated July 30, 1998 and
filed August 11, 1998
(7) Incorporated by Reference to Report on Form 8-K/A dated June 15, 2000 and
filed June 21, 2000
(8) Incorporated by Reference to Report on Form 8-K dated June 29, 2000 and
filed July 14, 2000
23
<PAGE>
(b) Reports on Form 8-K during the last quarter
1. A report on Form 8-K was filed on April 4, 2000 to report events on
March 21, 2000; the entering into a Stock Purchase Agreement with
Synagro Technologies, Inc. for the sale of Environmental Protection &
Improvement Company, Inc. and the amending of the Designation of Rights
of the Company's Series A, Series C and Series D Preferred Shares. No
financial statements were included in this filing.
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
APRIL 30, 2000
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2-F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Redeemable Preferred and Common F-5
Stocks and Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows F-6-F-7
Notes to Consolidated Financial Statements F-8-F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Compost America Holding Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Compost America
Holding Company, Inc. and Subsidiaries (the Company) as of April 30, 2000, and
the related consolidated statements of operations, redeemable preferred and
common stocks and stockholders' equity (deficit), and cash flows for the two
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Compost America
Holding Company, Inc. and Subsidiaries as of April 30, 2000, and the results of
their operations and their cash flows for the two years then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has a significant working capital
deficit, an accumulated deficit and a stockholders' deficit, and has incurred
losses since its inception and is in default of certain loan covenants that give
the lenders certain rights. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Further, the Company's growth
strategy will require substantial additional funds. Management's plans in regard
to these matters are also described in Note 3. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 2, the Company sold its wholly-owned subsidiary
Environmental Protection & Improvement Company, Inc. ("EPIC") in June 2000. The
accompanying consolidated financial statements have been prepared with the net
assets and operations of EPIC accounted for as discontinued operations. EPIC
accounted for substantially all of the Company's operations.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
July 11, 2000
F-1
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
April 30, 2000
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets
Cash and cash equivalents $ 70,785
Accounts receivable 15,045
Net assets of discontinued operations and deferred tax asset 26,547,932
-----------
Total current assets 26,633,762
Property, plant and equipment, net 11,653,783
Other assets 1,439,623
-----------
$39,727,168
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes payable $16,981,658
Due to related parties 9,788,577
Accounts payable 3,541,347
Accrued interest 4,279,021
Accrued dividends 2,266,625
Accrued expenses 2,114,914
-----------
Total current liabilities 38,972,142
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
April 30, 2000
LIABILITIES AND STOCKHOLDERS' DEFICIT (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Redeemable Preferred and Common stock
Series A Preferred, 169,000 shares authorized, issued,
and outstanding (liquidation value of $17,576,000) $7,975,145
Series B Preferred, 400,000 shares issued,
and outstanding (liquidation value of $1,250,025) 1,240,000
Series C Preferred, 91,000 shares authorized, issued,
and outstanding (liquidation value of $10,610,600) 5,492,408
Series D Preferred, 17,500 shares authorized, 8,771 issued,
and outstanding (liquidation value of $947,100) 414,365
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 16,892,754
------------
Stockholders' deficit
Preferred stock, no par value; 25,000,000 shares authorized; none issued
Preferred stock 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;
58,160,842 shares issued and outstanding 45,531,540
Additional paid-in capital 14,127,222
Common stock and warrants to be issued 708,755
Accumulated deficit (73,595,245)
Deferred compensation (1,487,500)
Treasury stock, 1,150,000 common shares, at cost (1,425,000)
------------
Total stockholders' deficit (16,137,728)
------------
$ 39,727,168
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended April 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 317,848 $ 217,129
------------ ------------
Costs and expenses
Operating 95,484 31,257
Selling, general and administrative 6,237,969 8,556,848
Depreciation and amortization 150,800 89,093
Provision for impairment 10,721,161
------------ ------------
6,484,253 19,398,359
------------ ------------
Operating loss from continuing operations (6,166,405) (19,181,230)
------------ ------------
Other income (expense)
Interest expense (4,099,241) (15,522,165)
Interest income 739,263 3,423,396
Loss on investment (819,129)
Other, net (255,051) (698,044)
------------ ------------
Loss from continuing operations
before income tax benefit (9,781,434) (32,797,172)
Income tax benefit 7,873,460
------------ ------------
Loss from continuing operations (9,781,434) (24,923,712)
Loss from discontinued operations (915,767) (1,366,540)
------------ ------------
Net loss (10,697,201) (26,290,252)
Preferred stock dividends (5,678,434) (1,519,761)
Accretion on preferred stock (2,947,691) (3,040,954)
------------ ------------
Net loss applicable to common stockholders $(19,323,326) $(30,850,967)
============ ============
Net loss per common share, basic and diluted
From continuing operations $ (0.33) $ (0.67)
From discontinued operations (0.02) (0.03)
------------ ------------
Net loss $ (0.35) $ (0.70)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED AND
COMMON STOCKS AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Series A Series B Series C
----------------------------- ---------------------------------
Shares Amount Shares Amount Shares
----------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balances, April 30, 1998 169,000 $5,710,521 - $ - 91,000
Proceeds from sales of Common stock,
net of transaction costs
Common stock issued for project costs
Common stock issued for services
Common stock issued in connection with debt
Common stock issued for interest
Reimbursement shares
Antidilution shares
Amortization of deferred compensation
Revaluation of Common stock to redemption value
Conversion of Preferred stock to Redeemable 400,000 1,240,000
Preferred stock
Conversion of Common stock to Redeemable
Common stock
Accretion of Preferred stock 1,037,133
Options and warrants issued for services
Options and warrants issued in connection with
debt financing
Debt conversion preference
Shares to be issued for services
Purchase of 1,150,000 shares of treasury stock
Preferred stock dividends
Net loss
----------- ----------- ---------- ----------- --------
Balances, April 30,1999 169,000 6,747,654 400,000 1,240,000 91,000
Common stock issued for services
Common stock issued in connection with debt
Common stock and warrants to be issued
in connection with settlements
Common stock issued for interest
Amortization of deferred compensation
Accretion of Preferred stock 1,227,491
Shares to be issued for services
Redemption of Series D Preferred stock
for investment in joint venture
connection with investment option
Preferred stock dividends
Net loss
----------- ---------- ---------- ----------- --------
Balances, April 30,2000 169,000 $ 7,975,145 400,000 $ 1,240,000 91,000
=========== ========== ========== =========== ========
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Redeemable Preferred Stock
---------------------------------------
Series C Series D Redeemable Common Stock
------------- ------------------------ ------------------------
Amount Shares Amount Shares Amount
------------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Balances, April 30, 1998 $2,441,927 17,500 $613,711 - $ -
Proceed from sales of Common stock,
net of transaction costs
Common stock issued for project costs
Common stock issued for services
Common stock issued in connection with debt
Common stock issued for interest
Reimbursement shares
Antidilution shares
Amortization of deferred compensation
Revaluation of Common stock to redemption value
Conversion of Preferred stock to Redeemable
Preferred stock
Conversion of Common stock to Redeemable 553,386 1,770,836
Common stock
Accretion of Preferred stock 1,387,990 615,831
Options and warrants issued for services
Options and warrants issued in connection with
debt financing
Debt conversion preference
Shares to be issued for services
Purchase of 1,150,000 shares of treasury stock
Preferred stock dividends
Net loss
------------- ---------- ------------ ---------- -----------
