<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-22191
CCA COMPANIES INCORPORATED
-------------------------------------------------------------
(Exact Name of Registrant)
Delaware 65-0675901
---------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3250 Mary Street
Suite 405
Coconut Grove, FL 33133
---------------------------------------
(Address of Principal Executive Offices)
(305) 444-3888
-------------------------
(Registrant's Telephone Number, Including Area Code)
Conserver Corporation of America
-----------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if changed Since Last Report)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No. [ ]
State the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date.
Class Outstanding at February 20, 1998
--------------- -------------------------------------
Common Stock, $.001 par value 10,710,623 shares
<PAGE>
CCA COMPANIES INCORPORATED
(a development stage company)
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1997
and December 31, 1997 (unaudited)......................................... 1
Condensed Statements of Operations for the Three and Six Months
ended December 31, 1996 (unaudited), the Three and Six Months
ended December 31, 1997 (unaudited), and for the period from
March 6, 1996 (inception) to December 31, 1997 (unaudited)................ 2
Condensed Statements of Cash Flows for the Three and Six Months
ended December 31, 1996 (unaudited), the Three and Six Months
ended December 31, 1997 (unaudited), and for the period from
March 6, 1996 (inception) to December 31, 1997 (unaudited)................ 3
Notes to Condensed Financial Statements...................................... 4
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations.................14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................24
Item 6. Exhibits and Reports on Form 8-K...............................25
SIGNATURES...................................................................26
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CCA COMPANIES INCORPORATED
(a development stage company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1997 1997
----------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,715,460 $ 7,236,885
Advances to officers and employees 26,965 113,388
Accounts receivable 5,867
Inventory 20,000 10,000
Other current assets 166,783 606,069
----------------- ------------------
Total current assets 7,929,208 7,972,209
Loans receivable 512,190
Construction in progress 3,443,597
Excess cost over fair value of assets acquired 10,676,280
Property and equipment, net 21,986 74,949
Other assets 54,815
Due from minority interests 64,222
----------------- ------------------
TOTAL $ 7,951,194 $ 22,798,262
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 476,602 721,290
Notes payable - current (net of $60,328 discount) 689,672
Accrued interest 55,000
----------------- ------------------
Total current liabilities 1,221,274 721,290
----------------- ------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01, 5,000 shares
authorized, 1 issued and outstanding 1
Common stock, par value $.001; 50,000,000 shares 6,386 9,670
authorized; 6,385,404 and 9,669,735 shares issued and
outstanding at June 30, 1997 and December 31, 1997, respectively
Additional paid-in capital 16,672,672 35,073,005
(Deficit) accumulated during the development stage (9,949,138) (13,005,704)
----------------- ------------------
Total stockholders' equity 6,729,920 22,076,972
----------------- ------------------
TOTAL $ 7,951,194 $ 22,798,262
================= ==================
</TABLE>
See notes to condensed financial statements.
<PAGE>
CCA COMPANIES INCORPORATED
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three For the For the Period from
Months Months Six Months Six Months March 6, 1996
Ended Ended Ended Ended (Inception) to
December 31, December 31, December 31, December 31, December 31,
1996 1997 1996 1997 1997
-------------- --------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
REVENUES $ $ 2,558 $ $ 8,028 $ 8,028
OPERATING EXPENSES:
Marketing and sales 61,695 164,007 279,584
Research and development 11,000 19,262 11,000 53,290 105,536
General and administrative 466,203 1,081,956 886,792 2,160,586 4,306,369
Write-down of inventory 10,000 10,000 365,800
Provision for bad debt 1,000,000
Compensation charges
in connection with issuance of
options and warrants 551,000 457,201 779,000 6,681,307
----------- -------------- -------------- -------------- ------------------
Total operating expenses 477,203 1,723,913 1,354,993 3,166,883 12,738,596
----------- -------------- -------------- -------------- ------------------
(LOSS) FROM OPERATIONS (477,203) (1,721,355) (1,354,993) (3,158,855) (12,730,568)
OTHER INCOME (EXPENSE):
