<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended July 31, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Exchange
Act; For the transition period from to
Commission File #0-27832
COMPOST AMERICA HOLDING COMPANY, INC.
................................................................
(Exact name of small business issuer as specified in its charter)
New Jersey 22-2603175
- ---------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Gateway Center, 25th floor Newark, New Jersey 07102
- --------------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
Issuers's telephone number, including area code: (973) 297-5400
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes No X
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
1. Common Stock - 55,452,489 shares outstanding
as at January 31, 2000.
Transitional Small Business Disclosure Format (check one):
Yes_____ No X
---
PLEASE ADDRESS ALL CORRESPONDENCE TO: Mark Gasarch, Esq.
40 West 57th Street
33rd Floor
New York, New York 10019
<PAGE>
PART I - FINANCIAL INFORMATION
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
July 31, 1999
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,378,398
Accounts receivable, net of allowance for
doubtful accounts of $117,422 4,790,633
Prepaid expenses and other assets 657,711
------------
Total current assets 6,826,742
------------
Property, plant and equipment, net 21,955,944
------------
Other assets
Customer contract rights, net 26,070,704
Other intangible assets, net 1,141,510
Other assets 73,441
------------
Total other assets 27,285,655
------------
$ 56,068,341
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Short-term debt $ 532,515
Long-term debt, current portion 18,905,024
Due to related parties 10,084,149
Accounts payable 4,496,427
Accrued expenses 4,610,027
------------
Total current liabilities 38,628,142
------------
Long-term debt 6,639,976
See accompanying notes to consolidated financial statements
F-1
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' DEFICIT (CONTINUED)
Redeemable Preferred and Common stock, no par value
Series A, 169,000 shares authorized, issued,
and outstanding (liquidation value of $17,688,700) $ 7,035,416
Series B, 400,000 shares authorized, issued,
and outstanding (liquidation value of $1,240,000) 1,240,000
Series C, 91,000 shares authorized, issued,
and outstanding (liqiuidation value of $11,989,562) 4,209,772
Series D, 8,771 shares authorized, issued,
and outstanding (liquidation value of $877,100) 371,530
Redeemable common stock, no par value; 553,386 shares issued
and outstanding (liquidation value of $1,770,836) 1,770,836
------------
Total redeemable Preferred and Common stock 14,627,554
------------
Stockholders' deficiency
Preferred stock, no par value; 25,000,000 shares authorized
Preferred series B Convertible, 5,000,000 shares authorized;
1,000 shares issued and outstanding 2,500
Common stock no par value; 100,000,000 shares authorized;
47,721,312 shares issued and outstanding 41,587,214
Additional paid-in capital 14,127,222
Common stock to be issued, no par value; 1,853,843
shares issued and outstanding 788,700
Accumulated deficit (56,974,217)
Deferred compensation (1,933,750)
Treasury stock, 1,150,000 common shares, at cost (1,425,000)
------------
Total stockholders' deficiency (3,827,331)
------------
$ 56,068,341
============
See accompanying notes to consolidated financial statements
F-2
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended July 31,
1999 1998
------------- -------------
Revenues $ 6,445,462 $ 5,650,263
------------- -------------
Costs and expenses
Operating 4,424,540 4,153,964
Selling, general and administrative 1,320,647 2,059,454
Depreciation and amortization 1,244,818 1,121,353
Compensation for stock options 148,750 148,750
------------- -------------
7,138,755 7,483,521
------------- -------------
Operating loss (693,293) (1,833,258)
Other income (expense)
Interest expense (1,587,502) (993,601)
Interest income 719,970
Loss in equity in joint venture (13,250)
------------- -------------
Loss before income tax expense (1,560,825) (2,840,109)
Income tax (expense) benefit (146,385) 920,458
------------- -------------
Net loss (1,707,210) (1,919,651)
Preferred stock dividends (312,597) (500,099)
Accretion on preferred stock (682,491) (587,408)
------------- -------------
Net loss applicable to common stockholders $ (2,702,298) $ (3,007,158)
============= =============
Net loss per common share
Basic $ (0.06) $ (0.07)
============= =============
Diluted $ (0.06) $ (0.07)
============= =============
See accompanying notes to consolidated financial statements
F-3
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended July 31,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,707,210) $(1,919,651)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 677,333 1,238,972
Depreciation 567,485
Deferred compensation 148,750 148,750
Deferred income taxes (920,458)
Loss in equity in joint venture 13,250
Stock issued for professional services 659,059
Stock options issued for services 42,993
Non-cash interest 239,055
Increase (decrease) in cash and cash equivalents attributable
to changes in operating assets and liabilities:
Restricted cash (821,000)
Accounts receivable, net 649,507 (1,238,889)
Other assets 180,968
Prepaid expenses and other current assets (144,846) 71,782
Accounts payable (543,307) 309,156