Balances, April 30,1999 3,829,917 17,500 1,229,542 553,386 1,770,836
Common stock issued for services
Common stock issued in connection with debt
Common stock and warrants to be issued
in connection with settlements
Common stock issued for interest
Amortization of deferred compensation
Accretion of Preferred stock 1,662,491 57,709
Shares to be issued for services
Preferred stock returned in
connection with investment option (8,729) (872,886)
Preferred stock dividends
Net loss
------------- ---------- ------------ --------- -----------
Balances, April 30,2000 $ 5,492,408 8,771 $ 414,365 553,386 $ 1,770,836
============= ========== ============ ========= ===========
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
----------------------------------------------------
Common
Stock and
Series B Warrant to
Preferred Stock Common Stock Additional be issued
----------------------- ---------------------------- Paid-in ------------
Shares Amount Shares Amount Capital Shares
---------- ---------- ---------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, April 30, 1998 401,000 $281,963 39,316,578 $34,248,453 $10,154,931 320,552
Proceed from sales of Common stock,
net of transaction costs 1,397,000 902,001
Common stock issued for project costs 171,000 139,200
Common stock issued for services 2,643,138 1,933,083
Common stock issued in connection with debt 1,364,528 1,699,873
Common stock issued for interest 285,000 137,168
Reimbursement shares 800,000 871,375
Antidilution shares 447,376 290,794
Amortization of deferred compensation
Revaluation of Common stock to redemption value 1,148,276
Conversion of Preferred stock to Redeemable (400,000) (279,463)
Preferred stock
Conversion of Common stock to Redeemable (553,386) (1,770,836)
Common stock
Accretion of Preferred stock
Options and warrants issued for services 1,437,253
Options and warrants issued in connection with 2,368,163
debt financing
Debt conversion preference 166,875
Shares to be issued for services 57,000
Purchase of 1,150,000 shares of treasury stock
Preferred stock dividends 1,530,777 1,460,759 481,012
Net loss
----------- -------- ------------ ------------- ----------- ----------
Balances, April 30,1999 1,000 2,500 47,402,011 41,060,146 14,127,222 858,564
Common stock issued for services 276,375 83,510 (57,000)
Common stock issued in connection with debt 923,410 362,548
Common stock and warrants to be issued 1,412,180
in connection with settlements
Common stock issued for interest 150,000 46,200
Amortization of deferred compensation
Accretion of Preferred stock
Shares to be issued for services (801,564)
Preferred stock returned in
connection with investment option
Preferred stock dividends 9,409,046 3,979,136
Net loss
----------- -------- ------------ ------------- ----------- ---------
Balances, April 30,2000 1,000 $ 2,500 58,160,842 $ 45,531,540 $14,127,222 1,412,180
=========== ======== ============ ============= =========== =========
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
-----------------------------------------------------------------------------
Common
Stock and
Warrants to
be Issued
----------- Accumulated Deferred Treasury
Amount Deficit Compensation Stock Total
----------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances, April 30, 1998 $ 508,325 $ (23,420,952) $ (2,677,500) $ - $ 19,095,220
Proceed from sales of Common stock,
net of transaction costs 902,001
Common stock issued for project costs 139,200
Common stock issued for services 1,933,083
Common stock issued in connection with debt 1,699,873
Common stock issued for interest 137,168
Reimbursement shares 871,375
Antidilution shares 290,794
Amortization of deferred compensation 595,000 595,000
Revaluation of Common stock to redemption value 1,148,276
Conversion of Preferred stock to Redeemable (279,463)
Preferred stock
Conversion of Common stock to Redeemable (1,770,836)
Common stock
Accretion of Preferred stock (3,040,954) (3,040,954)
Options and warrants issued for services 1,437,253
Options and warrants issued in connection with 2,368,163
debt financing
Debt conversion preference 166,875
Shares to be issued for services 31,800 31,800
Purchase of 1,150,000 shares of treasury stock (1,425,000) (1,425,000)
Preferred stock dividends 59,002 (1,519,761) -
Net loss (26,290,252) (26,290,252)
---------- --------------- ------------- ----------- ------------
Balances, April 30,1999 599,127 (54,271,919) (2,082,500) (1,425,000) (1,990,424)
Common stock issued for services (31,800) 51,710
Common stock issued in connection with debt 362,548
Common stock and warrants to be issued 708,755 708,755
in connection with settlements
Common stock issued for interest 46,200
Amortization of deferred compensation 595,000 595,000
Accretion of Preferred stock (2,947,691) (2,947,691)
Shares to be issued for services (567,327) (567,327)
Preferred stock returned in -
connection with investment option
Preferred stock dividends (5,678,434) (1,699,298)
Net loss (10,697,201) (10,697,201)
---------- ------------- ------------- ----------- ------------
Balances, April 30,2000 $ 708,755 $ (73,595,245) $ (1,487,500) $(1,425,000) $(16,137,728)
========== ============= ============= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended April 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(10,697,201) $(26,290,252)
Add: loss from discontinued operations (915,767) (1,366,540)
------------ ------------
Loss from continuing operations (9,781,434) (24,923,712)
Adjustments to reconcile loss from continuing operations to net cash used in
operating activities-
Depreciation and amortization 150,800 89,093
Provision for impairment 10,721,161
Loss on investment 819,129
Deferred income taxes (7,873,460)
Provision for conversion preference of debt 782,417
Common stock issued for interest 46,200 137,168
Common stock and warrants to be issued in connection with settlements 708,755
Common stock issued for services 83,510 3,127,049
Stock options issued for services 1,437,253
Noncash interest and financing costs 3,007,399 9,449,835
Increase (decrease) in cash and cash equivalents
attributable to changes in operating assets and liabilities:
Restricted cash 1,588,125
Accounts receivable 5,885 153,038
Other assets (5,650) 3,425
Accounts payable (93,094) 2,273,666
Accrued expenses 26,997 (1,128,487)
------------ ------------
Net cash used in operating activities (5,850,632) (3,344,300)
------------ ------------
Cash flows from investing activities
Purchases of property, plant and equipment (1,397,305)
Purchase of investment in soil (1,091,422)
Investment in joint venture (201,047) (315,000)
------------ ------------
Net cash used in investing activities (201,047) (2,803,727)
------------ ------------
Cash flows from financing activities
Repayments of short-term debt (90,000)
Proceeds from long-term debt 500,000 11,954,398
Repayments of long-term debt (130,085) (3,729,606)
Advances from related parties 1,610,000 1,297,694
Repayments to related parties (100,000) (705,206)
Purchase of treasury stock and payment for debt discount (3,300,000)
Proceeds from sale of common stock 902,001
------------ ------------
Net cash provided by financing activities 1,879,915 6,329,281
------------ ------------
Cash provided by (used in) discontinued operations 4,239,800 (182,850)
------------ ------------
Net increase (decrease) in cash and cash equivalents 68,036 (1,596)
Cash and cash equivalents, beginning of year 2,749 4,345
------------ ------------
Cash and cash equivalents, end of year $ 70,785 $ 2,749
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended April 30,
2000 1999
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information,
cash paid for interest $ 1,089,254 $4,342,711
=========== ==========
Supplemental disclosures of noncash investing and
financing activities
Conversion of notes payable into Common stock $ 362,548 $ --
=========== ==========
Accrued dividends $ 2,266,625 $ --
=========== ==========
Redemption of Series D Preferred stock
for investment in joint venture $ 872,886 $ --
=========== ==========
Repayment of restricted project bonds payable $91,370,763 $ --
=========== ==========
Accretion of preferred stock $ 2,947,691 $3,040,954
=========== ==========
Common stock issued for preferred stock dividends $ 3,979,136 $1,519,761
=========== ==========
Property, plant and equipment recorded pursuant to obligations
under financing agreements $ -- $ 377,392
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Operations
Compost America Holding Company, Inc. and Subsidiaries (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 certain situations. The Newark, New Jersey composting
facility project had to be altered 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 the land for a
waste transfer station or other suitable project. The Dade County,
Florida composting facility project has been delayed due to a
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 solid waste contracts will be sought
after by the Company.
