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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, 1999
[ ] 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.
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(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 [ ] NO [X]
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:
$ 22,249,982
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 - $ 5,795,894 (approximate as of February
1, 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 - 55,452,489 shares outstanding as at January 31, 2000
Documents Incorporated By Reference - None
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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 the following operating subsidiaries; American Soil, Inc., a New York
corporation, incorporated on August 6, 1986; Environmental Protection &
Improvement Company, Inc. ("EPIC"), formerly know as R.J. Longo Construction
Company, Inc., a New Jersey corporation incorporated on February 17, 1971;
Garden Life Sales Company, Inc., incorporated in Delaware on March 1, 1996; and
Gardenlife Sale Company of Florida, Inc., incorporated in Delaware on April 20,
1998. The Company has two other wholly-owned subsidiaries, both presently
inactive; Compost America Technologies, Inc., incorporated in Delaware on June
15, 1995 and Philadelphia Recycling and Composting Company, Inc., incorporated
in Pennsylvania on March 8, 1995. 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; and Gloucester Recycling and
Composting Company, Inc., incorporated in Delaware on August 15, 1994. 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.
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
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Composting Project"). Each of these projects is in the planning stage and
neither project has received final governmental permits and approvals. Permits
previously obtained by the Company for a composting facility in Newark, New
Jersey will, for the most part, not be applicable to the proposed solid waste
transfer station.
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 SUBSIDIARIES
ENVIRONMENTAL PROTECTION & IMPROVEMENT COMPANY, INC.
EPIC is in the business of transporting waste materials by intermodal
truck/rail hauling to land application sites for beneficial use and to landfill
sites. Its fleet of equipment consists of 150 articulated intermodal railcars
which are capable of handling up to six fully loaded containers, 1,300
containers designed to carry biosolids and other bulk materials, a fleet of
trucks for road transportation, and toploaders to load and unload containers
on/off railcars. With unit train capability and full railroad interchange
approval and authority, EPIC's railcars can freely move from line to line
throughout the United States.
EPIC's main loading facility is at Brills Yard in Newark, New Jersey. It
includes some 3,600 feet of rail siding (4,000 feet of staging track available)
and is a New Jersey Department of Environmental Protection ("NJDEP") 3,400
tons/day, 24-hour day, seven-day week permitted site. The site is used to load
and unload containerized waste material to be shipped to land application sites
for beneficial use and landfills for disposal throughout the country. Unlike the
method of using trucks or gondolas where material must be handled several times,
EPIC's containers are loaded, sealed, transported, and placed onto rail cars
whereby the material does not have to be handled again until the rail cars reach
their ultimate destination. Brills Yard is one of a kind in the New York
metropolitan area with two rail providers (Norfolk Southern and CSX) and located
within ten miles of the major bridges and tunnels from New Jersey and Staten
Island to New York City. Permitted beneficial use land application sites are
located in Virginia and Colorado.
EPIC's customers include New York City and Joint Meeting of Essex and Union
Counties, NJ, along with other clients who dispose of incinerator ash,
contaminated soils and municipal solid waste.
Subsequent to its April 30, 1999 fiscal year end, the Company entered
negotiations for the sale of EPIC.
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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.
The Company has acquired additional property adjacent to ASI which is expected
to be used for expansion. 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.
Subsequent to its April 30, 1999 fiscal year end, the Company entered into
negotiations for the sale of American Soil Inc.
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
3,500 tons of waste per day on a portion of its 12-acre parcel in Newark, New
Jersey (the "Newark Property"). This site previously was intended for use as a
municipal composting facility (the "Newark Composting Project"). However, it now
appears more likely that a waste transfer station will be developed in lieu of
the composting facility. 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. The balance of the Newark Property will be available for sale or other
use, such as warehousing or co-generation facilities.
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
development 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.
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The Amendment to the Restated Compost Recycling Agreement signed by
Bedminster, but not by the City, calls for the City to deliver a minimum 150,000
tons per year of municipal solid waste at 2,885 tons per week (i.e., a daily
average equal to 411 tons) to the Florida Composting Project. An initial
disposal fee of $52 per ton is specified, subject to an escalation that is a
function of the Consumer Price Index (CPI) for Miami-Ft. Lauderdale.
AMERICAN MARINE RAIL FACILITY
American Marine Rail, LLC ("AMR") is developing a 5,200 tons per day solid
waste transfer station in Bronx, New York. When 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.
AMR submitted its permit application to the State of New York in the Fall
of 1997, and expects final permits to be issued during the first half of 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 33% 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
$872,886 of its Series D Redeemable Preferred Shares, which AW Compost had
purchased for $305,515 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) In the same transaction, however, AW Compost granted
the Company the option to re-purchase up to a 28.72% interest in AMR, at any
time prior to March 31, 2000, for a cash payment of $1,750,000, plus interest,
less any interim funds advanced by the Company to AMR, up to a maximum of
$400,000. The repurchase percentage of 28.72% will be reduced pro-rata should
the Company fail to fund required advances and the funding is advanced by third
parties. If not exercised by the Company by March 31, 2000, the Company's
repurchase option terminates.
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PROJECT FINANCING
In December 1997, the Company closed a $90 million New Jersey Economic
Development Authority ("NJEDA") Revenue Bond issue (1-year term) for its
proposed Newark Composting Project, underwritten by PaineWebber Incorporated.
Bond proceeds were held in escrow and invested as security for debt service
pending satisfaction of certain conditions (the "Escrow Release Conditions"). In
September 1998, CAHC terminated its relationship with PaineWebber Incorporated
and on December 1, 1998 CAHC signed a financial advisory agreement with Goldman,
Sachs & Co. Thereafter on December 15, 1998, the $90 million NJEDA Revenue Bond
issue was remarketed by Goldman, Sachs & Co. However, the Escrow Release
Conditions were not met and in June 1999 the escrowed Bond proceeds were applied
to redeem the Bonds in whole. Accordingly, there is no existing project
financing for any project in Newark, New Jersey. In August, 1999 Goldman, Sachs
& Co. resigned as the Company's financial adviser.
If and to the extent that the Miami Lawsuit is successfully completed, the
Company anticipates that it will obtain funding for the Miami Project. However,
no financing commitment is available at the present time.
EMPLOYEES
Compost America and its subsidiaries consists of 88 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,
from an unaffiliated retail agent for $ 2,800.42 per month (excluding utilities
and parking). The lease expires on June 15, 2000.
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.
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.
Both the Newark site and the Florida site are encumbered by mortgages,
which are in default. Foreclosure proceedings have been commenced with regard to
the Newark site (see Legal Proceedings, below).
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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 5
years with a 5 year option.
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 invessel composting facility. This property currently is the
subject of a foreclosure proceeding.
EPIC Properties
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EPIC's corporate headquarters are located in Denville, New Jersey in a
three-story building which is rented on a month-to-month basis for $6,250 per
month from a trust, the beneficiaries of which are the children of Robert J.
Longo, President of EPIC and a Director of the Company. The Company believes
that this rental is comparable to that which would be charged by a
non-affiliated landlord.
EPIC has a 15-year lease with Conrail for Brills Yard. The site is located
on Avenue P, Newark, New Jersey off the New Jersey Turnpike Exit 15E. EPIC's
state of the art terminal is a fully licensed NJDEP intermodal container
facility. The Brills Yard facility is permitted for 3,400 TPD with 24-hour
service.
EPIC owns two properties; an intermodal rail siding located in Carlton,
Colorado on approximately 13.5 acres and an intermodal rail yard and maintenance
facility located in Tyler, Texas on approximately 39 acres. EPIC also has the
right to operate, by lease or other agreement, out of three facilities in the
State of Virginia.
ITEM 3.
LEGAL PROCEEDINGS
The Company is involved in one material legal proceeding as a plaintiff, as
follows. In November 1996, the Company made a payment of $1,000,000 to secure
performance of its obligations under the Restated Compost Recycling Agreement of
November 30, 1995 (the "Restated Agreement") with the City of Miami. Under the
terms of that Restated Agreement the commencement date of operations for its
Florida Composting Project was extended to November 1998. On February 24, 1998 a
resolution was proposed and adopted by the City of Miami Commission granting
Bedminster an additional extension through October 20, 2000 if the Company, (1)
agreed to pay the City an amount equal to the City's recycling costs for each of
the two years that the extension was granted; (2) agreed that the
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$1,000,000 previously deposited with the City by Bedminster to guarantee
Bedminster's performance of its obligations be released into the City's general
fund for the City to use as it deemed necessary; and (3) agreed to post a new
performance bond or letter of credit to guarantee the performance of its
obligations under the Contract. While an amendment agreement memorializing the
extension approved by the City in its February 24th resolution was signed by the
Company, the City has refused to sign the agreement. Bedminster has filed the
Miami Lawsuit against the City seeking a judgment: (1) declaring that the
Restated Agreement, as amended by the City's Resolution 98-224 of February 24,
1998 (collectively the "Contract") 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, now in default as a result of cross-default provisions in
the $1,000,000 Note. 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
but has not yet foreclosed upon the Newark Property pending settlement
discussions. These settlement discussions themselves are dependent upon the
Company obtaining additional funding. At any time, the Lender could proceed
to foreclose against the Newark Property which proceeding, if successful,
would prevent the Company from developing the Newark Property.
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.
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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 if the settlement efforts, presently underway, are not
successful.
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.
This is an action 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"). The Company is attempting to renegotiate the terms of
the note, including an extension of the due date, at the same time that
discovery proceedings have commenced. A parallel action by the plaintiffs
seeks to foreclose on the Freehold Property. The Company has filed an
answer to this action and a motion to join Michael Marchese as an
additional defendant while trying to negotiate a settlement with Mr.
Marchese on both matters. In February, 2000 this action was dismissed
without prejudice for Plaintiff's failure to respond to Defendant's
discovery requests.
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.
5. Capital Active Funding, Inc., Plaintiff, v. Compost America Holding
Company, Inc., et. al., Defendant, filed on October 16, 1998 in the
Superior Court of the State of Arizona, County of Maricopa, Docket # CV
98-18623.
Plaintiff obtained a judgment against the Company, amongst others, in the
amount of $145,029.50. The Company negotiated a settlement of this action
for this amount in October 1999 and is making settlement payments.
6. NuCentury Auto, Inc., Plaintiff, v. Compost America Holding Company, Inc.
and Chicago Recycling and Compost Company, Inc.,
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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 settlement discussions have commenced.
7. Center Capital Corp., Plaintiff, v. Compost America Holding Company, Inc.,
Defendant, filed in March 1999 in the Superior Court of New Jersey for
Bergen County. Plaintiff obtained a default judgment against the Company
for $37,000. By agreement between the Plaintiff and the Defendant, the
Plaintiff sold the equipment on which it held a chattel mortgage and
satisfied this judgment.
8. Devro-Teepak, Inc., Plaintiff, v. Compost America Holding Company, Inc.,
Defendant, filed in August, 1999 in the U.S. District Court for the
Northern District of Illinois. In 1995, Devro-Teepak, Inc. ("Teepak") made
loans to the Company aggregating approximately $265,000, to be repaid out
of the funding for the Company's Chicago, Illinois, composting facility.
Teepak now claims that this composting facility project has been abandoned
by the Company, and therefore approximately $310,000 (the $265,000 plus
interest) is now due. The Company has filed an answer in this matter, and
settlement discussions are underway.