Accrued expenses (474,129)
Due to related parties 87,500 1,215,883
------------ ------------
Net cash used in operating activites (318,894) (1,200,153)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,155,082)
------------ ------------
Net cash used in investing activities (1,155,082)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 500,000 10,150,000
Advances from (repayments to) related parties, net 1,405,152 (1,498,718)
Repayment of notes payable (90,000)
Repayment of long-term debt (506,870) (7,170,804)
Proceeds from sale of Common stock, net 591,900
------------ ------------
Net cash provided by financing activities 1,398,282 1,982,378
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,079,388 (372,857)
CASH AND CASH EQUIVALENTS, beginning of period 299,010 388,956
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,378,398 $ 16,099
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended July 31,
1999 1998
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
cash paid during the period for interest $ 1,120,730 $ 197,488
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued for consulting services $ 31,800 $ 659,059
Common stock issued for compost projects costs 40,052
Common stock issued for payment of liability
Common stock issued for payment of Preferred stock dividends 312,597 500,099
Conversion of note payable into Common stock 362,548 152,459
Common stock options granted on sale of common stock 161,205
Common stock options granted for consulting services 42,993
Accretion of Preferred stock 682,491 587,408
Redemption of Series D Preferred stocks for investment
in joint venture 872,886
Repayment of restricted project bonds payable 91,370,763
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Operations
Compost America Holding Company, Inc. (the Company), formerly known as
Alcor Energy and Recycling Systems, Inc. was incorporated in New
Jersey. The Company's initial business plan was to construct or
acquire, manage and own indoor compost manufacturing plants.
Composting is a method of converting the organic portion of municipal
solid waste and sewage into a peat moss like product with agronomic
benefits. The Company's first two development projects were to be
fully-enclosed composting facilities in Newark, New Jersey and Dade
County, Florida. These development projects have been altered or
delayed due to various situations. The Newark, New Jersey composting
facility project had to be abandoned due to the Company's inability to
remarket New Jersey Economic Development Authority municipal bonds and
lack of necessary capital. The Company is currently pursuing
alternative uses which would involve using part of the land for a
waste transfer station and leasing the remainder of the land. The Dade
County, Florida composting facility project has been delayed due to
the pending lawsuit between one of the Company's subsidiaries and the
City of Miami. Management believes that the litigation will prove
successful for the Company which would allow for the continuance of
the development of a composting facility. If the pending litigation
does not force adherence to the Company's contract with the City of
Miami, other authorities will be sought after by the Company.
The Company was previously considered a development stage company;
however, in November 1997, the Company acquired an operating business,
Environmental Protection and Improvement Company (EPIC). EPIC is in
the business of transporting biosolids to approved land application
sites and transporting ash, municipal solid waste and contaminated
soils to approved landfills by intermodal truck and/or rail hauling.
Substantially all of the Company's revenues for the three months ended
July 31, 1999 and 1998 were generated by EPIC.
NOTE 2 - Liquidity
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As of July
31, 1999, the Company had a working capital deficit of $31,801,400, an
accumulated deficit of $56,974,217 and a stockholders' deficiency of
$3,827,331. In addition, as of July 31, 1999, the Company was not in
compliance with a majority of its long-term debt agreements. In
addition, the Series A and Series C Preferred stockholders have
certain rights to exchange their shares of the Company's Preferred and
Common stock of the Common stock of EPIC. In connection with the
financing needed for the project costs incurred and the funding of
operating expenses, the Company has incurred indebtedness with
relatively short repayment schedules. In addition, the Company has
incurred losses since its inception and is subject to those risks
associated with companies in the early stages of development. The
Company's growth and development strategy will also require the
approval of certain permits from regulatory authorities and
substantial financing will be required to finance construction and
development of Compost projects, for working capital and for capital
expenditures. In addition, the Newark, New Jersey composting project
has been abandoned due to the inability to secure the necessary
permits and approvals, the inability to re-market tax free municipal
bonds which were issued by The New Jersey Economic Development
Authority and due to the Company's inability to secure the necessary
capital to proceed. The Company is presently pursuing alternative uses
for the Newark site, primarily a waste transfer station.