Substantially all of the Company's revenues for the years ended
April 30, 2000 and 1999 were generated by Environmental Protection
& Improvement Company, Inc. ("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. On
June 15, 2000, the Company sold EPIC (see Note 2).
NOTE 2 - Discontinued Operations
On June 15, 2000, pursuant to a stock purchase agreement, the
Company reached a definitive agreement to sell its wholly-owned
subsidiary EPIC. Under the terms of this agreement, the Company
sold all of the stock of EPIC for gross proceeds of $37.5 million,
subject to working capital adjustments as defined and an earnout.
The Company assumed liabilities of approximately $10 million which
were substantially paid off with the proceeds from the sale. Net
assets of approximately $14.6 million relating to the EPIC sale
have been segregated on the accompanying April 30, 2000
consolidated balance sheet.
The results of operations for all years presented have been
restated for the discontinued operations.
April 30,2000
-------------
Net Assets held for Discontinued Operations
Assets
Cash and cash equivalents $ 264,179
Receivables 4,620,304
Prepaid expenses and other 877,868
Property, plant and equipment, net 9,116,477
Customer contract rights, net 24,581,813
------------
Total assets 39,460,641
------------
Liabilities
Notes payable to bank and others 10,174,261
Accounts payable and accrued expenses 2,738,448
Deferred income taxes 11,941,000
------------
Total liabilities 24,853,709
------------
Net Assets of Discontinued Operations 14,606,932
Deferred tax asset 11,941,000
------------
Net assets of Discontinued Operations and
Deferred tax asset $ 26,547,932
============
F-8
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Discontinued Operations (Continued)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Summary of Operating Results of Discontinued
Operations
Revenues $ 23,952,073 $ 22,032,853
------------ ------------
Costs and expenses
Operating 16,569,336 15,798,816
Selling, general and administrative expense 2,282,352 1,898,736
Depreciation and amortization 4,154,398 4,246,996
Provision for impairment 200,000
Compensation for stock options 595,000 595,000
------------ ------------
23,801,086 22,539,548
------------ ------------
Operating income (loss) 150,987 (506,695)
Interest expense 1,014,586 892,805
------------ ------------
Loss before income tax expense (benefit) (863,599) (1,399,500)
Income tax expense (benefit) 52,168 (32,960)
------------ ------------
Loss from Discontinued Operations $ (915,767) $ (1,366,540)
============ ============
</TABLE>
Proceeds from the sale of EPIC were used to pay off debt, pay contract
termination fees to EPIC executives and to purchase additional membership
interests in a joint venture.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is based
on the historical balance sheet of the Company and is adjusted to give effect to
the sale of EPIC and the related use of proceeds by the Company. The Pro Forma
Balance Sheet gives effect to the sale as if it had occurred as of April 30,
2000. The sale and the related adjustments are described in the accompanying
notes. The Pro Forma adjustments are based upon available information and
certain assumptions that management believes are reasonable. The Pro Forma
Balance Sheet does not purport to represent what the Company's financial
condition would actually have been had the sale occurred prior to April 30,
2000. The Pro Forma Balance Sheet should be read in conjunction with the
historical financial statements of the Company.
<TABLE>
<CAPTION>
Pro Forma Adustments
--------------------
(in 000's)
Historical Pro Forma
---------- ----------
April 30, Sale of Use of April 30,
2000 EPIC (1) Proceeds (2) 2000
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 71 $ 38,112 $ (28,464) $ 9,719
Accounts receivable 15 15
Net assets of discontinued operations
and deferred tax asset 26,547 (26,547)
Property, plant and equipment, net 11,654 11,654
Investment in joint venture 1,700 1,700
Other assets 1,440 1,440
--------------------------------------------------------
Total assets $ 39,727 $ 11,565 $ (26,764) $ 24,528
========================================================
Notes payable $ 16,982 $ 9,361 $ (21,076) $ 5,267
Due to related parties 9,789 800 (4,750) 5,839
Accounts payable and other
current liabilities 12,201 352 (938) 11,615
Redeemable Preferred and
Common stock 16,893 16,893
Stockholders' deficit (16,138) 1,052 (15,086)
--------------------------------------------------------
Total liabilities, redeemable stock
and stockholders' deficit $ 39,727 $ 11,565 $ (26,764) $ 24,528
========================================================
</TABLE>
(1) Represents cash proceeds and assumption of certain EPIC debt and
liabilities and the payment of severance costs.
(2) Represents immediate use of proceeds at closing.
F-9
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Going Concern Consideration
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As of April 30, 2000, the Company had a working capital
deficit of approximately $12,300,000 an accumulated deficit of
approximately $73,600,000 and a stockholders' deficit of
approximately $16,100,000. In addition, as of April 30, 2000, the
Company was not in compliance with the majority of its long-term
debt agreements. 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, has nominal revenues 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 projects, for working capital and for other capital
expenditures. As discussed in Note 2, the Company has cash
proceeds from the sale of EPIC in which it utilized to pay off a
significant portion of its long-term debt. In addition, the
Newark, New Jersey composting project has been altered due to the
Company's inability to timely 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 as a waste transfer station. In June
2000, the Company used proceeds from the sale of EPIC to purchase
additional membership interests in a joint venture. The joint
venture is developing a solid waste station in Bronx, New York.