Interest income 15,044 73,415 26,390 176,967 236,888
Interest expense (47,500) (1,400) (77,500) (14,350) (199,524)
Amortization of debt discount (74,178) (74,178) (60,328) (312,500)
----------- -------------- -------------- -------------- ------------------
Total other income (106,634) 72,015 (125,288) 102,289 (275,136)
(expense)
----------- -------------- -------------- -------------- ------------------
NET (LOSS) $(583,837) $ (1,649,340) $ (1,480,28) $(3,056,566) $(13,005,704)
=========== ============== ============== ============== ==================
NET (LOSS) PER SHARE OF
COMMON STOCK $(0.12) $(0.19) $(0.31) $(0.38)
=========== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS
OUTSTANDING 4,936,233 8,494,681 4,766,650 7,990,959
=========== === =========== == ============== ==============
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
CCA COMPANIES INCORPORATED
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the For the Period from
Three Months Three Months Six Months Six Months March 6, 1996
Ended Ended Ended Ended (Inception)
December 31, December 31, December 31, December 31, to December 31,
1996 1997 1996 1997 1997
----------- -------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ($583,837) ($1,649,340) ($1,480,281) ($3,056,566) ($13,005,704)
Adjustments:
Compensation expense in connection with
issuance of options and warrants 551,000 457,201 779,000 6,681,307
Impairment of inventory 10,000 10,000 365,800
Provision for bad debt 1,000,000
Depreciation and amortization 74,473 2,650 74,960 64,471 327,140
Compensation expense for officer's salary 30,000 30,000 65,000 60,000 230,000
Legal services provided by shareholder 18,025 100,137 18,025 151,587 201,737
Consulting services provided for common 26,250 26,250
stock
Changes in current assets and current liabilities:
Advances to officers and employees (10,646) (77,092) (19,864) (86,423) (113,388)
Prepaid expenses and other current assets (461) (207,787) (8,525) (216,140) (402,923)
Accounts payable and accrued expenses 3,768 (20,233) 123,864 189,688 721,290
---------- ---------- ---------- ----------- ----------
Total adjustments 115,159 388,675 710,661 978,433 9,037,213
---------- ---------- ---------- ----------- ----------
Net cash (used) by operating activities (468,678) (1,260,655) (769,620) (2,078,133) (3,968,491)
---------- ---------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (23,463) (6,959) (57,106) (81,257)
Funds used for acquisitions and development (2,088,016) (2,602,652) (2,602,652)
Funds used for loans and notes receivable (243,300) (502,400) (243,300) (512,190) (1,776,472)
---------- ---------- ---------- ----------- ----------
Net cash (used) by investing activities (243,300) (2,613,879) (250,259) (3,171,948) (4,460,381)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Subscriptions receivable 1,374 1,374
Subscription funds returned (90,000) (90,000)
Repurchase of shares of common stock (1,200,000) (1,800,000) (1,800,000)
Net proceeds from public offering 1,447,569 10,306,296
Proceeds from sale of common stock 1,240,136 3,708,937 2,530,137 3,708,937 6,883,087
Proceeds from notes payable 275,000 750,000 2,250,000
Repayments of notes payable (385,000) (1,885,000)
---------- ---------- ---------- ----------- ----------
Net cash provided (used) by financing
activities 315,136 3,708,937 1,391,511 4,771,506 15,665,757
---------- ---------- ---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (396,842) (165,597) 371,632 (478,575) 7,236,885
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,273,479 7,402,482 1,505,005 7,715,460
---------- ---------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $1,876,637 $7,236,885 $1,876,637 $ 7,236,885 $7,236,885
========== ========== ========== =========== ==========
</TABLE>
3
<PAGE>
CCA COMPANIES INCORPORATED
(a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Note A) Basis of Presentation and the Company:
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included. Operating results
for the three-month and six-month periods ended December 31, 1997 are not
necessarily indicative of the results that may be expected for any interim
period or the year ending June 30, 1998.
The Company was incorporated on March 6, 1996 and initially adopted a
fiscal year ending August 31. Subsequently, in June 1997 the Company elected to
change its fiscal year end to June 30. Accordingly, the condensed statements of
operations and cash flows have been prepared for the three and six months ended
December 31, 1997 as compared to the three and six months ended December 31,
1996.
The balance sheet at June 30, 1997 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the audited financial
statements and footnotes thereto included in the Form 10-K for the year ended
June 30, 1997 filed by the Company.