F-6
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Liquidity (Continued)
The Company has executed a letter of intent to sell its wholly-owned
subsidiary EPIC to meet its obligations, complete pending projects and
continue as a going concern.
In the event of a sale of EPIC, under the terms presently
contemplated, the Series A and Series C Preferred shareholders have
indicated that no portion of the Series A and Series C Preferred Stock
will be redeemed. Simultaneous to the sale, the Series A and Series C
Preferred shareholders will waive their right to exchange various
securities for the stock of EPIC.
There is no assurance that the Company will be able to obtain
sufficient debt or equity financing on favorable terms if at all or
that the EPIC sale will be completed in a timely manner, if at all, or
on terms acceptable to the Company. If the Company is unable to secure
additional financing, attain future profitable operations and complete
the EPIC sale, its ability to implement its growth strategy will be
impaired and its financial condition and results of operations are
likely to be materially adversely affected. These matters, among
others, raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
NOTE 3 - Risk and Uncertainties:
The Company has elements of both a development company and an
operating company. The planned composting facilities are subject to
all of the risks inherent in the establishment of a new business
enterprise, including the absence of an operating history, lack of
market recognition for its products and the need to develop new
banking and financial relationships. The Company has not yet
demonstrated an ability to profitably operate any in-vessel compost
facilities, nor a transfer station, including those of the type
proposed to be built by the Company.
The waste management industry in which the Company operates as a
processor of municipal solid waste, sewage sludge and commercial
organic waste, is highly competitive and has been traditionally
dominated by several large and well recognized national and
multinational companies with substantially greater financial resources
than those available to the Company. The Company will be competing
with such other companies for a share of the available market and no
assurance can be given that in the future it will be able to obtain an
adequate commercial customer base to implement its operating plan.
The Company's planned operations are subject to substantial regulation
by federal, state and local regulatory authorities. Specific
regulations vary by state and locality. Local siting approvals require
differing levels of design documentation and process definition,
usually requiring public approvals in one or more public hearings.
Following local approval, the Company must apply for and receive air,
water, and solid waste and sewage sludge processing permits from state
environmental protection agencies. These permits will generally
include specific limits within which the facilities must operate. In
the case of air and water permits, these include limits on offsite
emission and discharge releases. Compost product composition may also
be regulated, requiring continual monitoring to assure compost product
quality. Continued compliance with this broad federal, state and local
regulatory network is essential and costly. Additionally, there can be
no assurance that additional, more restrictive regulations will not be
enacted in the future or that the Company will be in a position to
comply with such new regulations. Consequently, management is unable
to predict the effect upon its future operations of such regulations
except the failure to comply with such regulations might have a
material adverse effect on the Company and its operations in the
future.
The Company plans to contract for and to process, municipal solid
waste and sewage sludge that meets the Company's specifications. It is
possible that some of the wastes accepted at a company facility may
contain contaminants which could cause environmental damage and result
in liabilities. The receipt and disposal of contaminated wastes could
have a materially adverse effect on the Company and its operations in
the future.
F-7
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Basis of Presentation
The condensed financial statements included herein have been prepared
by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
These statements include all adjustments that, in the opinion or
management, are necessary to provide a fair statement of the results
for the periods covered. These financial statements should be read in
conjunction with the audited financial statements and the notes
thereto included in the Company's form 10-KSB for the year ended April
30, 1999. The results of operations for the interim periods presented
are not necessarily indicative of the results for the full year.
NOTE 5 - Net Loss Per Common Share
Earnings (loss) per common shares is based on the weighted average
number of common shares outstanding.
The Company complies with Statement of Financial Accounting Standards
("SFAS") 128, "Earnings Per Share", which requires dual presentation
of basic and diluted earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average common shares outstanding
for the year. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of
the entity.