9. David J. Egarian, P.E. and D.J. Egarian & Associates, Plaintiffs, v.
Compost America Holding Company, Inc. and Newark Recycling and Composting
Company, Inc., Defendants, filed in September, 1999 in the Superior Court
of New Jersey for Morris County. Plaintiffs obtained a default judgment
based upon a contract for $35,000. The Company has reached a settlement
with Plaintiffs to pay the amount of the judgment plus an additional $5,000
unpaid invoice in eight monthly payments of $5,000 each, commencing in
November, 1999.
10. R.W. Jones & Associates, Inc. and R.W. Jones III, Plaintiffs, v. Compost
America Holding Company, Inc., R.J. Longo Construction Company, Inc., R.J.
Longo Construction Company d/b/a EPIC, EPIC and Roger E. Tuttle,
Defendants, filed in September, 1999 in the Superior Court of New Jersey
for Essex, County. This is an action for various consulting and success
fees. The Company has settled this action for $853,000 to be made in a lump
sum payment on or before April 15, 2000. If the Company supplies a signed
contract for the sale of EPIC, the time to make the payment will be
extended to May 15, 2000. Should these conditions not be met the matter
proceeds to litigation.
11. Dughi & Hewitt, Plaintiff, v. Compost America Holding Company, Inc. and
Newark Recycling and Composting Company, Inc.,
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Defendants, filed in October, 1999 in the Superior Court of New Jersey for
Union County. This is an action for $27,000 for legal fees and interest.
Plaintiffs have proposed a settlement, accepted by the Defendants, for
$20,000 calling for an initial payment of $7,500, which has been made,
followed by monthly payments of $2,500 until the settlement has been paid
in full.
12. Roger Tuttle, Plaintiff, v. Compost America Holding Company, Inc.,
Defendant, filed in November, 1999 in the Superior Court of New Jersey for
Essex County. This is an action by the former President and Chairman of the
Company, who remains a Director of the Company, for 930,000 "replacement"
shares of the Company's common stock, $265,000 plus interest in repayment
of loans and $1,475,000 in accrued salary. The Company believes it has
meritorious defenses against this action, and has filed an answer,
affirmative defenses and counterclaims. The parties are currently
negotiating for the settlement of these claims.
13. 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 presently in
default in the amount of $150,000 plus interest at 10%. The Company has
retained counsel and has filed an answer in this matter.
14. 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 through mediation in the amount of $100,000. Payments
commence on May 1, 2000 with the final payment to be made August 1, 2000.
15. 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 Company intends to defend this matter vigorously.
16. Biological and Environmental Services, Plaintiff, v. Compost America
Holding Company, Inc. and Miami Recycling and Composting Company, Inc.,
Defendants, filed February, 2000 in the County Court of Broward County,
Florida. This is a claim for an account payable in the amount of $8,568.14
plus interest and costs. The Company has proposed settlement terms and is
waiting for plaintiff's response to same.
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17. Mehr & LeFrance, Plaintiff, v. Compost America Holding Company, Inc.,
Defendant, filed January, 2000 in the Superior Court of New Jersey, Essex
County. This is a claim for legal fees in the amount of $5,000 plus
interest and costs. The Company's time to answer has been extended to March
24, 2000.
18. Resource Reclamation Services, Inc., Plaintiff, v. Compost America Holding
Company, Inc., Defendant, filed February, 2000 in the Circuit Court for the
11th Judicial Circuit, Miami-Dade County, Florida. This is a claim for
$350,000 plus interest and costs for a breach of a Settlement Agreement.
The $350,000 has been paid down to $250,000, and the balance is being paid
in five monthly installments of $50,000 each.
The status of other material claims involving the Company is as follows:
19. 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.
20. Loans from VRH Construction Corp. On May 15, 1999, the Company also
defaulted on the payment of approximately $5,700,000 of promissory notes
payable to VRH Construction Corp., which notes are secured by a second
mortgage on the Newark Property. The Company disputes the propriety of this
second mortgage. The Company has entered into discussions with VRH
Construction Corp. seeking an extension of the maturity dates of these
notes. There can be no assurance that such an extension will be granted.
Should the Newark Property be foreclosed, the Company would not be able to
develop the Newark Property.
21. 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
not repaid this loan. To date, the lender has not taken any steps to
declare an event of default or to collect the loan. A similar situation
exists regarding an additional $50,000 in loans made to the Company by two
other parties.
22. Claim by Pasquale J. Dileo In response to a confirmation request from the
Company's auditors related to the Company's financial statements for its
fiscal year ended April 30, 1999, Pasquale J. Dileo, Secretary and a
Director of the Company, asserted that he was owned by the Company
$1,680,000 plus 1,000,000 of the Company's registered common shares plus
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options to purchase an additional 300,000 common shares and that Select
Acquisitions, Inc., a company controlled by Mr. Dileo, was owed $308,073,
plus accrued interest, and 408,640 of the Company's common shares. Other
than loans from Select in an amount less than $100,000, the Company refutes
all of these claims and will defend its position vigorously should Mr.
Dileo commence litigation in this matter.
23. Credit, Capitalization and Financing Agreement between Compost America
Holding Company, Inc., and two of its subsidiaries, Miami Recycling and
Composting Company, Inc. and Bedminster Seacor Services Miami Corporation
and Lionhart Global Appreciation Fund, and its affiliates, dated October
30, 1998 ("Agreement").
The various judgments set forth above, and the Company's failure to deliver
agreed upon collateral, appear to constitute an "Event of Default" under
this Agreement, such that Lionhart Global Appreciation Fund ("Lionhart")
could accelerate the collection of its $10,500,000 (face amount) promissory
note, secured by a first mortgage lien on the real property constituting
the site of the proposed Florida Composting Project (the "Florida Site")
and by the Company's stock ownership interest in MRCC and Bedminster. The
Company and Lionhart are in discussions to resolve this matter, with no
assurance that any such agreement can be reached.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's shares of Common Stock presently are being traded on the
"pink sheets" of the National Association of Securities Dealers, Inc. ("NASD")
under the symbol "CAHC". Until October 7, 1999 the shares had traded on the
Electronic Bulletin Board of the NASD, but this trading was transferred to the
"pink sheets" when the Company was significantly delinquent in its filings with
the Securities and Exchange Commission ("SEC"). During the period September 14,
1999 through October 7, 1999 inclusive, the shares 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". The Company believes that when
it is again timely in its filings with the SEC, the trading of its shares will
resume on the Electronic Bulletin Board.
The following table shows, for the calendar periods indicated,
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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
-------- -------
1997/1998:
Quarter ended 7/31.............. $2.50 $1.13
Quarter ended 10/31............. $4.25 $1.00
Quarter ended 1/31.............. $3.69 $1.63
Quarter ended 4/30.............. $2.31 $1.31
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
As of January 31, 2000 there were approximately 366 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, 1999, the Company issued
3,047,137 shares of its common stock (and cancelled 858,022 shares of its common
stock previously issued), without registering the securities under the
Securities Act of 1933, as amended, to 14 individuals for services rendered
valued at prices ranging from $0.25 to $0.90 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.
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ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The Company continues to incur significant losses from its operations and
development activities. Net loss available to common shareholders was
$30,850,967 for the fiscal year ended April 30, 1999, as compared to a loss of
$14,665,304 for the fiscal year ended April 30, 1998. The Company has incurred
losses since its inception, with an accumulated deficit of $54,271,919 as at
April 30, 1999 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 acquisition of EPIC, a wholly-owned subsidiary, the
Company is no longer considered a development stage company. For the year ended
April 30, 1999 the Company's consolidated revenues were $22,249,982, compared to
$9,259,698 for the prior fiscal year. The Company's operating loss for the
fiscal year ended April 30, 1999 was $21,985,261, including $10,721,161 as a
provision for impairment, as compared to an operating loss of $11,276,666 for
the prior fiscal year. EPIC's revenues for the fiscal year ended April 30, 1999
were $22,032,853 and it had a net loss of $3,094,463, as compared to EPIC's
revenues for the period from the acquisition date (November 3, 1997) to April
30, 1998 of $8,853,266 and a net loss of $2,780,021 for that period. However,
EPIC's income before interest, income taxes, compensation for stock options,
depreciation and amortization was $2,607,378 as compared to $1,035,221 for the
prior fiscal year. The Company's net loss before income tax benefit for the year
ended April 30, 1999 increased by $20,501,875 to $34,196,672 from $13,694,797
for the prior year due primarily to the aforementioned provision for impairment
of $10,721,161, an increase in net interest expense of $8,276,107 as the Company
increased its debt to finance its ongoing activities during the current year
while carrying the interest cost of the majority of the prior year's loans as
well and an increase in depreciation and amortization expense of $4,061,353
representing the inclusion of EPIC's equipment and contract costs for a full
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 and Redeemable Preferred
Stock, loans made by affiliates, including directors and principal shareholders,
and loans made by unaffiliated individuals and institutions. For the period May
1, 1998 through April 30, 1999 the Company secured funding through
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various private placements and loans from related and unrelated parties,
specifically, $902,001 from the sale of common stock, as compared to $13,306,144
for the prior fiscal year, none from the sale of Redeemable Preferred Stock, as
compared to $10,016,224 for the prior fiscal year and $23,126,563 from loans, as
compared to $5,861,606 for the prior fiscal year. The Company for the fiscal
year ending April 30, 2000 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 EPIC and American Soil, Inc.
("ASI"), project financing and additional loans and/or the sale of common and
preferred shares. For the period May 1, 1999 through January 20, 2000 the
Company secured additional funding in the form of $3,700,000 from loans from
both related and unrelated parties.
The Company's strategy to reduce and eventually eliminate these deficits
entails (1) the sale of its two operating subsidiaries, EPIC and ASI, (2) the
generation of revenues from its Florida Property by the construction and
operation of the Florida Composting 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)
finding buyers for EPIC and ASI at prices favorable to the Company, (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, or that the
EPIC sale will be completed in a timely manner, if at all, or on terms
acceptable to the Company or that the Company will reach an agreement with its
Series A Redeemable Preferred and Series C Redeemable Preferred stockholders. If
the Company is unable to secure additional financing, attain future profitable
operations, complete the EPIC sale and reach an agreement with its Series A
Redeemable Preferred and Series C Redeemable Preferred stockholders, 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 a portion of
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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 earliest, and future revenues generated from these Projects would
not be anticipated until the fiscal year ended April 30, 2002.
The Company does not incur any significant product research and development
expenses, and the Company does not expect significant changes in its number of
employees unless there is a sale of EPIC, in which case the number of employees
of the Company will be reduced from 88 down to approximately 7. There are no
seasonal aspects that have a material effect on the financial condition or
results of operations of the Company.
YEAR 2000 COMPLIANCE
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 temporary
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 affect 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.
SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS
This Report on Form 10-KSB including, without limitation, Plan of Operations,
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 environmental
regulations;
16
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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, 1999 (audited)
(b) Consolidated Statements of Operations for the fiscal years ended April 30,
1999 (audited) and April 30, 1998 (unaudited)
(c) Consolidated Statements of Redeemable Preferred and Common Stocks and
Stockholders' Deficiency for the fiscal years ended April 30, 1999
(audited) and April 30, 1998 (unaudited)
(d) Consolidated Statements of Cash Flows for the fiscal years ended April 30,
1999 (audited) and April 30, 1998 (unaudited)
(e) Notes to Consolidated Financial Statements (audited and unaudited)
The Company's financial statements contained herein for its fiscal year
ended April 30, 1999 have been audited by Rothstein, Kass & Company, PC,
Certified Public Accountants. Rothstein, Kass & Company, PC did express an
opinion on the Company's Consolidated Balance Sheet but was unable to and did
not express an opinion on the Company's Consolidated Statement of Operations,
Consolidated Statement of Redeemable Preferred and Common Stocks and
Stockholders' Equity (Deficiency) and Consolidated Statement of Cash Flows for
the year ended April 30, 1999, primarily for the reason set forth in Note 4 of
the Notes to Consolidated Financial Statements. The Company's financial
statements contained herein for its fiscal year ended April 30, 1998 are
unaudited. The Company's Form 10-KSB for its fiscal year ended April 30, 1998,
filed January 28, 1999, does contain financial statements for its fiscal year
ended April 30, 1998 audited by Arthur Andersen LLP, Certified Public
Accountants. Arthur Andersen LLP has not consented to the inclusion in this Form
10-KSB of its report on the consolidated financial statements for the Company's
fiscal year ended April 30, 1998, primarily for the reason set forth in Note 4
of the Notes to Consolidated Financial Statements prepared by Rothstein, Kass &
Company, PC. In addition, having been made aware of the matters described in
Note 4 of the Notes to Consolidated Financial Statements, Arthur Andersen LLP,
by letter dated February 29, 2000, stated to the Company, ". . . we therefore
request that you advise us of your planned actions to prevent future reliance on
the Company's Fiscal 1998 Financial Statements and the Auditor's Report
thereon."
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's financial statements for its fiscal year ended
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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 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
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(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.
By letter dated February 29, 2000, Arthur Andersen LLP changed its position
regarding the Company's Fiscal 1998 Financial Statements (see Item 7 above).
On July 20, 1998 Arthur Andersen LLP, Certified Public Accountants replaced
Zeller Weiss & Kahn, LLP Certified Public Accountants as accountants for the
Company by mutual agreement between the Company's Board of Directors and the
resigning accountants. No report on the Company's financial statements issued by
the resigning accountants contained an adverse opinion or disclaimer of opinion
or was qualified or modified as to uncertainty, audit scope or accounting
principles, nor were their any disagreements on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
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 January
31, 2000.
NAME AGE POSITION(S)
- ---------------- --- ---------------------------------
Christopher Daggett 49 Office of the President
Marvin Roseman 70 Office of the President; President
of all Subsidiaries (except EPIC,
Inc.), Principal Financial Officer
Richard L. Franks 56 Vice President and General
Counsel, Assistant Secretary
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Anthony P. Cipollone 36 Treasurer, Controller;
Principal Accounting Officer
G. Chris Andersen 60 Director
Charles R. Carson 52 Director
Pasquale J. DiLeo 47 Secretary; Director
Robert J. Longo 56 Director; President of EPIC, Inc.
Peter Petrillo 39 Director
John T. Shea 49 Director
Christopher Smith 35 Director
Roger E. Tuttle 58 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 Smith), of Robert J. Longo (currently
Robert J. Longo) and of Lionhart Global Appreciation Fund, Ltd., (currently
vacant) to the Company's Board of Directors. The board of directors has an audit
committee consisting of Charles R. Carson (Chairman),Pasquale J. DiLeo
(Secretary) 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 Daggett and Marvin Roseman. Each serve on a
month-to-month basis, and each is paid $20,000 per month, plus expenses.
OFFICERS AND DIRECTORS
CHRISTOPHER DAGGETT - OFFICE OF THE PRESIDENT
Christopher 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 Managing Director of
William E. Simon & Sons, a New Jersey based investment firm.
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MARVIN ROSEMAN - OFFICE OF THE PRESIDENT; PRINCIPAL FINANCIAL OFFICER; PRESIDENT
OF ALL SUBSIDIARIES (except EPIC, INC.)
Marvin Roseman joined the Company's Office of the President in April 1999.
From 1994 through the present, Mr. Roseman has been the President of Bentley,
King Associates, a business consulting firm located in Las Vegas, Nevada.
RICHARD L. FRANKS - VICE PRESIDENT AND GENERAL COUNSEL, ASSISTANT
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 1994 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; PRINCIPAL ACCOUNTING OFFICER
Anthony P. 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.
G. CHRIS ANDERSEN - DIRECTOR
G. Chris Andersen has been a general partner of Andersen, Weinroth & Co.,
L.P., a private merchant bank, since 1995. From 1990-1995, Mr. Andersen was Vice
Chairman and head of International Banking at PaineWebber Incorporated. He has
been a Director of the Company since November, 1997.
Mr. Andersen currently serves on the board of directors of several public
and private companies, including Terex Corporation and the Sunshine Mining
Company both of which are listed on the New York Stock Exchange.
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
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environmental/waste management industry.
PASQUALE ("PAT") J. DILEO - SECRETARY; DIRECTOR
Pasquale ("Pat") J. DiLeo, Secretary and a Director of the Company, has
been the President of Select Acquisitions, Inc., a holding company, since 1993.
He has been a Director of the Company since 1995.
ROBERT J. LONGO - DIRECTOR, PRESIDENT OF EPIC, INC.
Robert J. Longo, President and founder of EPIC, Inc. since 1971 became a
Director of the Company when it acquired EPIC in November 1997.
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 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 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.
ROGER E. TUTTLE - DIRECTOR
Roger E. Tuttle, the Company's founder in 1993, was, through April 1999, the
Company's President and Chairman, Chief Executive and Chief Financial Officer.
He remains a Director of the Company.
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ITEM 10.
EXECUTIVE COMPENSATION
(b) SUMMARY COMPENSATION TABLE
Name Annual Compensation All
and Fiscal Other Long- Other
Principal Year Annual Term Compen-
Position Ended Salary Bonus Comp. Comp. sation
- ---------- ------- ------- ----- ------ ------- -------
Roger E. 4/30/99 $225,000 none none none $ 9,210
Tuttle, 4/30/98 $350,000 none none none $12,488
President, 4/30/97 $225,000 none none none none
CEO
Robert J. 4/30/99 $325,000 none none none $17,200 (1)
Longo, 4/30/98 $162,500(2)none none none $3,600
President 4/30/97 n/a none none none none
of EPIC
(1) In addition, Mr. Longo earned a fee of $700,000 for providing a personal
indemnification for a surety bond issued to the Company. $214,508 of this
fee was paid during the fiscal year.
(2) Commencing November 3, 1997
(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
- ------- --------- --------- ---------------- ----------
R. Tuttle none n/a n/a n/a
R. Longo 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)
- ------- --------- -------- ------------ ------------
R. Tuttle none none 1,209,875 n/a
R. Longo none none 1,500,000 (1) n/a
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(1) 700,000 shares exercisable, 800,000 shares non-exercisable
(2) The market price of the Company's common stock as at its April 30, 1999
fiscal year end was $0.6875 per share, thus no options were "in-the-money".
(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 is not 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 receives a
one-time bonus of $500,000 when the Company's common shares are 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 disputes this termination
for cause.
On November 3, 1997 the Company's wholly owned subsidiary, EPIC, entered
into an employment agreement with Robert J. Longo. His agreement provides 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.
The Company entered into an employment agreement with Richard
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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 for a period of five years.
(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.
The following table sets forth, as of January 31, 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
- ------------------------ --------- -----
G. Chris Andersen 1,783,934 (2) 3.2%
821 West Shore Drive
Kinnelon, NJ 07405
(Director)
Charles R. Carson 238,334 (3) *
70 Mendota Avenue
Rye, NY 10580
(Director)
Anthony P. Cipollone 390,000 (4) *
7 Halley Drive
Pomona, NY 10970
(Treasurer, Controller)
Christopher Daggett 0 0%
96 Deer Ridge Road
Basking Ridge, NJ 07927
(Office of the President)
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Pasquale J. DiLeo 151,000 (5) *
832 Bay Avenue
Toms River, NJ 08753
(Secretary; Director)
Richard Franks 50,000 (6) *
8821 South Blue Mountain Pl.
Highlands Ranch, CO 80126
(Vice President, General
Counsel, Assistant Secretary)
Robert J. Longo 7,063,248 (7) 12.4%
71 Roxitichus Road
Mendham, NJ 07945
(Director)
Peter Petrillo 0 0%
243 Peachtree Drive
East Norwich, NY 11732
(Director)
Marvin Roseman 0 0%
7960 Castle Pines Avenue
Las Vegas, NV 8913
(Office of the President)
John T. Shea (8) 0%
94 Emily Road
Far Hills, NJ 07931
(Director)
Christopher Smith 0 0%
21 Middlesex Road
Darien, CT 06820
(Director)
Roger E. Tuttle 2,233,884 (9) 3.9%
3105 Gibson Lane
Doylestown, PA 18901
(Director)
Wasteco Ventures Limited 18,210,826 (8) 32.8%
Citco Building, Wickham's Cay
P.O. Box 662
Roadtown, Tortola, BVI
Officers and Directors 30,121,226 (10) 51.0%
As A Group (12 Persons)
- -------------------
* Less than 1%
26
<PAGE>
(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 301,532 shares owned by G. Chris Andersen directly, 1,082,402
shares owned by Andersen Weinroth LP, of which G. Chris Andersen is a general
partner and 100,000 shares owned by AW Compost Partners, of which Andersen
Weinroth LP is a general partner. Also includes 300,000 shares which may be
acquired by Mr. G. Chris Andersen within sixty (60) days upon the exercise of
options.
(3) Includes 238,334 shares which may be acquired by Mr. Carson within sixty
(60) days upon the exercise of options.
(4) Includes 40,000 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.
(5) Includes 1,000 shares owned directly by Mr. DiLeo and 150,000
shares owned by Select Acquisitions, Inc., of which Mr. DiLeo is
President.
(6) Includes 50,000 shares which may be acquired by Mr. Franks within sixty (60)
days upon the exercise of options.
(7) Includes 5,563,248 shares owned by Mr. Longo directly. Also includes
1,500,000 shares which may be acquired by Mr. Longo within sixty (60) days upon
the exercise of options.
(8) When authorized, on an item-by-item basis, John T. Shea acts as
attorney-in-fact for Wasteco Ventures Limited.
(9) Includes 1,024,009 shares owned by Roger E. Tuttle directly. Also includes
1,209,875 shares which may be acquired by Mr. Tuttle within sixty (60) days upon
the exercise of options.
(10) Includes 3,648,209 shares which may be acquired within sixty (60) days upon
the exercise of options and warrants. As at January 31, 2000, the Company had
55,452,489 shares outstanding. An additional 14,697,586 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 70,150,075.
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 3, 1997 the Company acquired all of the issued and outstanding
shares of R. J. Longo Construction Co., Inc. of Denville, New Jersey from its
President and sole shareholder, Robert J. Longo, and from the Andrea Longo
Charitable Trust, for
27
<PAGE>
approximately $33 million, including the assumption of approximately $ 8 million
of debt. R. J. Longo Construction Co., Inc. then changed its name to
Environmental Protection & Improvement Company, Inc. At the same time, the
Company sold to Wasteco Ventures Limited, a British Virgin Islands company
affiliated with Wafra Investment Advisory Group, Inc., 11,490,609 shares of its
common stock, no par value, 130,000 shares of its then newly created Series A
Redeemable Preferred Stock and 70,000 shares of its then newly created Series C
Redeemable Preferred Stock for gross proceeds of approximately $20 million. The
$26 million purchase price paid to Robert J. Longo and the Andrea Longo
Charitable Trust consisted of the $20 million in cash, plus the issuance to
Robert J. Longo of 3,447,182 shares of the Company's common stock, 39,000 shares
of its Series A Redeemable Preferred Stock and 21,000 shares of its Series C
Redeemable Preferred Stock, collectively valued at $6 million. As a result of
these transactions, Robert J. Longo and three designees and affiliates of Wafra
Investment Advisory Group, Inc., Peter Petrillo, John T. Shea and Christopher
Smith, were appointed to the Company's Board of Directors.