(Note B) The Company:
CCA Companies Incorporated, formerly known as Conserver Corporation of
America, (the "Company") is a development stage company incorporated under the
laws of the State of Delaware on March 6, 1996. The Company has been granted the
exclusive right to promote, import, distribute, market, sell and otherwise
commercially exploit Conserver 21(TM), a non-toxic product which can be used to
retard spoilage and decay in food and flowers, in the United States and Canada.
The Company also holds an option and a right of first refusal to exercise such
rights throughout the world. Conserver 21(TM) is currently packaged in two
forms: packets and filters.
The Company has experienced problems with respect to the pricing and
packaging of the Conserver 21(TM) product. While the Company is continuing to
try to resolve the outstanding issues with Agrotech 2000 S.L. ("Agrotech"), its
distributor, because of the delay in completing these negotiations, the Company
has attempted to identify alternative sources of products similar to Conserver
21(TM). After extensive research, the Company has identified only one other
product that, from independent tests, the Company believes is as efficacious as
Conserver 21(TM) and has taken certain steps to obtain the ability to purchase
this alternative product should negotiations with Agrotech be terminated. (See
Note E)
As a development stage company, the Company's activities since its
inception have been primarily focused on raising both debt and equity financing
(public and private), recruiting
4
<PAGE>
management personnel, testing, developing and exploiting Conserver 21(TM) and
negotiating distribution and other arrangements. Since the first quarter of
fiscal 1998, the management of the Company has also been engaged in exploring
new business opportunities for the Company.
From March 1996 through November 1996, the Company raised capital
necessary for its business development through debt and equity private
placements. In June and July 1997, the Company raised additional capital through
an initial public offering (the "IPO"). (See Note D.)
In August 1997, the Company announced that it was considering
diversifying beyond its sole line of business of marketing, distributing and
otherwise commercially exploiting Conserver 21(TM) (the "Principal Line of
Business") and was exploring a possible new line of business in the hotel and
casino industry (the "New Line of Business"). At a Special Meeting of
Stockholders, which the Company held December 2, 1997, the Company's
stockholders voted on and approved various proposals regarding the New Line of
Business and related matters. (See Notes E and F.) In order to meet the funding
requirements of the New Line of Business, the Company in November 1997 commenced
a private placement offering to sell shares of its common stock. (See Note D.)
(Note C) Summary of Significant Accounting Policies:
[1] Loss per share of common stock:
Net loss per share of common stock is based on the weighted average
number of shares outstanding during the period. Common shares issued and options
and warrants granted by the Company at prices less than the $5.00 IPO price
during the twelve months preceding the IPO date have been included in the
calculation of common and common equivalent shares outstanding as if they were
outstanding since inception using the treasury stock method.
[2] Stock based compensation:
The Company applies Accounting Principal Board Opinion No. 25 and
related interpretations in accounting for its employee stock option and purchase
plans. In October 1995, Statement of Financial Accounting Standards No. 123
("SFAS 123") was issued and requires the Company to elect either expense
recognition or disclosure-only alternative for stock based employee
compensation. The expense recognition provision encouraged by SFAS 123 would
require fair-value based financial accounting to recognize compensation expense
for the employee stock compensation plans. The Company has elected the
disclosure-only alternative.
The Company has computed the pro forma disclosures required under SFAS 123 for
employee stock options granted as of August 31, 1996 and June 30, 1997 using the
Black Scholes option pricing model prescribed by SFAS 123.
[3] Amortization of excess cost over fair value of assets acquired:
In December 1997, the Company acquired all of the common stock of
Sakhalin General Trading & Investments, Limited ("SGTI")' for an amount which
exceeded the fair value of the assets acquired. This excess amount has been
recorded as an intangible asset and will be amortized over a 30 year life. (See
Note F)
5
<PAGE>
(Note D) Initial Public Offering ("IPO") and Private Placement Offering ("PPO"):
In June 1997, the Company completed its initial public offering in
which it received net proceeds of approximately $8,900,000 from the sale of
2,200,000 shares of its common stock, $0.001 par value (the "Common Stock") at a
per share price of $5.00. In July 1997, the Company's underwriter exercised its
over-allotment option to purchase an aggregate of 330,000 shares of Common Stock
at $5.00 per share, resulting in the Company receiving additional net proceeds
of approximately $1,448,000. Aggregate net proceeds to the Company from the IPO
amounted to approximately $10,348,000. Also in connection with the IPO, the
Company sold to the underwriters, for nominal consideration, Underwriters'
Warrants to purchase 220,000 shares of Common Stock exercisable for a period of
four years at $8.25 per share.