The net loss and weighted average Common and Common equivalent shares
used in determining the net loss per share are as follows:
<TABLE>
<CAPTION>
Three Months Ended July 31,
1999 1998
------------ ------------
<S> <C> <C>
Cumulative net loss applicable to Common
stockholders per statements of operations $(2,702,298) $(3,007,158)
Preferred stock dividends not declared (182,000) (453,753)
----------- -----------
Net loss available for Common stockholders used for
basic and diluted net loss per Common share $(2,884,298) (3,460,911)
=========== ===========
Weighted average Common shares outstanding
during year 48,615,547 40,750,957
Dilutive effect of Common stock to be issued for
cumulative preferred stock dividends not declared 1,356,203 150,249
----------- -----------
Weighted average Common and Common equivalent
shares used for basic and diluted net loss per
Common share 49,971,750 40,901,206
=========== ===========
</TABLE>
F-8
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt
In June 1999, the Company issued a note payable of $500,000. The note
payable bears interest at 10% per annum and is payable upon the sale
of EPIC. In the event that the EPIC sale is not consummated, the note
is collateralized by the Miami property.
NOTE 7 - Restricted Project Bonds Payable
On December 30, 1997, the New Jersey Economic Development Authority
(the Authority), issued $90,000,000 of Solid Waste Disposal Facility
Revenue Bonds (the Bonds) to finance the costs of constructing the
Company's Newark, New Jersey composting project. The Bonds were issued
with an initial term ending on the earlier of December 15, 1998 or
such earlier date as permitted under the Bond Agreement and bore
interest at a rate of 3.95% per annum during the initial term.
On December 15, 1998, the Bonds were remarketed with an initial term
ending on the earlier of June 15, 1999 or such earlier date as
permitted under the Bond Agreement and bore interest at a rate of 3.0%
per annum during the initial term. During the initial terms, a trustee
held the $90,000,000 plus the interest earned.
On June 15, 1999, the Company elected not to remarket the bonds.
Accordingly, the escrowed funds were repaid to the bondholders.
NOTE 8 - Redeemable Preferred Stock
In July 1999, the holders of Series D Preferred (i) provided $225,000
to the Company; (ii) exchanged 8,729 shares of their Series D
Preferred Stock in the Company for the Company's 28.72% equity
interest in American Marine Rail, LLC (AMR); and (iii) gave up their
AMR Option as discussed in Section 9 of the Series D Certificates of
Designation. The holders of Series D Preferred then granted an option
to the Company, which option expires on March 31, 2000, to repurchase
the 28.72% equity interest in AMR for a cash payment of $1,750,000,
less any future payments made to AMR by the Company, up to $400,000.
F-9
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Related Party Transactions
The Company has various transactions and activities with certain
significant shareholders, directors, officers and other related
parties. A summary of activity with related parties is as follows:
<TABLE>
<CAPTION>
Three Months Ended July 31,
1999 1998
---------- ----------
<S> <C> <C>
Interest expense on advances:
VRH Construction Corporation $ 143,163 $ 130,148
Select Acquisitions, Inc. 6,031 401
Foundation Systems, Inc. 2,764 1,834
President of the Company 2,540 550
President of EPIC 8,600 28,675
Wasteco 29,624
Construction cost to Resource Reclamation,
Inc. and Ouster Corporation capitalized in
construction in progress 500,000
Fees paid to Resource Reclamation, Inc. and
Ouster Corporation 300,000
Fees related to personal guarantee to
President of EPIC 50,000 250,000
Deferred officers' salaries 35,000 106,875
Advances from former President 85,000
Advances from President of EPIC 360,000
Advances from Wasteco 1,250,000
Repayment of advances from President of EPIC 50,000 1,676,189
Repayment of advances from former President 20,223
Repayment of advances from Select Acquisitions, Inc. 4,979
Repayment of advances from VRH 75,000
</TABLE>
NOTE 10 - Contingencies
The Company, along with the Company's wholly-owned subsidiary, EPIC
and the Company's former President, have been named as defendants in
the Superior Court of New Jersey, Law Division, Essex Vicinage in an
action brought against it by unrelated parties (the "Plaintiffs"). In
the action, the Plaintiffs seek recovery of approximately $3 million
claimed due under a consulting agreement and amendments thereto (the
"Agreement"), together with interest, attorneys' fees and costs of
suit and related relief. The Plaintiffs' claims are based upon breach
of contract, fraud, misrepresentation and quantum meruit. The
Plaintiffs claim that the Agreement, executed on the Company's behalf
by its former President, entitles the Plaintiffs to a "success fee" in
the amount claimed due, arising from the performance by EPIC of a 15
year municipal waste disposal contract with the City of New York. In
December 1999, the Company reached a tentative settlement (see Note
11).