The Company holds an option to purchase additional membership
interests subject to the terms of the agreement. The Company also
intends to form strategic alliances with certain well- recognized
companies in the waste industry to further implement its business
plan.
There can be no assurance that the Company will be able to obtain
sufficient debt or equity financing on favorable terms, if at all.
If the Company is unable to secure additional financing and attain
future profitable operations, its ability to implement its growth
strategy will be impaired and its financial condition, results of
operations and cash flows are likely to be materially adversely
affected. Also, there are significant uncertainties which could
affect the success of the joint venture. In addition, unfavorable
outcomes of any of the various pending litigation and disputes
could have a material adverse effect on the Company's consolidated
financial position, results of operations and cash flows.
NOTE 4 - Risk and Uncertainties
The planned composting facilities and alternative uses of these
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 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, or a transfer station,
including those of the type proposed to be built by the Company.
Also, there are no guarantees that the Company's planned strategic
alliances will come to fruition or that the Company's investment
in the joint venture will result in profits to the Company.
The waste management industry in which the Company operates 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.
F-10
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Risk and Uncertainties (Continued)
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 that
the failure to comply with such regulations might have a material
adverse effect on the Company and its operations in the future.
It is possible that some of the waste accepted at a Company
facility may contain contaminants which could cause environmental
damage and result in liabilities. The handling of contaminated
waste could have a material adverse effect on the Company and its
operations in the future.
NOTE 5 - Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
wholly-owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents - The Company considers all
highly-liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
Impairment of Long-Lived Assets - The Company complies with
Statement of Financial Accounting Standards ("SFAS") 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and undiscounted cash flows
estimated to be generated by those assets are less than the
assets' carrying amount. The Company continually evaluates whether
events and circumstances have occurred that indicated the
remaining estimated useful life of long-lived assets may warrant
revision, or the remaining balance may not be recoverable.
F-11
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Summary of Significant Accounting Policies (Continued)
Property, Plant and Equipment - Property, plant and equipment are
recorded at cost less accumulated depreciation and amortization.
The Company provides for depreciation and amortization using the
straight-line method based over the following estimated useful
lives:
Machinery and equipment 5 - 7 years
Leasehold improvements Term of lease
At April 30, 2000, property, plant and equipment consists of the
following:
Land $ 8,420,633
Machinery and equipment 606,357
Leasehold improvements 174,519
Project costs, net 2,873,407
-----------
12,074,916
Less accumulated depreciation and amortization 421,133
-----------
$11,653,783
===========
Depreciation and amortization expense relative to the above was
$87,369 and $65,180 for the years ended April 30, 2000 and 1999,
respectively.
Project costs consist of costs incurred for the development of the
Company's composting facilities. These costs include the
architectural, legal, structural and consulting engineering,
artist rendering, planning board approvals and other permitting
costs. Upon commencement of operations of a facility, the costs
associated with such project will be depreciated over the
estimated useful life of the facility.
At April 30, 2000, project costs aggregated $10,978,957 less a
reserve of $8,105,550. A substantial portion of net project costs
are comprised of Miami project costs which are anticipated to be
recovered through litigation. In the event the Company is
unsuccessful in its litigation, all or a portion of these costs
will be charged to operations.
The allowance for project costs was recorded due to impairments
from uncertainties surrounding the Miami and Newark projects and
abandonment of the remaining projects.
Income Taxes - The Company compiles with SFAS 109, "Accounting for
Income Taxes", which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible
amounts, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
F-12
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments - The fair values of the
Company's assets and liabilities which qualify as financial
instruments under SFAS 107, "Disclosures about Fair Value of
Financial Instruments," approximate their carrying amounts
presented in the consolidated balance sheet at April 30, 2000.
Net Loss Per Common Share -Net loss per common share is based on
the weighted average number of common shares outstanding.
The Company complies with 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 net loss applicable to common stockholders by the
weighted-average number of 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 loss of the
entity.
The net loss and weighted average Common and Common equivalent
shares used in determining the net loss per share are as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
2000 1999
------------- -------------
<S> <C> <C>
Net loss applicable to Common stockholders
per statements of operations $(19,323,326) $(30,850,967)
Preferred stock dividends not declared - 1,820,000
------------- --------------
Net loss applicable to Common stockholders
used for basic and diluted net loss per Common
share $(19,323,326) $(32,670,967)
============= ==============
Weighted average common shares outstanding
during year 54,172,495 43,421,719
Dilutive effect of Common stock to be issued 1,555,274 429,282
------------- --------------
Weighted average Common and Common
equivalent shares used for basic and diluted
net loss per Common share 55,727,769 43,851,001
============= ==============
</TABLE>
F-13
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Notes Payable
At April 30, 2000, notes payable consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable (see below) $ 10,500,000
Promissory note payable, due on May 15, 1999 with
interest payable monthly at 15% per year, collateralized
by certain of the Company's assets. This note is
currently in default. (1) 1,000,000
Convertible promissory note due on November 1, 2000,
interest at 10% per year, convertible to the Company's
Common stock at $2.50 per share. This note is
currently in default. (1) 2,000,000
Other collateralized notes payable bearing interest at rates
between 4.9% and 12% per annum, maturing at various
dates through April 2004. Approximately $229,000 of
these notes are convertible into shares of the Company's
Common stock at per share prices ranging from $0.40
to $3.00. These notes are currently in default. 428,895
Other unsecured notes payable bearing interest at rates
between 6% and 12% per annum, maturing at various
dates through March 2001. These notes are currently
in default. 3,052,763
------------
$ 16,981,658
============
</TABLE>
(1) These notes are collateralized by a first mortgage on the Newark
land site. Foreclosure proceedings have been initiated which
could prevent the future development of the Newark project.