During the six months ended December 31, 1997, approximately $2,820,000
of the proceeds from the IPO were used for general business purposes, including
payments for the retirement of convertible debentures in the amount of $385,000
and advances of $462,000 made to Conserver Purchasing Corporation. (See Note E)
At June 30, 1997, approximately $2,130,000 of the proceeds from the IPO was used
for general business purposes, including the $1,000,000 loan to Agrotech under
the Distribution Agreement and the repayment of a $1,000,000 convertible
debenture, together with the accrued interest thereon. The Company anticipates
that the balance of the proceeds from the IPO will be used for working capital
and general business purposes primarily in connection with its Conserver 21(TM)
or related business.
In November 1997, the Company commenced efforts to raise additional
capital to fund its New Line of Business and New Business Opportunities (See
Note F). In December 1997, the Company completed the Tier I Offering and
received net proceeds of $3,709,000 from the sale of 876,331 shares of its
Common Stock at a per share price of $5.14. Also in connection with the PPO, the
Company sold to the placement agent, for nominal consideration, warrants to
purchase 306,716 shares of Common Stock exercisable for a period of four years
at $5.14 per share. Following the Tier I completion, the Company commenced the
Tier II Private Offering and raised additional funds that were received in
February 1998. (See Note G)
(Note E) The Conserver 21(TM) Distribution Agreement:
The Company's distribution and marketing rights for Conserver 21(TM)
are derived from a distribution agreement entered into in March 1997 (the
"Distribution Agreement") with Agrotech 2000 S.L. ("Agrotech"), a Spanish
company that manufactures and packages Conserver 21(TM) and whose principal
stockholder is the developer of Conserver 21(TM). Pursuant to the Distribution
Agreement, if the Company fails to purchase a minimum of $2,000,000 of Conserver
21(TM) products between April 1997 and April 1998, or fails to meet the minimum
annual purchase goals, Agrotech may sell Conserver 21(TM) to other customers in
the United States and Canada. The Distribution Agreement requires the Company to
purchase a minimum of $2,000,000 of Conserver 21(TM) products by April 1998 (the
"Initial Volume Commitment") and thereafter to continue to meet mutually agreed
upon minimum annual purchase goals. The purchase by the Company of the Conserver
21(TM) packets and filters from Agrotech is at a fixed per-unit price. The
Company is also required to pay Agrotech a 4% royalty on net revenues derived
from the Company's sales of Conserver 21(TM). Should the Company fail to meet
the minimum annual volume commitments established for any period, Agrotech may
sell Conserver 21(TM) to other customers in the United States and Canada after
90 days' written notice to the Company.
Initial marketing efforts of the Conserver 21(TM) product in the United
States have indicated a need for improvement in the packaging and pricing of the
Conserver 21(TM) product.
6
<PAGE>
These problems have affected the Company's ability to market Conserver 21(TM)
and to generate revenue. The Company and Agrotech are currently in negotiations
with respect to reducing the pricing arrangements for the Conserver 21(TM)
product and to modify the manufacturing arrangements so that packaging can be
done in the United States. Management of the Company is currently in discussions
with a U.S.-based company that specializes in packaging products comparable to
Conserver 21(TM), and has identified other U.S.-based packaging plants capable
of packaging Conserver 21(TM). Estimated packaging costs provided by these
entities indicate that the Company would be able to reduce the wholesale costs
of the Conserver 21(TM) product if the product were packaged in the United
States. There can be no assurance, however, that the Company will be able to
successfully renegotiate the Distribution Agreement on more favorable terms or
enter into a packaging arrangement with a third party to its satisfaction.
The Distribution Agreement requires the Company to make loans to
Agrotech of up to $1,500,000 for the enhancement of Agrotech's manufacturing
capacity. Under the terms of the Distribution Agreement, the first $1,000,000 of
such loan is repayable over a three-year period as an offset against Conserver
21(TM) purchases by the Company in excess of $2,000,000 annually and the balance
of any such loan is payable out of royalties which may be due Agrotech from such
sales over a three- to four-year period. At December 31, 1997, the Company had
advanced Agrotech $1,000,000 (the "Agrotech Loan") under the terms of the
Distribution Agreement.