On April 27, 1998 the Company sold to AW Compost Partners, LLC, a Delaware
limited liability company, 1,627,980 shares of its common stock and 17,500
shares of its then newly created Series D Redeemable Preferred Stock for cash of
$416,334, settlement of liabilities due to entities related to AW Compost
Partners, LLC totaling $888,079, a note receivable of $445,587 from American
Marine Rail, LLC and a one-third ownership in American Marine Rail, LLC. G.
Chris Andersen, a Director of the Company, is the Manager and a voting member of
AW Compost Partners, LLC. In consideration of their consenting to the creation
of the Series D Redeemable Preferred Stock, and in consideration of the November
3, transactions, Wasteco Ventures Limited was issued 602,955 shares of the
Company's common stock and Robert J. Longo was issued 180,887 shares of the
Company's common stock.
Employment agreements of Roger E. Tuttle, Robert J. Longo and Richard L.
Franks are set forth in Item 10 above.
Loans to the Company from VRH Construction Corp. and/or its principals
Victor Wortmann, Sr. and Robert E. Wortmann, are set forth in the Notes to
Consolidated Financial Statements, Note 14. Victor Wortmann, Sr. resigned as
Chairman and a Director of the Company on November 3, 1997. Robert E. Wortmann
resigned as Secretary and a Director of the Company on June 15, 1998.
During the fiscal year ended April 30, 1999, 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. $214,508 of this fee was paid in the fiscal
year ended April 30, 1999.
28
<PAGE>
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)
3. Articles of Incorporation (1), (2), (3), (4), (7)
and By-Laws
4. Instruments defining the (1), (2), (3), (4), (5)
Rights of Security Holders
9. Voting Trust Agreement (2), (3)
10. Material Contracts (2)
11. Statement re Computation of Per Share Earnings - See Consolidated
Statement of Operations and Note 4 to Consolidated Financial
Statements
13. Annual or Quarterly Reports none
16. Letter on Change in (6), (8)
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
(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
29
<PAGE>
(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 20, 1998 and
filed July 22, 1998
(7) Incorporated by Reference to Report on Form 8-K dated July 30, 1998 and
filed August 11, 1998
(8) Incorporated by Reference to Report on Form 8-K dated September 8, 1999
and filed September 14, 1999
(b) Reports on Form 8-K during the last quarter
1. A report on Form 8-K was filed on April 27, 1999 to report events on April
21, 1999; the creation of the Office of the President consisting of Roger
E. Tuttle, Christopher Daggett and Marvin Roseman, Mr. Tuttle's resignation
as the Company's President and Chief Executive Officer and the execution of
a second amended employment agreement with Mr. Tuttle. No financial
statements were included in this filing.
30
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-1 - F-2
Consolidated Balance Sheet F-3 - F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Redeemable Preferred and Common
Stocks and Stockholders' Equity (Deficiency) F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and shareholders of
Compost America Holding Company, Inc.
We have audited the accompanying consolidated balance sheet of Compost America
Holding Company, Inc. and Subsidiaries as of April 30, 1999, and the related
consolidated statements of operations, redeemable preferred and common stocks
and stockholders' equity (deficiency), and cash flows for the year 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 audit.
Except as discussed in the following paragraph, we conducted our audit 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
audit provides a reasonable basis for our opinion.
As discussed in Note 4, certain members of management of the Company are unable
to determine whether the Company's 1998 consolidated financial statements are
fairly stated, in all material respects, in conformity with generally accepted
accounting principles. As such, certain members of management of the Company are
unable to determine whether the Company's 1999 consolidated statements of
operations, redeemable preferred and common stocks and stockholders' equity
(deficiency), and cash flows are fairly stated, in all material respects, in
conformity with generally accepted accounting principles. Certain members of
management of the Company are therefore unable to provide appropriate
representations regarding the fair presentation of the 1998 consolidated
financial statements and the 1999 statements of operations, redeemable preferred
and common stocks and stockholders' equity (deficiency), and cash flows, as
required by generally accepted auditing standards.
In our opinion, the consolidated balance sheet referred to in the first
paragraph presents fairly, in all material respects, the financial position of
Compost America Holding Company, Inc. and Subsidiaries as of April 30, 1999, in
conformity with generally accepted accounting principles. We are unable to and
do not express an opinion on the consolidated statements of operations,
redeemable preferred and common stocks and stockholders' equity (deficiency),
and cash flows for the year ended April 30, 1999.
The 1998 consolidated financial statements of Compost America Holding Company,
Inc. and Subsidiaries were audited by other auditors who are unable to
re-release their report on such financial statements because, as discussed in
Note 4, current management of the Company is unable to provide them with
representations required by generally accepted auditing standards. Accordingly,
the 1998 consolidated financial statements are labeled "unaudited".
F-1
<PAGE>
As discussed in Note 14 to the consolidated financial statements, 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. Also as
discussed in Note 14 to the consolidated financial statements, the Company is
involved in a dispute with a member of its Board of Directors and Audit
Committee. The ultimate outcomes of the litigation and dispute cannot presently
be determined. The Company has provided for certain amounts relating to these
matters, but such amounts are significantly less than the amounts claimed.
Unfavorable outcomes of either of these matters could have a material adverse
effect on the Company's consolidated financial position, results of operations
and cash flows.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a significant working capital
deficit, an accumulated deficit and a stockholders' deficiency, and has incurred
losses since its inception and is in default of certain loan and Preferred stock
covenants and payments on debt that give the lenders and 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's plans in regard to these
matters are also described in Note 2. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
November 17, 1999, except for paragraph seven of Note 20 which is as of December
16, 1999, paragraph eight of Note 20 which is as of December 31, 1999, paragraph
nine of Note 20 which is as of December 9, 1999, and paragraph ten of Note 20
which is as of January 20, 2000
F-2
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
April 30, 1999
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 299,010
Restricted project fund trust account 91,370,763
Accounts receivable, net of allowance for doubtful accounts of $117,422 5,440,140
Prepaid expenses and other current assets 512,865
------------
Total current assets 97,622,778
------------
Property, plant and equipment, net 22,523,429
------------
Other assets
Customer contract rights, net 26,567,001
Other intangible assets, net 1,322,546
Investment in joint venture 872,886
Other assets 254,409
------------
Total other assets 29,016,842
------------
$149,163,049
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Short-term debt $ 522,816
Bond payable 91,370,763
Long-term debt, current portion 18,814,808
Due to related parties 8,403,637
Accounts payable 5,052,282
Accrued expenses 5,084,156
------------
Total current liabilities 129,248,462
------------
Long-term debt 7,087,062
------------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
April 30, 1999
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY (CONTINUED)
Redeemable Preferred and Common stock, no par value
Series A, 169,000 shares authorized, issued,
and outstanding (liquidation value of $17,350,668) 6,747,654
Series B, 400,000 shares authorized, issued,
and outstanding (liquidation value of $1,264,000) 1,240,000
Series C, 91,000 shares authorized, issued,
and outstanding (liquidation value of $11,807,562) 3,829,917
Series D, 17,500 shares authorized, 17,500 issued,
and outstanding (liquidation value of $1,866,646) 1,229,542
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 14,817,949
-----------
Stockholders' deficiency
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;
47,402,011 shares issued and outstanding 41,060,146
Additional paid-in capital 14,127,222
Common stock to be issued, no par value; 858,564 shares 599,127
Accumulated deficit (54,271,919)
Deferred compensation (2,082,500)
Treasury stock, 1,150,000 common shares, at cost (1,425,000)
------------
Total stockholders' deficiency (1,990,424)
------------
$149,163,049
============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended April 30,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Revenues $ 22,249,982 $ 9,259,698
------------ ------------
Costs and expenses
Operating 15,830,073 6,205,099
Selling, general and administrative 10,455,584 9,438,693
Depreciation and amortization 6,633,425 2,572,072
Compensation for stock options 595,000 2,320,500
Provision for impairment 10,721,161
------------ ------------
44,235,243 20,536,364
------------ ------------
Operating loss (21,985,261) (11,276,666)
------------ ------------
Other income (expense)
Interest expense (14,162,511) (3,627,735)
Interest income 3,468,273 1,209,604
Loss on investment (819,129)
Other, net (698,044)
------------ ------------
Loss before income tax benefit (34,196,672) (13,694,797)
Income tax benefit 7,906,420 2,076,671
------------ ------------
Net loss (26,290,252) (11,618,126)
Preferred stock dividends (1,519,761) (1,829,742)
Accretion on preferred stock (3,040,954) (1,217,436)
------------ ------------
Net loss applicable to common stockholders $(30,850,967) $(14,665,304)
============ ============
Net loss per common share
Basic and diluted $ (0.75) $ (0.55)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED AND COMMON STOCKS AND
STOCKHOLDERS' EQUITY (DEFICIENCY)
(unaudited)
<TABLE>
<CAPTION>
Redeemable Preferred Stock
----------------------------------------------------------------------------------------
Series A Series B Series C Series D
--------------------- -------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ----------- ------- ---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, April 30, 1997 $ -- $ -- $ -- $ --
Proceeds for acquisition from sale of
Preferred and Common stock 130,000 3,829,077 70,000 1,217,146
Preferred and Common stock issued
for acquisition 39,000 1,365,000 21,000 525,000
Preferred and Common stock issued for
investment transaction 17,500 612,500
Proceeds from sales of Common stock
Common stock issued for property
Common stock issued for services
Common stock issued for debt repayment
Proceeds from sale of Common stock and
Preferred stock, net of transaction
costs
Deferred compensation on stock options
granted
Amortization of deferred compensation
Common stock options granted to
consultants
Settlement of stock subscription
receivable
Conversion of Preferred stock to note
payable
Accretion of Preferred stock 516,444 699,781 1,211
Exercise of Common stock options,
including tax benefit
Preferred stock dividends
Net loss
--------- ---------- ------- ---------- ------- ---------- -------- ----------
Balances, April 30, 1998 169,000 5,710,521 -- -- 91,000 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 400,000 1,240,000
Conversion of Common stock to Redeemable
Common stock
Accretion of Preferred stock 1,037,133 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 169,000 $6,747,654 400,000 $1,240,000 91,000 $3,829,917 17,500 $1,229,542
========= ========== ======= ========== ======= ========== ======== ==========
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Stockholders' Equity (Deficiency)
--------------------------------------
Series B
Redeemable Common Stock Preferred Stock Common Stock Additional
------------------------- ---------------------- ----------------------- Paid in
Shares Amount Shares Amount Shares Amount Capital
--------- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, April 30, 1997 $ - $ - 17,707,841 $10,611,169 $ -
Proceeds for acquisition from sale of
Preferred and Common stock 11,490,609 10,069,335 1,750,000
Preferred and Common stock issued
for acquisition 3,447,182 3,705,000 525,000
Preferred and Common stock issued for
investment transaction 1,627,980 1,953,576
Proceeds from sales of Common stock 955,000 1,907,559
Common stock issued for property 200,000 200,000
Common stock issued for services 2,026,575 1,985,463
Common stock issued for debt repayment 541,478 1,261,338
Proceeds from sale of Common stock and
Preferred stock, net of transaction
costs 801,000 908,153 744,822
Deferred compensation on stock options
granted 4,998,000
Amortization of deferred compensation
Common stock options granted to
consultants 2,881,931
Settlement of stock subscription
receivable
Conversion of Preferred stock to note
payable (400,000) (626,190)
Accretion of Preferred stock
Exercise of Common stock options,
including tax benefit 419,080 488,774
Preferred stock dividends 900,833 1,321,417
Net loss
--------- ---------- ---------- --------- ---------- ----------- ----------
Balances, April 30, 1998 - - 401,000 281,963 39,316,578 34,248,453 10,154,931
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 Preferred stock (400,000) (279,463)
Conversion of Common stock to Redeemable
Common stock 553,386 1,770,836 (553,386) (1,770,836)
Accretion of Preferred stock
Options and warrants issued for services 1,437,253
Options and warrants issued in connection 2,368,163
with debt financing
Debt conversion preference 166,875