F-14
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Notes Payable (Continued)
On October 30, 1998, the Company issued a $10,500,000 note to a
company affiliated with one of the Company's current shareholders
and debt holders. The note bears interest at 15% and interest is
payable upon the maturity date of the note which is the earlier of
October 30, 2000 or financial closing for the Miami project, as
defined. In connection with this transaction, the conversion of a
$200,000 debenture payable into 159,670 shares of the Company's
common stock in September of 1997 was rescinded. As part of this
note agreement, the convertible debenture payable in the amount of
$800,000, including the $200,000 rescinded amount, which is held
by an affiliate of the noteholder was converted into 1,406,593
shares of the Company's Common stock (665,000 shares were
transferred from the proprietary holdings of a related party on
behalf of the Company. The difference between the fair value of
the Common stock and the convertible debenture payable of $782,417
has been recorded as an expense (included in other expense in the
accompanying 1999 consolidated statement of operations) for the
conversion preference on the debt. As part of this note agreement
the Company was required to utilize $3,000,000 for the redemption
of 1,000,000 shares of the Company's common stock from an
affiliate of the noteholder. Since the redemption of the Company's
Common stock was completed as part of the $10,500,000 note payable
transaction, the difference between the buyback price and the fair
value of the Company's Common stock of $1,875,000 has been
recorded as a debt discount. The fair value of the Company's
Common stock repurchased has been recorded as treasury stock. In
addition, as part of the note agreement the company affiliated
with the noteholder has certain rights to convert the 400,000
shares of the Company's Series B Preferred stock which it
currently owns to Common stock on a one- for-one basis and then
the right to put the Common stock back to the Company at a per
share price of $3.10 as of the maturity date of the note payable.
Since the redemption premium was included as part of the
$10,500,000 note payable transaction, the difference between the
redemption price and the carrying value of the Series B Preferred
stock of $960,537 has been recorded as a debt discount. Since
these shares of Series B Preferred stock are now subject to this
redemption feature they have been classified outside of
stockholders' deficit in the accompanying consolidated balance
sheet. The company affiliated with the noteholder also has the
right to put up to 50% of the shares of Common stock held as of
the note closing date (553,386 shares) back to the Company at a
per share price of $3.20 as of the first anniversary of the
maturity date of the note payable. Since the redemption premium
was included as part of the $10,500,000 note payable transaction,
the difference between the redemption price and the carrying value
of the Common stock of $1,148,276 has been recorded as a debt
discount. In addition, given that the 553,386 shares of Common
stock are now subject to this redemption feature they have been
classified outside of the stockholders' deficit in the
accompanying consolidated balance sheet. The Company issued
warrants to purchase 1,500,000 shares of the Company's common
stock at exercise prices ranging from $1.00 to $2.25 as part of
the note agreement. The fair value of these warrants totaling
$1,187,000 has been recorded as a debt discount. As part of the
various transactions and provisions included in this $10,500,000
note payable, a debt discount of $5,170,813 has been recorded.
This amount has been charged to interest expense in its entirety
during the year ended April 30, 1999 based upon the respective
note being in default and thus callable at April 30, 1999.
During June 2000, this note, plus accrued interest, was paid with
proceeds from the sale of EPIC. This resulted in a gain on
extinguishment of debt of approximately $500,000.
F-15
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Minority Interest In Consolidated Subsidiaries
Newark Recycling and Composting Company, Inc. (Newark Recycling)
was incorporated in 1994 with Compost America Company of New
Jersey, Ltd. (a wholly-owned subsidiary of the Company) owning 75%
and Prince George's Contractors, Inc., d/b/a Potomac Technologies,
Inc., owning 25%. Newark Recycling is in the business of
development, construction and operation of a sewer sludge
composting facility in Newark, New Jersey. The Company has
consolidated the financial statements of Newark Recycling. In
addition, Newark Recycling owns 100% of American BIO-AG
Corporation. The minority shareholder's equity in Newark Recycling
has been reduced to zero as a result of prior years' loss
allocations.
Miami Recycling and Composting Company, Inc. (Miami Recycling) was
incorporated in 1995 with the Company owning 80.1% and an outside
consultant owning 19.9%. Miami Recycling is in the business of
development, construction and operation of a composting facility
in Miami, Florida. The Company has consolidated the financial
statements of Miami Recycling. The minority shareholder's equity
in Miami Recycling has been reduced to zero as a result of prior
years' loss allocations.
NOTE 8 - Redeemable Preferred Stock
The Company has authorized 25,000,000 shares of Preferred stock of
which 677,500 have been designated as Redeemable Preferred stock.
The Company has authorized 169,000, 400,000, 91,000 and 17,500
shares of Series A Redeemable Preferred Stock (Series A
Preferred), Series B Redeemable Preferred Stock (Series B
Preferred), Series C Redeemable Preferred Stock (Series C
Preferred) and Series D Redeemable Preferred Stock (Series D
Preferred), respectively (collectively Redeemable Preferred
Stock). The Series A, C and D Preferred is senior to all other
equity securities in terms of dividends and liquidation
preferences.
The holders of Series A Preferred are entitled to receive
cumulative dividends of 8% per share per year, which are payable
semi-annually on June 30 and December 31. The holders of Series C
Preferred are entitled to a non-cumulative dividend of 20% per
share per year through May 3, 1999 and of 8% per share per year
thereafter. Per an amendment to the Preferred Stock Agreements in
June 2000, dividends on the Series C Preferred are payable in cash
or shares of the Company's Common stock at a per share price equal
to 90% of the average trading price on the dividend payment date,
as defined. Per an amendment to the Preferred Stock Agreements in
June 2000, dividends on the Series D Preferred are payable in cash
or shares of the Company's Common stock at a per share price equal
to 90% of the average trading price on the dividend payment date,
as defined. The holders of Series D Preferred are entitled to
receive cumulative dividends of 8% per share per year which are
payable semi-annually on June 30 and December 31. Per amendments
to the Preferred Stock Agreements in June 2000, dividends on the
Series A, C and D Preferred are payable in cash or shares of the
Company's Common stock at a per share price equal to 90% of the
average trading price on the dividend payment date, as defined.
The liquidation value of the Series A Preferred, Series C
Preferred and Series D Preferred is $100 per share plus accrued
dividends. The Series A, C and D Preferred have no voting rights,
however, the consent of 66 2/3% of the holders' approval is
required for certain transactions. One of the limitations included
in the Series A and Series C Preferred agreement requires consent
for the issuance of any new series of Preferred stock.
F-16
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Redeemable Preferred Stock (Continued)
During the year ended April 30, 2000, shares of the Company's
Common stock valued at $3,979,136 have been recorded as a dividend
to the Series A, Series B, Series C and Series D Preferred
holders. On November 3, 2004, the Company is required to redeem
all of the outstanding shares of Series A Preferred, Series C
Preferred and Series D Preferred at a redemption price per share
of $100 plus accrued dividends. The Series A, C and D Preferred
are valued in the accompanying consolidated balance sheet at the
original investment, less transaction expenses, plus the
calculated accretion. The accretion is being recognized in order
to record the Preferred stock at the per share redemption value as
of the redemption date. In addition, each share of Series A, C and
D Preferred stock is redeemable upon a change in control, as
defined.
In addition, the Series A and Series C Preferred agreement
contains certain covenants and restrictions which apply to EPIC
including, but not limited to, restrictions on dividends or
intercompany advances to other parties including the Company,
limitations on additional indebtedness and limitations on capital
expenditures.