Due to the current uncertainty as to the outcome of the renegotiation
of the Distribution Agreement with Agrotech and recent limitations with
Agrotech's current packaging of the Conserver 21(TM) product, management of the
Company believes that exceeding the Initial Volume Commitment necessary to
offset the Company's purchases from Agrotech against the Agrotech Loan is
remote. Accordingly, the Company has established a reserve equal to the Agrotech
Loan. Under the terms of the Distribution Agreement, the Company may be
obligated to extend an additional loan of $500,000 to Agrotech. Due to the
current renegotiations, the Company cannot determine at the present time whether
any additional loans, under the terms of the Distribution Agreement, will be
made or whether any offsets under the Distribution Agreement will be available.
While the Company is continuing to try to resolve the outstanding
issues with Agrotech, because of the delay in completing these negotiations, the
Company has attempted to identify alternative sources of products similar to
Conserver 21(TM). After extensive research, the Company has identified only one
other product that, from independent tests, the Company believes is as
efficacious as Conserver 21(TM).
Conserver Purchasing Corporation ("CPC") has entered into two
agreements, each dated December 9, 1997, with Sitedev S.a.r.l. ("Sitedev"), the
owner of the French company Atmos Concept S.A. ("Atmos"), which manufactures
this alternative similar product. The Company believes, although there can be no
assurance, that the Atmos product does not infringe upon the patents of
Conserver 21(TM) held by Agrotech. While the Company is not a party to either of
these agreements with Sitedev, the Company has the option, in its sole
discretion, to require CPC to assign all of its rights under these two
agreements to the Company and to purchase the Atmos shares from CPC at the same
price and on the same terms and conditions as CPC purchased such shares from
Sitedev.
Under the first agreement, CPC has acquired 51% of the shares of Atmos
in return for advancing $400,000 to Atmos upon execution of the first agreement
on December 9, 1997, and agreed to advance an additional $250,000 to Atmos which
it did on February 9, 1998. The agreement requires Atmos to use all such funds
to discharge certain of its debts and obligations.
7
<PAGE>
The Company advanced the $400,000 to CPC under a loan agreement dated December
5, 1997, to fund the initial payment under the first agreement, and the Company
in February 1998, advanced the $250,000 to CPC for the remaining payments under
the first agreement. Since CPC will be unable to repay any of the loans made to
it by the Company, the Company must exercise the option to acquire Atmos in
order to recoup the value of its loans to CPC.
Under the second agreement, CPC is obligated to deliver to Sitedev
common stock of the Company having a market value of $1,000,000 in February
1998, subject to Atmos having received assignments satisfactory to CPC of
certain patent rights in respect of its food preservation product from a former
Atmos shareholder. The Company intends to issue $1,000,000 of its Common Stock
for delivery of the patent rights assigned to Atmos. There can be no assurance
that such assignments of the patent rights will be obtained. If such
satisfactory assignments are not obtained, there will be no obligation to
deliver any shares of the Company's common stock to Sitedev, and while CPC (or
the Company, if it has exercised its option under the loan agreement) would
retain its 51% stake in Atmos, the rights of CPC and the Company to utilize the
alternative product may be diminished.
The Atmos product, like Conserver 21(TM), has not been successfully
commercialized, and there can be no assurance that the Atmos product can be
successfully commercialized. Successful commercialization of the Atmos product
is subject generally to similar difficulties and uncertainties that
commercialization of Conserver 21(TM) faces.
Although the Company is generally prohibited under the Distribution
Agreement from dealing in products competitive with the Conserver 21(TM)
product, the Company does have the right, upon appropriate notice to Agrotech,
to use competing products if Agrotech is unable to supply the Conserver 21(TM)
product on a timely basis in the quantities required by the Company. As a result
of the transactions described herein with CPC and Sitedev, the Company may lose
its exclusive distribution rights to Conserver 21(TM) in the United States and
Canada under the Distribution Agreement.