Shares to be issued for services
Purchase of 1,150,000 shares of treasury
stock
Preferred stock dividends 1,530,777 1,460,759
Net loss
--------- ---------- ---------- --------- ---------- ----------- -----------
Balances, April 30, 1999 553,386 $1,770,836 1,000 $ 2,500 47,402,011 $41,060,146 $14,127,222
========= ========== ========== ========= ========== =========== ===========
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Stockholders' Equity (Deficiency)
---------------------------------------------------------------------------------------
Common Stock
to be Issued
-------------------- Accumulated Deferred Subscripitons Treasury
Shares Amount Deficit Compensation Receivable Stock Total
--------- ---------- ----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, April 30, 1997 $ - $(8,755,648) $ - $(28,672) $ - $1,826,829
Proceeds for acquisition from sale of
Preferred and Common stock 11,819,335
Preferred and Common stock issued
for acquisition 4,230,000
Preferred and Common stock issued for
investment transaction 1,953,576
Proceeds from sales of Common stock 1,907,559
Common stock issued for property 200,000
Common stock issued for services 1,985,463
Common stock issued for debt repayment 1,261,338
Proceeds from sale of Common stock and
Preferred stock, net of transaction
costs 1,652,975
Deferred compensation on stock options
granted (4,998,000)
Amortization of deferred compensation 2,320,500 2,320,500
Common stock options granted to
consultants 2,881,931
Settlement of stock subscription
receivable 28,692 28,692
Conversion of Preferred stock to note
payable (626,190)
Accretion of Preferred stock (1,217,436) (12,174,436)
Exercise of Common stock options,
including tax benefit 488,774
Preferred stock dividends 320,552 508,325 (1,829,742)
Net loss (11,618,126) (11,618,126)
--------- --------- ----------- --------- -------- --------- -----------
Balances, April 30, 1998 320,552 508,325 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 (279,463)
Redeemable 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 debt financing 2,368,163
Debt conversion preference 166,875
Shares to be issued for services 57,000 31,800 31,800
Purchase of 1,150,000 shares of treasury
stock (1,425,000) (1,425,000)
Preferred stock dividends 181,012 57,002 (1,519,761)
Net loss (26,290,252)
--------- ---------- ----------- --------- -------- ---------- -----------
Balances, April 30, 1999 8,585,614 $599,127 $(54,271,919) $(2,082,500) $ - $(1,425,000) $ (1,990,424)
========= ========== =========== ========= ======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended April 30,
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (26,290,252) $ (11,618,126)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 6,633,425 2,802,072
Provision for impairment 10,721,161
Loss on investment 819,129
Deferred compensation 595,000 2,320,500
Deferred income taxes (8,114,420) (2,076,671)
Provision for conversion preference of debt 782,417
Common stock issued for interest 137,168
Stock issued and to be issued for professional services 3,127,052 1,677,249
Stock options issued for cashless transactions 203,824
Stock options issued for services 1,437,253 175,050
Noncash interest and financing costs 6,518,851
Settlement of note payable 1,035,148
Increase (decrease) in cash and cash equivalents
attributable to changes in operating assets and liabilities:
Restricted cash 1,588,125 (1,588,125)
Accounts receivable (2,512,113) (215,355)
Prepaid expenses and other current assets 54,173 (256,718)
Accounts payable 2,182,103 (1,173,493)
Accrued expenses 375,685 5,539,381
Due to related parties 916,337
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (1,028,906) (3,175,264)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,160,495) (1,258,142)
Purchase of investment in soil (1,034,261)
Acquisition of EPIC, net of cash acquired (19,758,640)
Purchase of customer contract rights (246,266)
Investment in joint venture (315,000) (94,130)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (4,509,756) (21,357,178)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt 522,816
Repayments of short-term debt (1,487,305) (2,447,879)
Proceeds from long-term debt 22,454,398 2,833,712
Repayments of long-term debt (12,128,648) (1,043,756)
Advances from related parties 149,349 3,027,894
Repayments of related party obligations (1,663,895)
Deferred financing costs (781,203)
Purchase of treasury stock and payment for debt discount (3,300,000)
Proceeds from sale of Common stock 902,001 13,306,144
Proceeds from sale of Series A Preferred stock, net 4,338,624
Proceeds from sale of Series B Preferred stock, net 1,917,500
Proceeds from sale of Series C Preferred stock, net 3,343,766
Proceeds from sale of Series D Preferred stock, net 416,334
Proceeds from the exercise of Common stock options 2,250
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,448,716 24,913,386
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (89,946) 380,944
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 388,956 8,012
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 299,010 $ 388,956
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended April 30,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 5,280,393 $ 1,410,253
=========== ===========
Cash paid for income taxes $ 51,000 $ -
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued for purchase of property, plant
and equipment $ - $ 200,000
=========== ===========
Common stock issued for compost project costs $ 139,200 $ 420,914
=========== ===========
Common stock issued for investment in joint venture $ - $ 1,953,576
=========== ===========
Conversion of notes payable into Common stock $ - $ 1,261,338
=========== ===========
Common stock options granted for compost project costs $ - $ 226,939
=========== ===========
Common stock options granted on sale of preferred and
Common stock $ - $ 2,479,942
=========== ===========
Common stock issued for deferred financing costs $ - $ 170,000
=========== ===========
Conversion of Preferred stock to note payable $ - $ 1,000,000
=========== ===========
Preferred stock issued for investment in joint venture $ - $ 612,500
=========== ===========
Accretion of preferred stock $ 3,040,954 $ 1,217,436
=========== ===========
Common stock issued for preferred stock dividends $ 1,460,759 $ 1,321,417
=========== ===========
Common stock to be issued for preferred stock dividends $ 59,002 $ 508,325
=========== ===========
Mortgage payable for land acquisition $ - $ 794,000
=========== ===========
Property, plant and equipment recorded pursuant to obligations
under financing agreements $ 377,392 $ -
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<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 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 (See Note 8) 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 (See Note 19). 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.
The Company was previously considered a development stage company;
however, in November 1997, the Company acquired an operating
business, 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. Substantially all of the
Company's revenues for the years ended April 30, 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 April 30, 1999, the Company had a working capital
deficit of $31,625,684, an accumulated deficit of $54,271,919 and
a stockholders' deficiency of $1,990,424. In addition, as of April
30, 1999, the Company was not in compliance with the vast majority
of its long-term debt agreements. In addition, the Series A and
Series C Preferred stockholders have certain rights which allow
them to exchange their shares of the Company's Preferred and
Common stock for the Common stock of EPIC. If these rights are
exercised, the Company would record a charge to operations in
excess of $7.5 million. 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 other
capital expenditures. In addition, the Newark, New Jersey
composting project has been altered 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-9
<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. This sale, if completed, is
expected to provide the Company with capital to meet its current
obligations and to provide partial funding for pending projects.
The Company will still require additional sources of capital to
complete its pending projects. Additionally, management of the
Company and the Series A Preferred and Series C Preferred
stockholders have agreed that in the event of a sale of EPIC,
under the terms presently contemplated, no portion of the Series A
and Series C Preferred stock will be redeemed and that the Series
A and Series C Preferred shareholders will waive their right to
exchange various securities for the stock of EPIC.
There can be 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 or that the Company
will reach an agreement with its Series A Preferred and Series C
Preferred stockholders. If the Company is unable to secure
additional financing, attain future profitable operations,
complete the EPIC sale and reach an agreement with its Series A
Preferred and Series C Preferred stockholders, 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. In addition, unfavorable outcomes
of any of the various pending litigation and disputes (see Notes
14, 19 and 20) could have a material adverse effect on the
Company's consolidated financial position, results of operations
and cash flows. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments
relating to the recoverability of recorded asset amounts or
amounts and classifications of liabilities that might result
should the Company be unable to continue as a going concern.
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 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.
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 that
the failure to comply with such regulations might have a material
adverse effect on the Company and its operations in the future.
F-10
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Risk and Uncertainties (Continued)
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 material adverse effect on the
Company and its operations in the future.
NOTE 4 - 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 (See Note 9). All
significant intercompany balances and transactions have been
eliminated. Investment in joint venture is accounted for on the
equity method (See Note 18).
Use of Estimates - The preparation of consolidated 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.
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:
Building 25 years
Machinery and equipment 5 - 7 years
Leasehold improvements Term of lease
At April 30, 1999, property, plant and equipment consists of the
following:
<TABLE>
<CAPTION>
<S> <C>
Land $ 8,600,571
Building 247,250
Machinery and equipment 13,360,981
Leasehold improvements 749,405
Project costs 2,873,407
-----------
25,831,614
Less: Accumulated depreciation and amortization ( 3,308,185)
-----------
$22,523,429
===========
</TABLE>
F-11
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Summary of Significant Accounting Policies (Continued)
Depreciation and amortization expense relative to the above was
$2,130,451 and $1,130,124 for the years ended April 30, 1999 and
1998, respectively.
Construction in progress 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 1999, 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. Such costs are anticipated
to be recovered through litigation (See Note 19). In the event the
Company is unsuccessful in its litigation, all or a portion of
these costs will be written off to operations at this point.
The allowance for project costs was recorded due to impairments
from uncertainties surrounding the Miami and Newark projects (See
Note 1) and abandonment of the remaining projects.
In its consolidated statement of operations for the year ended
April 30, 1999, the Company recorded impairments of project costs
from uncertainties surrounding the Newark and Miami projects and
the abandonment of the remaining projects in the amount of
$10,721,161. Certain members of present management are unable to
determine if all or any portion of this $10,721,161 impairment in
fact related to the year ended April 30, 1998. For this reason,
primarily, certain members of present management of the Company
are unable to determine whether the Company's 1998 consolidated
financial statements are fairly stated, in all material respects,
in conformity with generally accepted accounting principles. As
such, certain members of present management of the Company are
unable to determine whether the Company's 1999 consolidated
statements of operations, redeemable preferred and common stocks
and stockholders' equity (deficiency), and cash flows are fairly
stated, in all material respects in conformity with generally
accepted accounting principles.
Customer Contract Rights - Customer contract rights of $29,777,812
net of accumulated amortization of $3,210,820, are being amortized
using the straight-line method over the life of the respective
contract which is 15 years. Amortization expense for customer
contract rights was $2,231,454 and $979,366 for the years ended
April 30, 1999 and 1998, respectively.
F-12
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Summary of Significant Accounting Policies (Continued)
Other Intangible Assets - Intangible assets are being amortized
using the straight-line method over the estimated lives indicated
below. Other contract rights, deferred financing costs and lease
incentive are being amortized using the straight-line method over
the lives of the respective contracts or agreements.
At April 30, 1999, other intangible assets consist of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
Estimated
Life
-------------
Deferred financing costs 1 to 3 years $ 2,122,143
Lease incentive 7 years 150,000
Other contract costs 1,000,000
Bonding costs and other 301,149
-----------
3,573,292
Less: Accumulated amortization (2,250,746)
------------
$ 1,322,546
===========
</TABLE>
Amortization expense for other intangible assets was
$2,207,910 and $692,582 for the years ended April 30, 1999
and 1998, respectively.