F-10
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Contingencies (Continued)
The Company has been named as a defendant in the Superior Court of New
Jersey, Law Division, Essex Vicinage in an action brought against it
by its former President. The former President seeks (i) damages for
alleged accrued salary of $1.5 million under an employment agreement
with interest and loans claimed due from the Company of approximately
$265,000 with interest, (ii) the award of 930,000 "replacement shares"
of the Company's stock, (iii) an accounting for the disbursement of
Company funds during the period January 1, 1999 to present, (iv)
damages resulting from the Company's alleged bad faith in dealing with
the former President and (v) related relief. At July 31, 1999, the
Company has recorded approximately $1,066,000 in connection with item
(i), which consists primarily of his compensation through July 31,
1999.
The Company has filed an answer, affirmative defenses and
counterclaims against the former President. The Company's legal
counsel has indicated that the ultimate outcome of this litigation
cannot presently be determined. Accordingly, no further provision for
liability to the Company that may result upon adjudication has been
made in the accompanying consolidated financial statements. The
parties are currently negotiating for the settlement of these claims.
An unfavorable outcome of this matter could have a material adverse
effect on the Company's consolidated financial position, results of
operations and cash flows and its ability to continue as a going
concern.
The Company is in dispute with a member of its Board of Directors and
Audit Committee (hereinafter referred to as the "Board Member"). The
Board Member claims that the Company owes him and Select Acquisitions,
Inc. ("Select"), a company of which the Board Member is President,
amounts substantially in excess of amounts recorded in the
accompanying consolidated financial statements. Specifically, the
Board Member claims the Company owes Select 408,640 shares of the
Company's registered common stock and $308,073 in cash plus accrued
interest and that the Company owes the Board Member 1,000,000 shares
of the Company's registered common stock, options to purchase 300,000
shares of the Company's registered common stock and $1,680,000 in
cash. Of the $308,073 which the Board Member asserts is owed to
Select, $210,000 is claimed as consulting fees for the period between
January 1994 and June 1996, while the remaining $98,073 relates to
loans made to the Company in 1995 and 1996. The Board Member claims
for himself $870,000 in consulting fees for the period between July
1996 and July 1999 and $810,000 in closing fees, related to certain
Company transactions which closed between November 1997 and November
1998. The Board Member indicates that the 408,640 shares of the
Company's registered common stock claimed on behalf of Select
allegedly were transferred by Select in order to facilitate a November
1997 Company transaction closing. The Board Member also claims that
the options to purchase 300,000 shares of the Company's registered
common stock at $.01 per share were due him as a board member in
connection with the closing of a November 1997 Company transaction.
Finally, the Board Member claims the 1,000,000 shares of the Company's
registered common stock as an equity bonus. These claims are based
upon alleged agreements entered into between the Board Member and the
former President of the Company.
At July 31, 1999, the Company has recorded approximately $182,000 in
notes and accrued interest to Select.
F-11
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Commitments and Other Contingencies (Continued)
The Company's legal counsel has indicated and the Company's management
believes that (i) the Company's records do not reflect any approval
(or even discussion) by the Company's Board of Directors of any
consulting, employment or other agreement which would support the
Board Member's claims (except for loans payable to Select in an amount
less than $150,000); (ii) there is no documentation in the closing
binders and official transcripts of the Company transactions
referenced by the Board Member that would support the Board Member's
and/or Select's claims for closing fees, stock options or shares of
the Company's registered Common stock in connection with any of the
transactions for which the Board Member is claiming consideration is
owed and (iii) the absence of notice by the Board Member as well as
lack of any performance standards by which to judge his work for the
Company as an employee or a consultant would appear to seriously
undermine any quantum meruit claim by the Board Member. Accordingly,
based upon the assessment of the claims by the Company's legal counsel
and management, no further provision for liability of the Company that
may result upon adjudication has been made in the accompanying
consolidated financial statements. An unfavorable outcome to this
matter could have a material adverse effect on the Company's
consolidated financial position, results of operations, cash flows and
its ability to continue as a going concern.
During the year ended April 30, 1999, Select transferred 800,000
shares of its proprietary holdings of Common stock on behalf of the
Company to certain parties (including 665,000 shares to an affiliate
of the $10.5 million noteholder. These shares were reimbursed to
Select during the year ended April 30, 1999.
As a result of the Company's deteriorated financial condition, the
Company is the subject of several other threatened, and certain
actual, legal actions for nonpayment of obligations. The ultimate
liabilities in these matters are not known and the vendors, in some
cases, may seek damages in excess of amounts recorded in the
accompanying consolidated financial statements. The Company believes,
but no assurance can be made, that its liability will not exceed
amounts recorded in the accompanying consolidated financial
statements.