(Note F) New Line of Business and New Business Opportunities:
In August 1997, the Company announced that it was considering
diversifying beyond its sole line of business of marketing, distributing and
otherwise commercially exploiting Conserver 21(TM) (the "Principal Line of
Business") and was exploring a possible new line of business in the hotel and
casino industry (the "New Line of Business"). At a Special Meeting of
Stockholders, which the Company held on December 2, 1997, the Company's
stockholders voted on and approved various proposals regarding the New Line of
Business and New Business Opportunities (as hereinafter defined) which: (i)
permit the Company to enter into the New Line of Business in the hotel and
casino industry and the New Business Opportunities, and to authorize the
issuance of up to 5,500,000 shares of the Company's Common Stock and options to
purchase 600,000 shares of Common Stock in connection with the proposal; (ii)
amend the Company's Certificate of Incorporation to change the Company's name
from "Conserver Corporation of America" to "CCA Companies Incorporated"; (iii)
amend the Company's Certificate of Incorporation to increase the number of
authorized shares of the Common Stock from 30,000,000 shares to 50,000,000
shares and Preferred Stock from 5,000 shares to 5,000,000 shares; and (iv) amend
the Company's 1996 Stock Option Plan to increase the number of Common Stock
shares authorized for issuance thereunder.
In connection with the New Line of Business, the Company has, as more
fully described herein, (i) acquired certain rights to develop a hotel and
casino project in Yuzhno-Sakhalinsk on
8
<PAGE>
the Sakhalin Island of the Russian Federation (the "Sakhalin Project"), located
20 minutes by air from Sapporo, Japan, (ii) entered into an agreement with Dato
David Chiu to provide certain development services with respect to the Sakhalin
Project, (iii) reached an agreement to manage certain hotels of Dorsett Hotels
and Resorts International, and (iv) entered into several other related
agreements, including the Surinam Project, as hereinafter described
(collectively, the "New Business Opportunities"). The foregoing agreements and
transactions (other than the agreement relating to the Surinam Project)
obligated the Company to pay approximately $6.75 million and to provide for the
issuance by the Company, under certain circumstances and subject to the
completion of certain terms and obligations thereunder, of up to 5,500,000
million shares of Common Stock and options to purchase 600,000 shares of Common
Stock. In connection with the Company seeking New Business Opportunities, the
Company entered into an agreement in principle, as of October 3, 1997, with
Parbhoe Handelmij NV, a Surinamese limited liability company, to create a joint
venture company to develop a casino project (the "Surinam Project") in
Paramaribo, the capital city of Surinam (the former Dutch Guyana). Pursuant to
the agreement, the joint venture company will also enter into an operating
agreement with the Company to manage the casino. If the Surinam Project is
developed as contemplated, the amount of cash to be advanced by the Company or
financing from outside sources to be arranged by the Company is expected to
aggregate approximately $4,800,000
In addition to the direct issuance of shares of the Company's Common
Stock in connection with the proposed transactions, the Company anticipates
funding the cash portion of the initial capital required for the proposed New
Line of Business and New Business Opportunities with the proceeds from the
private offering of shares of additional Common Stock and/or other securities of
the Company. (See Note D)
Sakhalin Agreement. In connection with the Sakhalin Project, the
Company entered into an agreement dated August 12, 1997, and amended September
9, 1997 (as amended, the "Sakhalin Agreement") with Sakhalin General Trading and
Investments Limited ("SGTI") and Sovereign Gaming and Leisure Limited
("Sovereign"), each a limited liability company organized under the laws of
Cyprus, pursuant to which the Company would acquire: (i) all of the share
capital of SGTI, which includes (a) all of SGTI's rights and interest in a
project to develop the Sakhalin Project, and (b) SGTI's ownership interest in
65% of the shares of Sakhalin City Centre Limited ("SCC"), a closed joint stock
company incorporated under the laws of the Russian Federation, which, in turn,
holds certain rights, including a guarantee by the city of Yuzhno-Sakhalinsk to
issue a gaming license to SCC and (ii) all rights and interest to or in the
Sakhalin Project held by Sovereign, including certain operating and project
management agreements with respect to the Project (collectively, the "Shares and
Rights").