Revenue Recognition - Transportation and disposal fees, the
Company's principal source of revenue in the years ended April 30,
1999 and 1998, are recognized upon the receipt of the organic
waste at the Company's transfer site. Costs to transport and
dispose of the waste are accrued upon receipt of the waste.
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.
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, 1999.
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.
F-13
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Summary of Significant Accounting Policies (Continued)
The net loss and weighted average Common and Common equivalent
shares used in determining the net loss per share are as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Net loss applicable to Common stockholders per statements
of operations $(30,850,967) $(14,665,304)
Preferred stock dividends not declared 1,820,000 887,562
------------ ------------
Net loss applicable to Common stockholders used for
basic and diluted net loss per Common share $(32,670,967) $(15,552,866)
============ ============
Weighted average Common shares outstanding during year 43,421,719 28,135,231
Dilutive effect of Common stock to be issued for cumulative
preferred stock dividends not declared 429,282 151,720
------------ ------------
Weighted average Common and Common equivalent shares
used for basic and diluted net loss per Common share 43,851,001 28,286,951
============ ============
</TABLE>
NOTE 5 - Business Acquisition (unaudited)
On November 3, 1997, the Company acquired all of the outstanding
Common Stock of EPIC for $26,120,000. The purchase price was paid
in cash of $20,000,000, the issuance of 39,000 shares of the
Company's Series A Preferred Stock valued at $1,365,000, 21,000
shares of the Company's Series C Preferred Stock valued at
$1,050,000 and 3,447,182 shares of the Company's unregistered
Common stock valued at $3,585,000. In addition, in May 1997, the
Company's President transferred 100,000 shares of his personal
holdings of the Company's unregistered Common stock valued at
$120,000, on behalf of the Company, as part of the negotiations of
the original letter of intent for the EPIC acquisition. This
transfer of the President's shares was recorded as a capital
contribution as of the date of the transaction based on the
closing bid price per share. The purchase price of $26,706,525,
including the related transaction expenses of $586,525 was
allocated to the fair value of the net liabilities assumed, with
$29,531,555 allocated to customer contract rights under the
purchase method of accounting. In addition, the Stock Purchase
Agreement contains a provision for additional payments based on
the future operating results, as defined, if two specific customer
contracts are entered into by EPIC within a specified period.
The cash portion of the purchase price was funded primarily from
proceeds from the sale to one investor of 130,000 shares of the
Company's Series A Preferred stock valued at $3,829,077 (net of
expenses of $720,923), 70,000 shares of the Company's Series C
Preferred stock valued at $1,217,146 (net of expenses of $532,854
and a conversion preference of $1,750,000 (see Note 11)) and
11,490,609 shares of the Company's unregistered Common stock
valued at $10,069,335 (net of expenses of $1,880,665). The Series
A Preferred stock, Series C Preferred stock and unregistered
Common stock amounts were determined by an appraisal by an
independent party.
As of November 3, 1997, the Company had approximately $5,000,000
of deferred income tax assets for which a valuation allowance had
been established. Based upon the application of purchase
accounting for the EPIC transaction, a significant deferred income
tax liability was recorded and, as a result, the valuation
allowance on the deferred income tax asset was no longer required.
Under the provisions of SFAS 109, the impact of the reversal of
the valuation allowance is recorded as part of the EPIC purchase
accounting resulting in a reduction in customer contract rights.
F-14
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Business Acquisition (unaudited) (Continued)
See Note 11 regarding certain exchange rights for the Series A and
Series C Preferred stock issued as part of the EPIC acquisition.
If the EPIC acquisition had occurred on May 1, 1997, unaudited pro
forma revenues, net loss available to common stockholders and net
loss per share would have been approximately $17,900,000,
$16,500,000 and $0.44, respectively, for the year ended April 30,
1998. The pro forma financial information does not purport to
represent what the Company's results of operations would have been
had the acquisition in fact occurred on May 1, 1997, or to project
the Company's results of operations for any future period.
NOTE 6 - Long-Term Debt
<TABLE>
<CAPTION>
<S> <C> At April 30, 1999, long-term debt consists of the
following:
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 (see Note 20). 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 (see Note 20). 2,000,000
Note payable in monthly installments of $215,539 including interest at
10.0% per annum, through June 2001 and monthly installments of $95,811 including
interest at 10%, from July 2001 to June 2006, collateralized by substantially
all of the assets of EPIC and subject to certain covenants. At April 30, 1999,
the Company was not in compliance with a certain covenant but
subsequently received a waiver (see Note 20). 8,634,567
Other secured notes payable bearing interest at rates between 4.9%
and 12% per annum, maturing at various dates through April 2004.
approximately $429,000 of these notes are convertible into shares
of the Company's Common stock at per share prices ranging from
$0.40 to $3.00. A majority of these notes are currently in default. 1,440,037
Other unsecured notes payable bearing interest at rates between 6%
and 12% per annum, maturing at various dates through November
2000.
A majority of these notes are currently in default 2,327,266
------------
25,901,870
Less: Current portion (18,814,808)
------------
$ 7,087,062
============
</TABLE>
F-15
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt (Continued)
On November 5, 1998, the Company issued a $10,500,000 note to a
company affiliated with one of the Company's current shareholders
and debt holders. The note bears interest at 10.5% and interest is
payable upon the maturity date of the note which is the earlier of
October 30, 2000 or financial closing for the Miami project, as
defined. The note agreement includes provisions which restrict the
proceeds for specific uses as follows: $4,612,000 for repayment of
a mortgage note in default, $3,000,000 for the redemption of the
Company's common stock owned by an affiliate of the lender,
$440,000 for fees associated with the note payable and the
remainder for general working capital and Miami project expenses.
In connection with this transaction, the conversion of a $200,000
debenture payable into 159,670 shares of the Company's common
stock in September of 1997 was rescinded. As part of this note
agreement, the convertible debenture payable in the amount of
$800,000, including the $200,000 rescinded amount, which is held
by an affiliate of the noteholder was converted into 1,406,593
shares of the Company's Common stock (665,000 shares were
transferred from the proprietary holdings of a related party on
behalf of the Company - see Notes 11 and 14). 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 noted above, as part of this note agreement the Company
is required to utilize $3,000,000 for the redemption of 1,000,000
shares of the Company's common stock from an affiliate of the
noteholder. Since the redemption of the Company's Common stock was
completed as part of the $10,500,000 note payable transaction, the
difference between the buyback price and the fair value of the
Company's Common stock of $1,875,000 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' equity 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 equity 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.
As a result of the various judgements against the Company and
certain other events of default, as defined under the note
agreement, the lenders could accelerate the collection of the
$10,500,000 note, which is collateralized by a first mortgage lien
on the real property constituting the site of the Florida
F-16
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt (Continued)
composting facility project and by the Company's 80.1% stock
ownership interest in Miami Recycling and Composting Company, Inc.
The parties are in discussions to resolve this matter.
Maturities of long-term debt as of April 30, 1999 are as
follows:
Year Ending April 30,
2000 $ 18,814,808
2001 2,474,894
2002 1,233,121
2003 856,393
2004 886,274
Thereafter 1,636,380
------------
$ 25,901,870
============
NOTE 7 - Short-Term Debt
At April 30, 1999, short-term debt consists of borrowing of
$522,816 under a revolving credit line agreement up to $2,000,000.
The credit line bears interest at 2.65% plus the current 30-day
commercial paper rate as defined (7.45% at April 30, 1999) and
expires June 30, 1999. Amounts due under the line of credit are
guaranteed by an officer of EPIC. During June 1999, the line of
credit was extended through June 30, 2000.
NOTE 8 - 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.
The bonds, including accrued earned interest, have been classified
in the accompanying consolidated balance sheet as a current
liability with an offsetting amount as a current asset.
NOTE 9 - 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
F-17
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Minority Interest In Consolidated Subsidiaries (Continued)
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 10 - Redeemable Preferred Stock (disclosures relating to April 30,
1998 and prior are unaudited)
The Company has authorized 25,000,000 shares of Preferred stock of
which 668,771 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. Through November 3,
1999, dividends on the Series A Preferred were payable at the
Company's option 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. After November 3, 1999,
dividends on the Series A Preferred are payable only in cash. 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. Through May 3, 1999, dividends on
the Series C Preferred were payable at the Company's option 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. After May 3, 1999, dividends of 8% per share per
year, which are payable semi-annually on June 30 and December 31,
are payable only in cash. Through November 3, 1999, dividends on
the Series D Preferred were payable at the Company's option 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. After November 3, 1999, dividends on the Series
D Preferred are payable only in cash.
The liquidation value on 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. The Company
issued 783,842 shares of the Company's Common stock in order to
obtain the approval from the Series A and Series C Preferred
holders for the issuance of the Series D Preferred stock in April
1998.
During the year ended April 30, 1999, shares of the Company's
Common stock valued at $1,519,761 have been recorded as a dividend
to the Series A and Series C 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 and accrued dividends. 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.
F-18
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Redeemable Preferred Stock (disclosures relating to April 30,
1998 and prior are unaudited) (Continued)
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.
Accumulated dividends payable as of April 30, 1999 were $450,667
on the Series A Preferred, and $116,660 on the Series D Preferred
based on the Company's determination that the dividends would be
paid in Common stock utilizing the applicable trading price during
the period. In the aggregate 801,564 of the Company's Common stock
is issuable to these Preferred stockholders. Since the Series A
dividends and the Series D dividends are cumulative and management
indicated that they will be paid in Common stock, these dividends
are recorded as Common Stock to be Issued in the accompanying
consolidated balance sheet. The Series C dividends are
non-cumulative, thus not recorded as common stock to be issued.
However, the imputed amount of the Series C dividends are recorded
in the net loss per share calculation.
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.
If at any time shares of both the Series A Preferred and Series C
Preferred remain issued and outstanding and the Company is in
default of any covenant or in default of payment on any debt in
excess of $100,000, then at their option, the holders of Series A
Preferred and Series C Preferred have the right to exchange all of
their shares of Series A Preferred, Series C Preferred and
15,721,633 Common shares issued to the Series A Preferred holders
for all the outstanding shares of Common stock of EPIC. In
addition, even if not in default, the holders of the Series A
Preferred have the right to exchange shares of Series A Preferred
for all shares of Common stock of EPIC outstanding during the
period from November 1, 1999 through October 31, 2000, but only if
all or part of the Series C Preferred is outstanding. If such
exchange is made, all shares of Series A Preferred, Series C
Preferred and the 15,721,633 Common stock shares issued to the
Series A Preferred holders will be returned to the Company. If
these rights are exercised, the Company would record a charge to
operations likely to be in excess of $7.5 million. This option
shall be void upon payment in full of the Series C Preferred.
As of April 30, 1999, the Company was not in compliance with
certain of its debt obligations, which would result in the holders
of the Series A Preferred and Series C Preferred having the right
to exchange their shares of the Company's Preferred and Common
stock for the outstanding shares of EPIC. The Series A Preferred
and Series C Preferred holders have signed an agreement which
states that they will not exercise their EPIC option to the extent
that such exercise would result in, or increase, a stockholders'
deficiency after giving effect to the transaction.
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 (see Note 18) 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 as of April 30, 1999.
F-19
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Redeemable Preferred Stock (disclosures relating to April 30,
1998 and prior are unaudited) (Continued)
During 1999, in connection with a certain financing arrangement,
400,000 shares of Preferred B stocks were given a redemption
feature in which the shares can be redeemed at $3.10 per share
upon the maturity of the note payable, which is October 30, 2000.
The difference between the carrying value of the Series B shares
prior to this feature and the redemption value has been recorded
as debt discount.