NOTE 11 - Subsequent Events
In August 1999, the Company's former President was terminated from all
duties pursuant to his May 1, 1999 Second Amendment to Employment
Contract. In November 1999, the former President filed suit in the
Superior Court of New Jersey, Law Division, Essex Vicinage seeking
damages and notifying the Company that there is a dispute as to his
termination for cause (see Note 10).
In August 1999, the Company and EPIC signed a letter of intent with an
unrelated party to sell EPIC.
In November 1999, EPIC received waiver on all current defaults of a
certain debt obligation.
In December 1999, the Series A Preferred shareholders signed an
agreement stating that prior to May 2000 they will not exercise their
EIPC option to the extent that such exercise would result in, or
increase, a stockholders' deficiency after giving effect to the
transaction.
In December 1999, the Company settled an action brought against it by
unrelated parties for $853,000 to be made in a lump sum payment upon
the earlier of the sale of EPIC or March 31, 2000.
In December 1999, the Company entered into a Modification of Contract
and Settlement Agreement with RRS whereby the Company will pay RRS
$425,000 to terminate certain provisions made in the previous contract
which relates to future services RRS was to provide to the Company.
Since April 30, 1999, the Company has received loans aggregating
approximately $3.7 million from shareholders and existing creditors.
Additionally, since April 30, 1999, the Company has issued
approximately 8.5 million shares of its Common stock primarily for
payment of dividends on Preferred stock.
F-12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
historical financial statements of the Company and related notes thereto
included elsewhere in this Form 10-QSB and the Annual Report on Form 10-KSB for
the year ended April 30, 1999 (the "Form 10-KSB"). This discussion contains
forward-looking statements regarding the business and industry of the Company
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on the current plans and expectations of the Company
and involve risks and uncertainties that could cause actual future activities
and results of operations to be materially different from those set forth in the
forward-looking statements.
The information set forth and discussed below for the three months ended
July 31, 1999 and 1998 is derived from the consolidated financial statements
included elsewhere herein. The financial information set forth and discussed
below is unaudited but, in the opinion of management, reflects all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of such information. The results of operations of the Company for the fiscal
quarter ended July 31, 1999 may not be indicative of results expected during the
other quarters or for the entire fiscal year ended April 30, 2000.
RESULTS OF OPERATIONS
For the quarter ended July 31, 1999, total revenues were $6,445,462 compared
to $5,650,263 for the quarter ended July 31, 1998, an increase of $795,199. The
increase is attributable to the sales by the Company's wholly owned subsidiary,
Environmental Protection & Improvement Company. Inc. (`EPIC'), which was
acquired on November 3, 1997.
For the quarter ended July 31, 1999 total costs and expenses were $7,138,755
compared to $7,483,521 for the quarter ended July 31, 1998, a decrease of
$344,766. The decrease in total costs and expenses consists of a decrease in
selling, general and administrative expenses of $738,807, offset by increases
in operating expenses of $270,576 and depreciation and amortization expense of
$123,465. The increases in operating expenses and depreciation and amortization
and compensation for stock options are attributable to the increased sales and
activities of EPIC. The decrease in selling, general and administrative expenses
was due primarily to a reduction in the costs associated with projects now
abandoned.
1
<PAGE>
Net interest expense for the quarter ended July 31, 1999 was $867,532,a
decrease of $126,069 from the quarter ended July 31, 1998. Net interest expense
for the quarter ended July 31, 1999 decreased due to notes which were converted
into common stock of the Company, and the amortization of deferred finance costs
associated with the Newark bond which previously had been charged to interest
expense. These costs were fully expensed as of June 1999. The Company's long
term debt obligations (including amounts due to related parties) as of July 31,
1999 were $35,629,149 as compared to $26,303,565 as of July 31, 1998. This
increase of $9,325,584 is due primarily to the loan of an additional $10,500,000
made in November 1998.
The Company recorded an Income Tax expense of $146,385 for the quarter
ended July 31, 1999 as compared to an income tax benefit of $920,458 for the
quarter ended July 31, 1998. The income tax expense primarily is the result of
EPIC having state taxable income. Certain items that are deductible for
financial statement reporting are not deductible for income tax reporting. The
Company files consolidated Federal Tax Returns for which the carry-forward
losses and current losses exceed any non-deductible items. The Company has not
recorded any income tax benefit for the quarter ended July 31, 1999. Management,
at this time, cannot determine the probability if this tax benefit will be
realized in future periods. At July 31, 1999, the Company has significant net
operating loss carry-forwards in excess of $46,000,000, which begin to expire in
2008. The Tax Reform Act of 1986 contains provisions that may limit the net
operating loss carry-forwards available to be used in any given year in the
event of significant changes in ownership.