On December 12, 1997, the Company, in accordance with the Sakhalin
Agreement (i) completed the acquisition of 100% of the shares of SGTI, and thus
acquired an indirect interest in 65% of the capital stock of SCC, (ii) acquired
all rights and interests of Sovereign in certain operating and project
management agreements related to the Sakhalin Project, and (iii) issued
2,000,000 shares of its Common Stock to the owners of SGTI. In addition, as
required by the Sakhalin Agreement and in consideration of the Shares and
Rights, the Company made advances of $3,000,000 to SGTI. The Company's Common
Stock was valued at $5.20 per share on the date the acquisition was completed
and as such, the value attributed to the 2,000,000 shares of the Company's
Common Stock issued to the owners of SGTI was $10,400,000. Further, in
connection with the development of the Sakhalin Project, the Company through
its acquisition of SGTI and SCC recorded construction in progress of
$3,444,000.
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The Sakhalin Agreement further provides that, upon request of the
Company, Sovereign agrees to become project manager during the construction
phase of the Sakhalin Project, subject
to agreement on reasonable compensation for such services, which shall not
exceed 5% of the construction cost of the Sakhalin Project or $5,000,000,
whichever is less. Discussions with potential contractors for the Sakhalin
Project have commenced, but there can be no assurance that contracts on terms
acceptable to the Company for construction of the Sakhalin Project will be
signed.
Development Services Agreement. On October 2, 1997, the Company entered
into an agreement (the "Development Services Agreement") with Dato David Chiu
("Chiu"), pursuant to which the Company would, as described below, transfer to
Chiu 38.46% of the share capital of SGTI and would issue to Chiu one share of
convertible junior preferred stock of the Company (the "Convertible Preferred
Stock Share") which would convert, under specified conditions and certain
circumstances, into 1,500,000 shares of Common Stock of the Company. The
Development Services Agreement provides that Chiu will provide certain
development services to the Company in connection with the Sakhalin Project,
including using his best efforts to procure or secure the necessary debt
financing and guarantees (on behalf of the Company and its subsidiaries and
affiliates) for the complete turnkey construction of the Sakhalin Project which
financing is to be on mutually acceptable terms. Construction costs for the
Sakhalin Project are currently estimated at US$100 million. The shares of Common
Stock underlying the Convertible Preferred Stock Share and the shares of SGTI to
be issued to Chiu in consideration for his services will be issued on the date
of mutual execution by the Company or its nominated affiliate of a legally
enforceable and binding agreement from a lender, the terms of which are
acceptable to the Company, SGTI and SCC, to provide the financing. In the event
Chiu is unable to procure or secure the necessary financing and guarantees
acceptable to the Company in accordance with the Development Services Agreement,
the Convertible Preferred Stock Share issued to Mr. Chiu would not convert into
1,500,000 shares of Common Stock of the Company. If the financing is not
realized as contemplated pursuant to the Development Services Agreement, the
Company and the other investors in the Sakhalin Project would be required to
obtain additional financing on behalf of SCC from a variety of sources,
including borrowings under bank credit facilities, sales of securities and
placement of term debt, to construct the hotel and casino. There can be no
assurance that such additional financing would be available on terms
satisfactory to the Company. Furthermore, there can be no assurance that the
Company will not be required to issue additional securities of the Company in
connection with the financing of the construction of the Sahkalin Project.
Chiu has also agreed that he shall not for a period of three years from
the date of issuance or transfer, as applicable, of the Convertible Preferred
Stock Share (and the underlying Common Stock) received under the Development
Services Agreement, voluntarily or involuntarily, directly or indirectly, sell,
contract to sell, grant a right to purchase, exchange, mortgage, pledge,
hypothecate, give, bequeath, transfer, assign, encumber, alienate or in any
other way whatsoever dispose of (hereinafter collectively called "transfer") any
of such shares, including any options and warrants with respect to such shares,
received by way of dividend or upon an increase, reduction, substitution or
reclassification or combination of stock of the Company or upon any
reorganization of the Company, as applicable.
Notwithstanding any of the foregoing, Chiu may transfer such shares to
any affiliate, subject to the Company's consent, which consent shall not be
unreasonably withheld. Chiu also agreed, until three years from the issuance
date of the shares to give the Company an irrevocable proxy, with full power of
substitution, to vote on all matters as the Company deems appropriate, with
respect to the shares at all meetings of the stockholders of the Company and by
means of
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any written consent of stockholders with respect to all matters. The Company has
designated Charles H. Stein, the Chairman, President and Chief Executive Officer
of the Company as the authorized person to exercise the aforementioned voting
rights on behalf of the Company, until such time as the Mr. Stein is
incapacitated to act.