The Company had the right to redeem the outstanding shares of
Series C Preferred through May 3, 1999 and the shares of Series A
and D Preferred at any time for a redemption price per share of
$100 plus accrued dividends. The Series C Preferred is convertible
into Common stock after May 3, 1999 at the holders' option. Each
share of Series C Preferred would be valued at $100 per share and
would be convertible into Common stock on the conversion date, as
defined. The Company has recorded a conversion preference of
$1,750,000 in additional paid-in capital which was accreted
through May 3, 1999. At any time after November 3, 2000, the
Series A, C and D Preferred is exchangeable, at the holders'
option, for 9% Senior Subordinated Notes of the Company due on
November 3, 2004, at the rate of $100 principal amount of such
notes for each share of Preferred stock.
In July 1999, the holders of Series D Preferred stock exchanged
8,729 shares of the Series D Preferred for the Company's interest
in American Marine Rail, LLC pursuant to an agreement. In
addition, the Company has an option to repurchase its interest in
American Marine Rail, LLC for designated amounts. The remaining
Series D preferred shares can be converted to common shares at
$.40 per share through June 30, 2002, also pursuant to the
agreement. The loss on this transaction aggregating $819,129 was
reflected in the accompanying consolidated financial statements
during the year ended April 30, 1999.
During 1998, in connection with a certain financing arrangement,
400,000 shares of Series B Preferred stock were given a right to
convert each preferred share for one share of Common stock and
then to Put such Common stock to the Company for a Put purchase
price of $3.10 per share at the earlier of March 29, 2002 or the
close of the Miami project.
NOTE 9- Stockholders' Deficit
Common Stock - During the year ended April 30, 1999, the Company
issued 8,085,433 shares of Common Stock. The Company sold
1,397,000 shares of Common Stock for cash proceeds of $902,001 at
per share prices ranging from $0.25 to $1.00. Included in the
1,397,000 shares of Common Stock sold for cash proceeds were
transactions with one investor totaling 700,000 shares of Common
Stock from the Company for cash proceeds of $550,000. The Company
issued 1,530,777 shares of Common Stock for payment of dividends
on Preferred stock, which were valued at $1,460,759. The Company
issued 1,364,528 shares of Common stock in connection with debt,
which were valued at $1,699,873. The Company issued 285,000 shares
of Common stock for interest expense valued at $137,168. The
Company issued 800,000 shares of Common stock to Select
Acquisitions, Inc. ("Select") (a related party) as reimbursement
for Select's transfer of 800,000 shares of its proprietary
holdings of common stock on behalf of the Company to new investors
(including 665,000 shares to an affiliate of the $10.5 million
noteholder). These shares were valued at $871,375.
F-17
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9- Stockholders' Deficit (Continued)
The Company issued 447,376 shares of Common Stock to the Series A
and C Preferred holders under antidilusion provisions as a result
of additional shares of common stock issued this period. These
additional shares, had they been issued prior to the closing of
the sale of the Preferred stock, would have been included in the
calculation in accordance with the Preferred Series A and C
agreement. These shares were valued at $290,794. The Company also
issued 2,643,138 shares of Common stock for services rendered
which were valued at $1,933,083. Additionally, the Company issued
171,000 shares of Common stock for services relating to project
costs which were valued at $139,200. These shares were valued
based upon the fair value of the services rendered, since the
value of the services was more reliably determinable than the fair
value of the Common stock issued. If the fair value of the
services rendered was not reliably determinable these shares were
valued based upon the fair value of the Common stock issued.
The company affiliated with the $10.5 million noteholder also has
the right to put up to 50% of the shares of Common stock it holds
as of the note closing date (553,386 shares) back to the Company
at a per share price of $3.20 as of the first anniversary of the
maturity date of the note payable. Given that the 553,386 shares
of Common stock are now subject to this redemption feature, they
have been classified outside of stockholders' deficit in the
accompanying consolidated balance sheet.
During the year ended April 30, 2000, the Company issued
10,758,831 shares of Common Stock. Shares in the amount of 923,410
were issued in connection with the conversion of notes payable to
Common Stock at per share prices ranging from $0.37 to $0.42. The
Company issued 9,409,046 shares of Common Stock for payment of
dividends on Preferred Stock at per share prices ranging from
$0.15 to $0.67. The Company issued 150,000 shares of Common Stock
for payment of interest at per share prices ranging from $0.10 to
$0.44. Additionally, the Company issued 276,375 shares of Common
Stock for various services at per share prices ranging from $0.14
to $0.56.
Preferred Stock - The Company has authorized 25,000,000 shares of
Preferred stock, of which 5,000,000 shares have been designated as
Series B Convertible Preferred stock (Series B Preferred) and with
400,000 shares issued and outstanding 277,500 shares have been
designated as Series A, C and D Preferred Stock. The Series B
Preferred is senior to the Common stock, but junior to the Series
A, C and D Preferred Stock, in terms of dividends and liquidation
preferences.
The holders of Series B Preferred are entitled to receive
cumulative dividends at the rate of one share of Common stock for
every ten shares of Series B Preferred, payable on April 30 of
each year. Each share of Series B Preferred is convertible into
one share of Common stock at any time after September 15, 1997, at
the holders' option. During 1998, in connection with a certain
financing arrangement, 400,000 shares of Preferred B stocks were
given a right to convert each Preferred share for one share of
Common stock and then to Put such Common stock to the Company for
a Put purchase price of $3.10 per share at the earlier of March
29, 2002 or the close of the Miami project.
F-18
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10- Common Stock Warrants and Options
The following table summarizes common stock warrant activity:
<TABLE>
<CAPTION>
Weighted
Average
Number of Range of Exercise
Excercisable Exercise Price
Shares Prices Per Share
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Warrants outstanding at
April 30, 1998 1,072,058 $0.83 - $6.00 $ 2.58
Granted 1,500,000 1.00 - 2.25 1.50
---------------- ---------------- ----------------
Warrants outstanding at
April 30, 1999 2,572,058 0.83 - 6.00 1.98
Expired (772,058) 0.83 - 2.89 0.96
---------------- ---------------- ----------------
Warrants outstanding at
April 30, 2000 1,800,000 $1.00 - $6.00 $ 2.25
================ ================ ================
</TABLE>
As of April 30, 2000, all of the outstanding Common stock warrants
were vested.
The Company has issued stock options to various employees and
consultants with vesting terms and exercise prices determined by
management or the Board of Directors.