NOTE 11 - Stockholders' Equity (Deficiency) (disclosures relating to April
30, 1998 and prior are unaudited)
Common Stock - In June 1998, the Company's Board of Directors
approved an increase to the total number of shares of Common stock
that the Company shall have the authority to issue from 50,000,000
to 100,000,000.
During the year ended April 30, 1998 the Company issued 11,490,609
shares of Common stock as part of a combined transaction with the
Series A Preferred and Series C Preferred which were valued at
$11,950,000 or approximately $1.04 per share. The Company incurred
transaction expenses of $1,880,665 related to the sale of Common
stock. These shares were valued by an independent appraiser. The
Company also sold 955,000 shares of Common stock for cash proceeds
of $1,907,559 at per share prices ranging from $0.50 to $2.50.
Included in the 955,000 shares of Common stock sold for cash
proceeds were two sale transactions with the same investor, one in
August 1997 and one in September 1997, for the sale of 250,000
shares of Common stock from the Company for cash proceeds of
$500,000. As part of these sale transactions, four of the
Company's current stockholders (one of which is the Company's
former President, one of which is the Company's attorney, one of
which is a Director of the Company, and one of which is an entity
whose President is a Director of the Company) transferred 150,000
and 300,000 shares, respectively, from their personal holdings of
the Company's Common stock to the new investor on behalf of the
Company. These transfers of the existing stockholders shares were
recorded as capital contributions as of the date of these
transactions.
In addition, the Company issued 3,447,182 shares of Common stock
for a business acquisition which was valued at $3,585,000 or
approximately $1.04 per share based on an independent appraisal.
In addition, the Company issued 1,627,980 shares of Common stock
in connection with an acquisition of a joint venture which were
valued at $1,953,576, or $1.20 per share. The Company also issued
200,000 shares of Common stock for the acquisition of certain
property which were valued at $200,000. The Company also issued
541,478 shares of Common stock which were valued at $1,261,338 for
the repayment of outstanding liabilities of $600,000. The Company
issued 116,991 shares of Common stock for payment of dividends on
Preferred stock which were valued at $263,230. The Company issued
783,842 shares of Common stock valued at $1,058,187 to obtain the
approval from the Series A and Series C Preferred holders for a
new series of Preferred stock which was recorded as an additional
dividend to the Series A and Series C Preferred holders. The
Company also issued 2,026,575 shares of Common stock for services
rendered which were valued at $1,985,463, at per share prices
ranging from $0.50 to $3.06. These shares were valued based upon
the fair value of the services rendered, if reliably determinable,
since that value 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.
During the year ended April 30, 1999, the Company issued 8,638,819
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
F-20
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Stockholders' Equity (Deficiency) (disclosures relating to April
30, 1998 and prior are unaudited) (Continued)
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 - see Note
14) 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 - see Notes 6 and 14). These shares were
valued at $871,375.
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 that 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' equity (deficiency)
in the accompanying consolidated balance sheet.
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
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 1999, 400,000 shares of the Series B
Preferred were given a redemption feature, at the holder's option,
upon maturity of a certain debt obligation of the holders at $3.10
per share. The Series B Preferred has no voting rights.
In July 1997, the Company sold 400,000 shares of Series B
Preferred for proceeds of $867,737, net of transaction expenses of
$132,263. As part of this sale transaction, one of the Company's
current stockholders, an entity whose President is also a Director
of the Company, transferred 700,000 shares of the Company's Common
stock from its personal holdings of the Company's Common stock to
this new Series B Preferred stockholder on behalf of the Company.
In September 1997, the Company sold 400,000 shares of Series B
Preferred for proceeds of $782,738, net of transaction expenses of
$217,262. As part of this sale transaction, one of the Company's
current stockholders, an entity whose President is also a Director
of the Company, transferred 100,000 shares of the Company's Common
stock from its personal holdings of the Company's Common stock to
this new Series B Preferred stockholder on behalf of the Company.
These transfers of the existing stockholders shares were recorded
as capital contributions as of the dates of the transactions with
the total proceeds from the two sale transactions of $1,650,475,
allocated between the Series B Preferred for $905,653 and Common
stock for $744,822, based on the relative fair values as of the
date of the transactions.
F-21
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Stockholders' Equity (Deficiency) (disclosures relating to April
30, 1998 and prior are unaudited) (Continued)
In addition, in August 1997, the Company sold 1,000 shares of
Series B Preferred for proceeds of $2,500, or $2.50 per share. On
November 3, 1997, 400,000 shares of the Class B Preferred were
converted into a $1,000,000 promissory note. As part of this
conversion the Company recorded an expense of $373,810 for the
difference between the net value in the Series B Preferred account
and the promissory note balance.
NOTE 12 - Common Stock Warrants and Options (disclosures relating to April
30, 1998 and prior are unaudited)
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>
Warrants outstanding at April 30,
1997 and 1998 (unaudited) 1,168,995 $0.83 - $6.00 $ 2.58
Granted 1,500,000 $1.00 - $2.25 1.50
------------ ------------- ------
Warrants outstanding at
April 30, 1999 2,668,995 $0.83 - $6.00 $ 1.98
============ ============= ======
</TABLE>
As of April 30, 1999, 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.
F-22
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Common Stock Warrants and Options (disclosures relating to April
30, 1998 and prior are unaudited) (Continued)
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>
Options outstanding at
April 30, 1997 (unaudited) 4,505,709 $2.00 - 9.00 $ 2.62
Granted 5,406,049 0.01 - 6.00 1.89
Exercised (524,960) 0.01 - 6.00 2.86
Cancelled (750,000) 3.00 3.00
---------- ------------ ------
Options outstanding at
April 30, 1998 (unaudited) 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
========== ============ ======
</TABLE>
The following table summarizes information regarding stock options
outstanding at April 30, 1999:
<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, 1999 Life in Years Share April 30, 1999 Price
- ----------------- ---------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
$.01-$2.50 12,090,528 3.61 1.38 10,890,528 1.43
3.00-5.00 465,000 3.44 3.35 465,000 3.35
6.00-9.00 270,000 2.92 6.63 270,000 6.63
</TABLE>
F-23
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Common Stock Warrants and Options (disclosures relating to April
30, 1998 and prior are unaudited) (Continued)
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" were adopted by the Company in the year ended April
30, 1997. Had compensation cost for options granted after December
15, 1995 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:
<TABLE>
<CAPTION>
Year Ended April 30,
1999 1998
------ -------
(unaudited)
<S> <C> <C>
Net loss, as reported $ (32,670,967) $ (15,552,866)
Net loss, pro forma (33,750,443) (15,943,733)
Loss per share, as reported (0.75) (0.55)
Loss per share, pro forma (0.77) (0.56)
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended April 30,
1999 1998
------- -------
(unaudited)
<S> <C> <C>
Risk-free interest rate 5% 5.87%
Expected dividend yield - -
Expected life 4 years 4 years
Expected volatility 82% 50%
</TABLE>
During the year ended April 30, 1998, the Company granted
2,100,000 Common stock options to employees of EPIC for which the
Company has recorded deferred compensation based upon the
difference between the fair market value of the Company's Common
stock and the exercise price at the grant date. The deferred
compensation balance is being amortized as compensation expense
over the option vesting periods which range upon grant to five
years.
During the year ended April 30, 1998, one consultant who had
options to purchase 300,000 shares of the Company's Common stock
completed a cashless exercise transaction which resulted in the
issuance of 194,120 shares of Common stock. The Company recorded
an expense of $203,824 as a result of this transaction, which is
included in selling, general and administrative expenses in the
accompanying 1998 statement of operations.
In addition, during the years ended April 30, 1999 and 1998, 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.
F-24
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Employee Benefit Plans (disclosures relating to April 30, 1998
and prior are unaudited)
Certain employees of EPIC are covered by union-sponsored,
collectively bargained, multi-employer pension plans.
Contributions are determined in accordance with the provisions of
negotiated labor contracts. Pension expense for these plans was
$47,765 and $21,008 for the years ended April 30, 1999 and 1998,
respectively. In the event that the Company decided to withdraw
from its participation in the multi-employer pension plans, which
is not the Company's intent, the Company would be required to
contribute its share of the Plan's unfunded benefit obligation.
NOTE 14 - Related Party Balances, Transactions and Contingencies
(disclosures relating to April 30, 1998 and prior are unaudited)
At April 30, 1999, due to related parties consists of the
following:
<TABLE>
<CAPTION>
<S> <C>
Promissory notes payable, including accrued interest
and accounts payable of approximately $2,025,000, to VRH
Construction Corp.; interest accrues at 10% per year and is
payable upon the date of maturity for the principal;
collateralized by certain of the Company's assets (c) (f)
6,112,727
Amount due to former owner of EPIC (current member of the
Company's Board of Directors), non-interest bearing; no
specific repayment terms (e) 485,491
Payable to Resource Reclamation Services, Inc. (d) 300,000
Advances from Select Acquisitions, Inc.; interest
accrues at 10% per year and is payable upon the date of
maturity for the principal; unsecured (b) (f) 176,534
Advances, including accrued interest of $19,233 and accrued
salary deferrals of $938,500, from the Company's former
President; interest accrues on cash advance at 10% per year
and is payable upon the date of maturity for the principal;
unsecured. (a) (f) 1,036,402
Deferred salary due to officers and other (f) 292,483
----------
$8,403,637
==========
</TABLE>
(a) 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 April 30, 1999, the Company has
recorded approximately $1,036,000 in connection with item (i),
which consists primarily of his compensation through April 30,
1999.
The Company has filed an answer, affirmative defenses and
counterclaims against the former President.
F-25
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Related Party Balances, Transactions and Contingencies
(disclosures relating to April 30, 1998 and prior are unaudited)
(Continued)
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.
(b) 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.
April 30, 1999, the Company has recorded $176,534 in notes and
accrued interest to Select.
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.
F-26
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Related Party Balances, Transactions and Contingencies
(disclosures relating to April 30, 1998 and prior are unaudited)
(Continued)
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 - see Notes 6 and 11).
These shares were reimbursed to Select during the year ended April
30, 1999.
(c) 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 (see Note 20).
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.
(d) 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 (see Notes 9, 19 and 20). In light of the
Company's recognition that there is no readily-available market
for 100,000 tons of impure soil and in accordance with its policy
on impairment on long-lived assets, the Company has adjusted the
carrying amount ($1,929,261) of its asset to zero.
(e) The amount arose from fees charged to the Company from the former
owner of EPIC for personally guaranteeing a performance bond.
(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 is individually considered material.
NOTE 15 - Income Taxes (disclosures relating to April 30, 1998 and prior
are unaudited)
The provision (benefit) for income taxes consists of the
following:
Year Ended April 30,
1999 1998
----------- ------------
Current: (unaudited)
Federal $ - $ -
State 208,000
----------- ------------
208,000 -
----------- ------------
Deferred:
Federal (6,897,257) (1,741,559)
State (1,217,163) (335,112)
----------- ------------
(8,114,420) (2,076,671)
----------- ------------
$(7,906,420) $ (2,076,671)
=========== ============
F-27
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Income Taxes (disclosures relating to April 30, 1998 and
prior are unaudited)
At April 30, 1999, the Company has net operating loss
carryforwards of approximately $46 million which expire between
2008 and 2019. The Tax Reform Act of 1986 contains provisions that
may severely limit the net operating loss carryforwards available
to be used in any given year in the event of significant changes
in ownership.