During the quarter ended July 31 1999, the Company recorded $312,597 in
dividends, payable in common stock, relating to its issued redeemable Preferred
Stock, as compared to $500,099 for the quarter ended July 31, 1998. The decrease
of $187,502 primarily is due to the partial conversion of Preferred Series D
Stock for the Company's ownership of an interest in American Marine Rail, LLC
(`AMR'). During the quarter ended July 31, 1999 the Company also recorded
accretion on its Preferred Stock of $682,491 related to a mandatory redemption
feature,as compared to $587,408 for the quarter ended July 31, 1998. This
increase of $95,083 is due to the normal process of accretion to redemption
value of the Redeemable Preferred Stock.
2
<PAGE>
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporarily
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company does not believe that it has material exposure to the Year 2000
issue with respect to its own information systems since its existing systems
correctly define the year 2000. For this reason the Company does not anticipate
that it will incur any significant expense in effecting year 2000 compliance
with regard to its own information system. The Company at present is unable to
predict the extent to which the year 2000 issue will effect its suppliers, or
the extent to which the Company would be vulnerable to the failure by any of its
suppliers to remediate any Year 2000 issues on a timely basis. The failure of
any major supplier to convert its systems on a timely basis or a conversion that
is incompatible with the Company's systems could have a material adverse effect
on the Company.
LIQUIDITY AND CAPITAL RESOURCES.
As of July 31, 1999, the Company has cash and cash equivalents of
$1,378,398, a working capital deficit of $31,801,400 and an accumulated deficit
of $56,974,217. Included in the working capital deficit is $18,905,024 for the
current portion of long term debt and $10,084,149 for amounts due to related
parties. Since April 30, 1999, the Company has defaulted on substantially all of
its obligations, but has received extensions for the original maturity terms to
dates after April 30, 1999 on several accounts payable, accrued expenses and
debt obligations, primary amounts due to related parties, who are also
stockholders of the Company, and such extended terms are reflected in the
financial statements. In addition, the Company has incurred losses since in its
inception and is subject to those risks associated with the companies in the
early stage of development. These matters raise substantial doubt about the
company's ability to continue as a going concern.
The Company's growth and development strategy will also require the approval
of certain permits from regulatory authorities and substantial financing will be
required to finance construction and development of Compost projects, for
working capital and for capital expenditures. The Company expects that adequate
financing will be available to fund the Company's working capital needs and to
fund the required debt payments. However, there is no assurance that the Company
3
<PAGE>
will be able to obtain sufficient debt or equity financing on favorable terms or
at all. If the Company is unable to secure addition financing, its ability to
implement its growth strategy will be impaired and its financial condition and
results of operations are likely to be materially adversely affected.
During the quarter ended July 31, 1999 the net cash used in operating
activities was $318,894 as compared with cash used in operating activities in
the prior year period of $1,200,153. This decrease in cash used in operating
activities for July 31, 1999 as compared with July 31,1998 is primarily due to
the decrease in accounts receivables and other assets of $649,507 and $180,968
respectively, which favorably impacted cash flow in the period.
For the quarter ended July 31, 1999 the Company made no cash purchases of
property, plant and equipment. During the quarter ended July 31, 1998 the
Company utilized cash for purchases of property, plant and equipment of
$1,155,082. These purchases were primarily related to capital expenditures for
the Company's composting projects in progress and for the EPIC subsidiary.
During the quarter ended July 31, 1999 the Company received net cash from
financing activities of $1,398,282, as compared to $1,982,378 for the quarter
ended July 31, 1998. The cash was received from proceeds from long-term debt of
$500,000 and net advances from related parties of $1,405,152, less $506,870 used
for the repayment of long-term debt.
Historically, the Company has satisfied its capital expenditures, working
capital and its acquisition needs primarily through private placements of debt
and equity securities, equipment lease financing and loans from related parties.
The Company has used, and believes that it will likely continue using amounts in
excess of the cash generated from operations to fund the growth components of
its business including acquisitions and ongoing operating expenses. 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.