The following table summarizes common stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Range of Exercise
Number of Exercise Price Per
Shares Prices Share
------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Options outstanding at
April 30, 1998 8,636,798 $ 1.00 - 9.00 $ 2.05
Granted 4,978,730 0.01 - 7.00 1.07
Exercised (7,500) 0.50 - 0.75 0.63
Cancelled (782,500) 1.50 - 5.00 2.78
------------------- ------------------- ------------------
Options outstanding at
April 30, 1999 12,825,528 0.01 - 9.00 1.62
Expired (451,000) 0.50 - 1.00 0.96
------------------- ------------------- ------------------
Options outstanding at
April 30, 2000 (see note 15) 12,374,528 $ 0.01 - 9.00 $ 1.06
=================== =================== ==================
</TABLE>
F-19
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10- Common Stock Warrants and Options (Continued)
The following table summarizes information regarding stock options
outstanding at April 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------------
Weighted Weighted
Number Average Average Number Weighted
Range of Outstanding Remaining Exercise Exercisable Average
Exercise at Contractual Price Per at Exercise
Prices April 30, 2000 Life in Years Share April 30, 2000 Price
----------------- ---------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
$.01-$2.50 11,639,528 2.54 1.40 10,890,528 1.43
3.00-5.00 465,000 2.44 3.35 465,000 3.35
6.00-9.00 270,000 1.92 6.63 270,000 6.63
</TABLE>
The Company applies Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" and the related
interpretations in accounting for its stock option grants. The
disclosure requirements of SFAS 123, "Accounting for Stock Based
Compensation" are applied by the Company. Had compensation cost
for options granted been determined based upon the fair value of
the options at the date of grant, as prescribed by SFAS 123, the
Company's pro forma net loss and pro forma net loss per share
would have been as follows:
Year Ended
April 30,
1999
-------------
Net loss, as reported $ (30,850,967)
Net loss, pro forma (31,930,443)
Loss per share, as reported (0.70)
Loss per share, pro forma (0.73)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
Year Ended
April 30,
1999
-------------
Risk-free interest rate 5%
Expected dividend yield -
Expected life 4 years
Expected volatility 82%
F-20
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10- Common Stock Warrants and Options (Continued)
During the year ended April 30, 1999, the Company issued stock
options to various outside consultants for services rendered most
of which had exercise prices in excess of the trading prices on
the date of grant. These stock option grants have been accounted
for under the provisions of SFAS 123 using the Black-Scholes
option pricing model with the value of the options recorded as
expense, deferred financing costs, project capitalizable costs or
equity related costs, as appropriate. No options were granted
during the year ended April 30, 2000.
NOTE 11 - Related Party Balances, Transactions and Contingencies
At April 30, 2000, due to related parties consists of the
following:
<TABLE>
<CAPTION>
<S> <C>
Promissory notes payable, including accrued interest
and accounts payable of approximately $2,590,000,
to VRH Construction Corp.; interest accrues at 10%
per annum and is payable upon maturity; collateralized
by certain of the Company's assets (a) (f) $ 6,686,242
Amount due to former owner of EPIC, including accrued
interest of $35,600. Interest accrues at 10% per annum,
payable upon maturity. This amount was paid on
June 15, 2000 (c) 395,600
Payable to Resource Reclamation Services, Inc. (b) 224,772
Advances from Select Acquisitions, Inc. and affiliate;
$75,000 paid on June 15, 2000; 24 monthly payments
of $4,917 including imputed interest of 10% per annum
commencing on July 15, 2000 (d) 176,555
Advances from Wasteco Ventures Limited; interest
accrues at 10% per annum and was subsequently
paid off upon the EPIC closing on June 15, 2000 1,342,633
Advances from former President, includes a payment
of $300,000 made on June 15, 2000 and 35 monthly
payments of $16,666 including imputed interest at
10% beginning on July 15, 2000 (e) 804,138
Deferred salary due to officers and other (f) 158,637
------------
$ 9,788,577
============
</TABLE>
F-21
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Related Party Balances, Transactions and Contingencies (Continued)
(a) The shareholders of VRH Construction Corporation (VRH) are
also shareholders of the Company. The Company has engaged
in various transactions with VRH including advances, notes
payable and office leasing. VRH is the construction
manager for the Newark, New Jersey composting facility. In
May 1999, the Company defaulted on the payment of
approximately $5,700,000 of promissory notes, including
interest.
In addition, the Company repriced options held by VRH to
purchase 600,000 shares of the Company's Common Stock from
an exercise price of $1 to $.01. The Company also issued
VRH options to purchase 800,000 shares of the Company's
Common Stock of which 200,000 shares could be purchased at
an exercise price of $.01 and 600,000 shares at an
exercise price of $1.00.
Interest expense related to the VRH obligations for the
years ended April 30, 2000 and 1999 was approximately
$574,000 and $521,000, respectively.
(b) The Company has purchased recycled soils from Resource
Reclamation Services, Inc. ("RRS"), an entity owned by the
individual who owns 19.9% of Miami Recycling. In light of
the Company's recognition that there is no
readily-available market for 100,000 tons of impure soil,
the Company has adjusted the carrying amount ($1,929,261)
of its asset to zero.
(c) The amount arose from fees charged to the Company from the
former owner of EPIC for personally guaranteeing a
performance bond.
(d) Select Acquisitions, Inc. and affiliate are due 482,180
shares of common stock and 300,000 warrants to purchase
common stock at $1.50 per share expiring in 2005. These
securities were issued in June 2000 and are recorded in
common stock and warrants to be issued in the amount of
$215,135. These amounts were previously disputed and are
per a settlement agreement executed June 2000.
(e) Former President is due 930,000 shares of common stock and
1,000,000 warrants to purchase common stock at $1.50 per
share expiring in 2005. These securities were issued in
June 2000 and are recorded in common stock to be issued in
the amount of $493,620. These amounts were previously
litigated and are per a settlement agreement executed June
2000.
(f) These amounts are past due, hence, they are in default for
non-payment.
In addition, the Company has various transactions with several
consultants and service providers who are also minority
shareholders or acting executives of the Company. None of these
transactions are individually considered material.
F-22
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12- Income Taxes
At April 30, 2000, the Company has net operating loss
carryforwards ("NOL's") of approximately $51 million, which expire
between 2008 and 2020. The Tax Reform Act of 1986 contains
provisions that may severely limit the NOL's available to be used
in any given year in the event of significant changes in
ownership.
The statutory federal income tax rate differs from the effective
tax rate due to the change in the deferred tax asset valuation
allowance.
At April 30, 2000, the Company's deferred income tax asset is
comprised of the tax benefit associated with the following items
based on the statutory tax rates in effect:
Net operating losses $ 20,400,000
Valuation allowance (8,459,000)
-------------
Deferred tax asset, net $ 11,941,000
=============
In connection with the sale of EPIC, the deferred asset of
$11,941,000 will be reserved with the charge recorded as an offset
against the gain from the sale of EPIC.