The statutory federal income tax rate is reconciled to effective
tax rate, as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
1999 1998
------ -----------
(unaudited)
<S> <C> <C>
Statutory federal rate (35.0)% (35.0)%
State income taxes, net of federal
income taxes (5.0) (4.0)
Income tax benefit recorded as part of
purchase accounting for EPIC 12.6
Deferred compensation not deductible 2.0 6.9
Increase in valuation allowance 14.9
Other 4.3
------ ------
(23.1)% (15.2)%
====== ======
</TABLE>
At April 30, 1999, 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:
Differences between financial and
tax bases of assets and liabilities $ 3,440,000
Accrued compensation 568,000
Net operating losses 18,400,000
Other 186,000
-----------
Deferred tax asset, gross 22,594,000
Valuation allowance (22,594,000)
------------
Deferred tax asset, net $ -
============
F-28
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - Customer Information (disclosures relating to April 30, 1998 and
prior are unaudited)
The Company's operations are conducted in one business segment
with its customers located primarily in New York and New Jersey.
The following table summarizes those customers whose revenues are
in excess of 10% of total revenues.
Year Ended April 30,
Customer 1999 1998
-------- ------------- ---------------
(unaudited)
A 33% - %
B 20% 26%
C 16% 13%
D 13% 24%
E 16%
----- -----
82% 79%
===== =====
In September 1997, EPIC was awarded a 15-year take or pay contract
from New York City for biosolids disposal. The contract requires a
minimum volume of 225 tons per day at an initial rate of $98 per
ton, subject to escalation as defined. The contract became
effective on June 22, 1998. The Company was required to obtain a
surety bond as part of the terms of this contract.
NOTE 17 - Supplier Concentration
The operations at EPIC are currently dependent upon the use of
railroad facilities and rail transportation from a sole source.
The operations of EPIC have historically not been impacted by this
dependence, however, this dependence involves several risks,
including a potential inability to obtain an adequate alternative
supply and reduced control over pricing, timely performance and
quality.
A significant number of employees at EPIC are covered by
collective bargaining agreements with two separate unions. The
agreement with one of these unions expired in March 1997 and the
union members are currently working on a month-to-month basis as
the two parties are negotiating a new multi-year agreement. The
other agreement expires in March 2001.
NOTE 18 - Joint Venture (disclosures relating to April 30, 1998 and prior
are unaudited)
On April 27, 1998, the Company issued 17,500 shares of Series D
Preferred (valued at $612,500) 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% net cash flows in equity and net
proceeds from the sale, as defined, 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. The value
assigned to the ownership interest of $1,493,872 (including the
note receivable of $445,587, the transaction expenses of $138,079
and additional expenses previously incurred related to this joint
venture of $94,130) was included in the investment in joint
venture account as of April 30, 1998.
F-29
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - Joint Venture (disclosures relating to April 30, 1998 and prior
are unaudited) (Continued)
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 (see Notes 10 and 20). The loss on this transaction
aggregating $819,129 was reflected in the accompanying
consolidated financial statements as of April 30, 1999.
NOTE 19 - Commitments and Other Contingencies (disclosures relating to
April 30, 1998 and prior are unaudited)
Operating Leases - The Company leases office space, land and
certain equipment under noncancellable operating leases. Rent
expense under these leases for the years ended April 30, 1999 and
1998 was approximately $235,000 and $270,000, respectively.
Approximate future minimum rental payments as of April 30, 1999 on
these leases are as follows:
Year Ending April 30,
2000 $ 338,000
2001 318,000
2002 176,000
2003 77,000
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.
Approximate future minimum annual compensation under these
employment agreements is as follows:
Year Ending April 30,
2000 $ 1,407,000
2001 1,407,000
2002 932,000
2003 417,000
2004 144,000
-----------
$ 4,307,000
===========
Consulting Agreements - The Company has a consulting agreement
with an individual who owns 19.9% of Miami Recycling (see Notes 9
and 14). 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. As part
of the consulting agreement, the individual was paid cash of
$250,000, issued 200,000 shares of the Company's Common stock
valued at $300,000 and issued options to purchase 500,000 shares
of the Company's Common stock at an exercise price of $2.00 per
share. The total cost of this agreement has been capitalized as
part of the construction in progress account for the Miami
Recycling project. In addition, as part of the negotiation process
for this consulting agreement in February 1997 the Company's
President transferred 200,000 shares of his personal holdings of
the Company's unregistered Common stock on behalf of the Company.
In addition, upon the closing of
F-30
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - Commitments and Other Contingencies (disclosures relating to
April 30, 1998 and prior are unaudited) (Continued)
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 with the City of Miami (the Restated Agreement). Under the
terms of Restated Agreement the commencement date of operations
for its Miami Composting facility was extended to October 1998. On
February 24, 1998, a resolution was proposed and adopted by the
City of Miami Commission granting the Company an additional
extension through October 20, 2000 if the Company agreed to the
additional provisions noted below. The resolution included
provisions that the Company would agree to pay the City an amount
equal to the City's recycling costs for each of the two years of
the extension period, agree that the $1,000,000 previously
deposited with the City to guarantee the Company's performance
under the Restated Agreement be released into the City's general
fund for the City's use and posting of a new performance bond 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, 1999.
An amended agreement including these provisions has been signed by
the Company. The Company was notified by the City of Miami
Administration that they refuse to acknowledge the extension
agreement. As a result, the Company has filed suit against the
City of Miami in order to protect its rights under the Miami
contract and to secure the extension of the contract pursuant to
the resolution adopted by the Miami City Commission in February
1998.
A substantial portion of net project costs (see Note 4) pertain to
the Miami contract. Management anticipated 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 written off to operations.
Government Regulations - In the normal course of business and, as
a result of the extensive governmental regulation of the solid
waste industry, the Company periodically may become subject to
various judicial and administrative proceedings involving federal,
state or local agencies. Certain federal and state environmental
laws impose strict liability on the Company for such matters as
contamination of water supplies or the improper disposal of
hazardous waste.
Litigation (also see Notes 14 and 20) - 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 has
reached a tentative settlement (see Note 20).
F-31
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - Commitments and Other Contingencies (disclosures relating to
April 30, 1998 and prior are unaudited) (Continued)
The holder of a $200,000 mortgage note, collateralized by a first
lien on the Company's 15 acre property in Freehold, New Jersey
(the "Freehold Property") has commenced litigation to collect its
mortgage note. A parallel action by the same holder of the
$200,000 mortgage note seeks to foreclose on the Freehold
Property. The ultimate outcome of these litigations cannot
presently be determined. Although the Company has initiated
settlement discussions, there can be no assurance that settlements
can be reached.
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 (in addition to those
described in Notes 14 and 20). 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 20 - Subsequent Events
In May 1999, the Company defaulted in the payment of a $1,000,000
promissory note, plus accrued interest and penalties. The Lender
also is the holder of a $2,000,000 convertible promissory note,
due November 1, 2000, now in default as a result of cross-default
provisions in the $1,000,000 note. As a result, the Lender filed
suit in May 1999. Both notes are collateralized by a first
mortgage on the Company's Newark property, upon which the Company
intends to construct its waste transfer station. The Lender
obtained a default judgment against the Company in September 1999
but has not yet foreclosed upon the Company's Newark property
pending settlement discussions. These settlement discussions are
dependent upon the Company obtaining additional funding. At any
time, the Lender could proceed to foreclose against the Company's
Newark property which proceeding, if successful, would prevent the
Company from developing the Newark property.
In May 1999, the Company also defaulted on the payment of
approximately $5,700,000 of promissory notes, including interest,
to VRH (see Note 14), which notes are collateralized by a second
mortgage on the Company's Newark property. The Company disputes
the propriety of this second mortgage. The Company has entered
into discussions with VRH seeking an extension of the maturity
dates of these notes. There can be no assurance that such an
extension will be granted.
In July 1999, the holders of Series D Preferred (i) 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); (ii) gave up their AMR Option as discussed in Section 9 of
the Series D Certificates of Designation and (iii) provided the
payment of $225,000 to AMR to cure certain funding defaults by the
Company. 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.
In August 1999, the Company's former President was terminated for
cause 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 14).
In August 1999, the Company and EPIC signed a letter of intent
with an unrelated party to sell EPIC.
In November 1999, the Company received a waiver on all current
defaults of the debt obligation of EPIC (See Note 6).
F-32
<PAGE>
COMPOST AMERICA HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - Subsequent Events (Continued)
In December 1999, the Series A Preferred shareholders signed an
agreement stating that prior to May 1, 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 (see Note 10).
In December 1999, the Company settled an action brought against it
by unrelated parties for $853,000 to be made in a lump sum payment
upon the earlier of the sale of EPIC or April 15, 2000. At April
30, 1999, the Company has accrued approximately $109,000 relative
to this suit which represents services through April 30, 1999.
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 in
connection primarily with payment of dividends on Preferred stock.
F-33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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/ CHRISTOPHER DAGGETT
Christopher Daggett, Co-Principal Executive
Officer
By: /s/ MARVIN ROSEMAN
Marvin 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.
CHRISTOPHER DAGGETT March 20, 2000 By: /s/CHRISTOPHER DAGGETT
Office of the President Christopher Daggett
MARVIN ROSEMAN March 20, 2000 By: /s/MARVIN ROSEMAN
Office of the President, Marvin Roseman
Principal Financial Officer
RICHARD L. FRANKS March 20, 2000 By: /s/RICHARD L. FRANKS
Vice President, Richard L. Franks
General Counsel,
Assistant Secretary,
ANTHONY P. CIPOLLONE March 20, 2000 By: /s/ANTHONY P.CIPOLLONE
Treasurer, Controller, Anthony P.Cipollone
Principal Accounting Officer
G. CHRIS ANDERSEN March 20, 2000 By: /s/G. CHRIS ANDERSEN
Director G. Chris Andersen
CHARLES R. CARSON March 20, 2000 By: /s/CHARLES R. CARSON
Director Charles R. Carson
ROBERT J. LONGO March 20, 2000 By: /s/ROBERT J. LONGO
Director Robert J. Longo
<PAGE>
PETER PETRILLO March 20, 2000 By: /s/PETER PETRILLO
Director Peter Petrillo
JOHN T. SHEA March 20, 2000 By: /s/JOHN T. SHEA
Director John T. Shea
CHRISTOPHER SMITH March 20, 2000 By: /s/CHRISTOPHER SMITH
Director Christopher Smith
G. Chris Andersen, Charles R. Carson, Robert J. Longo, Peter
Petrillo, John T. Shea and Christopher Smith constitute a
majority of the members of the Registrant's Board of Directors.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE AUDITED FINANCIAL
STATEMENTS OF COMPOST AMERICA HOLDING COMPANY, INC. FOR THE FISCAL YEAR ENDED
APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 299,010
<SECURITIES> 0
<RECEIVABLES> 5,557,562
<ALLOWANCES> 117,422
<INVENTORY> 0
<CURRENT-ASSETS> 97,622,778
<PP&E> 25,831,614
<DEPRECIATION> 3,308,185
<TOTAL-ASSETS> 149,163,049
<CURRENT-LIABILITIES> 129,248,462
<BONDS> 7,087,062
13,047,113
2,500
<COMMON> 57,557,331
<OTHER-SE> (57,779,419)
<TOTAL-LIABILITY-AND-EQUITY> 149,163,049
<SALES> 22,249,982
<TOTAL-REVENUES> 22,249,982
<CGS> 15,830,073
<TOTAL-COSTS> 15,830,073
<OTHER-EXPENSES> 26,454,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,162,511
<INCOME-PRETAX> (34,196,672)
<INCOME-TAX> (7,906,420)
<INCOME-CONTINUING> (26,290,252)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,290,252)
<EPS-BASIC> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