The Company presently is negotiating for the sale of its subsidiary EPIC. If
successful, the proceeds from this sale, combined with additional loans, should
enable the Company the continue operations while developing a waste-related
project in Newark.
4
<PAGE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This quarterly report includes forward looking statements which involve
risks and uncertainties. Such statements can be identified by the use of
forward-looking language such as "will likely result", "may", "are expected to",
"is anticipated", "estimate", "believes", "projected", or similar words. All
statements other than statements of historical fact included in this section,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. The
Company's actual results could differ materially from those anticipated in any
such forward-looking statements as a result of various risks, including, without
limitation, the dependence on a single line of business; the failure to close
proposed financing; rapid technological change; change in permitting and
environmental regulations; inability to attract and retain key personnel; Year
2000 compliance issues; the potential for significant fluctuations in operating
results; and the potential volatility of the Company's common stock.
5
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings None not Previously
Reported
Item 2. - Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) During the fiscal quarter ended July 31, 1999, the Company
issued 1,318,301 shares of its common stock as follows:
<TABLE>
<CAPTION>
Date # of Shares Issued To For Price
- ---- ----------- --------- --- -----
<S> <C> <C> <C> <C>
05/10/99 405,000 noteholder conversion of note $0.40/share
05/13/99 40,100 two investors dividend $0.50/share
05/20/99 57,000 one consultant services $0.56/share
05/21/99 120,000 three noteholders interest $0.44/share
06/14/99 15,000 consultant services $0.39/share
07/02/99 162,791 one investor dividend $0.43/share
07/21/99 518,410 noteholder conversion of note $0.50/share
</TABLE>
These shares were issued without registering the securities under the Securities
Act of 1933, as amended. There were no underwriters involved in the transaction,
and no underwriting discounts or commissions. In light of the small number of
recipients and that all securities issued were restricted against subsequent
transfer, the Company believes that this issuance of securities was effected
under an exemption provided by Section 4(2) of the Securities Act of 1933, as
amended, being sales by an issuer not involving a public offering.
(d) Not Applicable
Item 3. - Defaults Upon Senior Securities None
Item 4. - Submission of Matters to a Vote of Security Holders
None
Item 5. - Other Information None
Item 6. - (a) Exhibits None
(b) Reports on Form 8-K
1. A report on Form 8-K dated May 15, 1999 was filed on May
27, 1999 to report on a significant number of lawsuits
brought against the Company.
<PAGE>
2. A report on Form 8-K dated June 2, 1999 was filed on June
11, 1999 to report on the Company's decision not to
remarket its $90,000,000 of NJEDA Solid Waste Disposal
Facility Revenue Bonds, but instead to use the escrowed
proceeds of the bond sale to retire the bonds, and to
explore alternative uses for the Company's Newark, New
Jersey property.
3. A report on Form 8-K dated June 17, 1999 was filed on
June 24, 1999 to report on the Company's decision to
create a vacancy in the position of Chairman of the Board
and to reduce the Office of the President down to two
persons, Christopher J. Daggett and Marvin H. Roseman.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: COMPOST AMERICA HOLDING COMPANY, INC.
March 20, 2000 (Registrant)
By /s/ Marvin Roseman
-----------------------------------
Marvin Roseman, Co-Principal
Executive Officer, Principal
Financial Officer
By /s/ Anthony P. Cipollone
----------------------------------
Anthony P. Cipollone, Controller,
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF COMPOST AMERICA HOLDING COMPANY, INC. FOR THE FISCAL QUARTER ENDED
JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 1,378,398
<SECURITIES> 0
<RECEIVABLES> 4,908,055
<ALLOWANCES> 117,422
<INVENTORY> 0
<CURRENT-ASSETS> 6,826,742
<PP&E> 26,163,590
<DEPRECIATION> 4,207,646
<TOTAL-ASSETS> 56,068,341
<CURRENT-LIABILITIES> 38,628,142
<BONDS> 6,639,976
12,856,718
2,500
<COMMON> 58,273,972
<OTHER-SE> (60,332,967)
<TOTAL-LIABILITY-AND-EQUITY> 56,068,341
<SALES> 6,445,462
<TOTAL-REVENUES> 6,445,462
<CGS> 4,424,540
<TOTAL-COSTS> 4,424,540
<OTHER-EXPENSES> 2,714,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,587,502
<INCOME-PRETAX> (1,560,825)
<INCOME-TAX> 146,385
<INCOME-CONTINUING> (1,707,210)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,707,210)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