NOTE 13- Joint Venture
On April 27, 1998, the Company issued 17,500 shares of Series D
Preferred (valued at $613,711) and 1,627,980 shares of Common
stock (valued at $1,953,576) in exchange for cash of $416,334,
repayment of loans due to this investor of $350,000, consulting
fees due to this investor of $538,079, a note receivable of
$445,587 from American Marine Rail, LLC ("AMR") and a one-third
ownership interest in AMR (valued at $816,076, net of transaction
expenses of $138,079). The Preferred stock was valued based on an
independent valuation. As part of this agreement, the Company
assigned 2.5% of its 33-1/3% interest, to the investor which sold
the interest to the Company. Subsequently, the Company transferred
an additional 1% and 1.11% of its ownership interest to the
investor and an unrelated party, respectively, leaving the
Company's ownership interest in AMR at 28.72%. In addition, the
Company committed to fund the future expenditures to be incurred
for the final approval and development of the AMR operations.
In July 1999, the holders of Series D Preferred stock exchanged
8,729 shares of the Series D Preferred for the Company's interest
in AMR. The loss on this transaction aggregating $819,129 was
reflected in the accompanying consolidated financial statements as
of April 30, 1999 (see Note 15).
F-23
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14- Commitments and Other Contingencies
Employment Agreements - The Company has employment agreements with
certain of its key executives and employees. The agreements
provide for minimum levels of compensation during current and
future years and are subject to adjustment, as defined. In
addition, certain of these agreements provide for a lump sum
payment, as defined, upon termination without cause or upon a
change in control.
Consulting Agreements - The Company has a consulting agreement
with an individual who owns 19.9% of Miami Recycling. This
consultant will be paid a management fee equal to 30% of the
distributable net income, as defined, from all facilities
developed in Florida. In February 1997, the Company entered into a
ten-year consulting agreement with this individual to provide
consulting services in the management of solid waste and sewer
sludge and in business development in Florida. In addition, upon
the closing of financing and commencement of operations for
composting facilities in Florida, the consultant will be paid a
cash fee and options to purchase shares of the Company's Common
stock at $2.00 per share based on the terms outlined in the
agreement. In addition, the Company has agreed to contract
exclusively with the consultant for trucking services in Florida
at negotiated competitive rates.
The Company has entered into various consulting agreements for
investment banking services, development of land application
business, financial consulting services and project development
services for which the consultants receive cash payments, Common
stock or Common stock options in exchange for services provided.
Certain of these consultants will receive future consideration
based upon the completion of certain future events (financings,
project approvals, etc.).
Miami Contract Commitment - In November 1996, the Company made a
payment of $1,000,000 to secure performance of its obligations
under the Restated Compost Recycling Agreement dated November 30,
1995 (Restated Agreement) with the City of Miami (the City). Under
the terms of Restated Agreement, the commencement date of
operations for its Miami Composting facility was extended to
October 1998. On February 24, 1998, a resolution was proposed and
adopted by the City of Miami Commission granting the Company an
additional extension through October 20, 2000 if the Company
agreed to the additional provisions noted below. The resolution
included provisions that the Company would agree to pay the City
an amount equal to the City's recycling costs for each of the two
years of the extension period, agree that the $1,000,000
previously deposited with the City to guarantee the Company's
performance under the Restated Agreement be released into the
City's general fund for the City's use and posting of a new
performance bond or letter of credit in the amount of $1,000,000
to guarantee the performance of its obligations under the Restated
Agreement. The $1,000,000 previously deposited has been
capitalized in other intangible assets as of April 30, 2000.
An amended agreement including these provisions has been signed by
the Company. The Company was notified by the City Administration
that they refuse to acknowledge the extension agreement. As a
result, the Company has filed suit against the City in order to
protect its rights under the Miami contract and to secure the
extension of the contract pursuant to the resolution adopted by
the City Commission in February 1998.
F-24
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Commitments and Other Contingencies (Continued)
A substantial portion of net project costs pertain to the Miami
contract. Management anticipates the recovery of these costs
through the above mentioned litigation. However, in the event the
Company is unsuccessful in its litigation, all or a portion of
these costs will be charged off to operations.
As a result of the Company's deteriorated financial condition, the
Company is the subject of several 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 15- Subsequent Events
As stated in Note 2, on June 15, 2000 the Company sold EPIC. The
Company utilized proceeds from the EPIC sale, to purchase a
membership interest in AMR for $1,700,000 and to repay certain
obligations.
During June 2000, the Company granted 2,400,000 options to certain
officers to purchase shares of common stock for $.01. These
options expire June 2010. Also, 750,000 options to purchase shares
of common stock at $1.00 per share were terminated upon the close
of the EPIC sale (see Note 2). Both of these transactions resulted
in charges to operations for the first quarter of fiscal 2001.
Additionally, 4,300,000 warrants to purchase shares of common
stock at prices ranging from $.01 to $1.50 were issued to various
parties in connection with debt. These warrants expire between
June 2003 and March 2005.
During June 2000, the Company entered into consulting contracts
with the firms providing services of the two consultants who are
the sole members of the Company's Office of the President. The
contracts commit the Company to a monthly fee of $20,000 to each
firm plus options to purchase 1,200,000 shares of the Company's
common stock at $.01 per share for a period of ten years. Options
to purchase an additional 2,000,000 shares of common stock will be
granted only if certain performance levels are achieved.
F-25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this first amendment to this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: July 31, 2000 COMPOST AMERICA HOLDING COMPANY, INC.
(Registrant)
By: /s/ CHRISTOPHER J. DAGGETT
--------------------------------------
Christopher J. Daggett,
Co-Principal Executive Officer
By: /s/ MARVIN H. ROSEMAN
--------------------------------------
Marvin H. Roseman,
Co-Principal Executive Officer,
Principal Financial Officer
By: /s/ ANTHONY P. CIPOLLONE
--------------------------------------
Anthony P. Cipollone,
Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ CHRISTOPHER J. DAGGETT Office of the President July 31, 2000
-----------------------------
Christopher J. Daggett
By: /s/ MARVIN H. ROSEMAN Office of the President, July 31, 2000
----------------------------- Principal Financial Officer
Marvin H. Roseman
By: /s/ RICHARD L. FRANKS Vice President, July 31, 2000
----------------------------- Secretary
Richard L. Franks
By: /s/ ANTHONY P. CIPOLLONE Treasurer, Controller, July 31, 2000
----------------------------- Principal Accounting Officer
Anthony P. Cipollone
By: /s/ CHARLES R. CARSON Director July 31, 2000
-----------------------------
Charles R. Carson
By: /s/ PETER PETRILLO Director July 31, 2000
-----------------------------
Peter Petrillo
By: /s/ JOHN T. SHEA Director July 31, 2000
-----------------------------
John T. Shea
By: /s/ CHRISTOPHER R. SMITH Director July 31, 2000
-----------------------------
Christopher R. Smith
Charles R. Carson, Peter Petrillo, John T. Shea and Christopher R. Smith
constitute all of the current members of the Registrant's Board of Directors.