Furthermore, the Development Services Agreement provides that, in the
event that Chiu wishes to sell all or any part of the shares after the three
year period described above, the Company shall have the first option to purchase
all or any part of the shares from Chiu. Chiu agreed to give the Company written
notice thereof of its intent to sell any or all of the shares. The Company has a
right to purchase said shares at a price equal to the (i) closing price per
share as reported on the Nasdaq (as reported in The Wall Street Journal) on the
date written notice is given to the Company or (ii) the price offered to Chiu by
an unaffiliated third party (not a competitor of the Company) in an irrevocable
and unconditional bona fide written offer (the "Bona Fide Offer"), as
applicable. The Company has the right to purchase all or a portion of the shares
by giving Chiu written notice no later than ten business days after written
notice is provided to the Company. In the event that the Company fails to
exercise its option, Chiu has the right to sell the shares to such third party
at the price offered to the Company without any further obligations to sell the
shares to the Company. If, however, any or all of the shares are not sold
pursuant to the Bona Fide Offer within 30 days from the receipt by the Company
of Chiu's notice of intent to sell, the unsold shares shall remain subject to
the terms of the Development Services Agreement.
Consummation of Sakhalin Agreement and Development Services Agreement.
Assuming consummation of each of the transactions contemplated above, the
Company and Chiu would own through their respective shares in SGTI, a 40% and
25% interest in SCC, respectively, and the remaining 35% of the interests would
continue to be held 20% by the City of Yuzhno-Sakhalinsk and 15% by the Sakhalin
Oblast (the regional government).
Sakhalin Casino Consulting Agreement. Effective as of August 14, 1997,
the Company entered into an agreement (the "Casino Consulting Agreement") which
commenced December 2, 1997 (the "Commencement Date"), with Star Casinos Limited,
a limited liability company organized under the laws of Cyprus (the
"Consultant"), whereby the Consultant has agreed to provide consulting and
technical services to the Company and any affiliated entities for a period of
two years with respect to the development and ongoing operations of the Sakhalin
Project casino. Under the terms of the Casino Consulting Agreement, the
Consultant has agreed to make available the services of David Hartley
("Hartley"). The Consultant will receive (i) a fee of $21,000 per month plus
reimbursement of reasonable expenses for the term of the agreement, adjusted pro
rata for any partial month of service and (ii) options to purchase 100,000
shares of the Company's Common Stock, at $6.50 per share, with 50% of the
options becoming exercisable on each of the first and second anniversary dates
of the Commencement Date and expiring on the third anniversary date. At the end
of the term of the agreement, provided that the Consultant is not in breach of
the Casino Consulting Agreement, the Consultant will also be entitled to receive
a $250,000 bonus. From the period between October 1, 1997 through the
Commencement Date, the Consultant was paid by the Company a fee of $21,000 a
month plus reimbursement of reasonable expenses. The Company may terminate the
Casino Consulting Agreement for "cause," which includes (i) a material breach of
the agreement, (ii) the unavailability of Hartley, (iii) material misconduct
injurious to the Company by the Consultant or Hartley or (iv) the conviction of
an act of fraud or conviction of a crime by the Consultant or Hartley. The
agreement also binds the Consultant and Hartley to a two-year non-compete,
non-solicitation provision.
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Hotel Management Services. On October 2, 1997, the Company entered an
agreement (the "Hotel Management Agreement") with Dorsett Hotels and Resorts
International, Ltd. ("Dorsett"), a company controlled 100 percent by Chiu,
pursuant to which the Company, directly or through a subsidiary, would act as
exclusive operator and manager of certain hotels owned by Dorsett. In
consideration for Dorsett entering into the Hotel Management Agreement, the
Company would (i) issue to Dorsett up to an aggregate 2,000,000 shares and/or
options to purchase shares of the Company's Common Stock, upon specified
conditions being satisfied and (ii) pay Dorsett $3,000,000. The Hotel Management
Agreement provides for twenty year exclusive operating agreements (which have
not yet been executed) with respect to the management of the Dallas Grand Hotel,
Dallas, Texas, Dorsett Regency Bali, Indonesia and Rockman's Regency Melbourne,
Australia, as well as operating agreements on substantially similar terms for
five other hotels scheduled to open within the next two years (the "Operating
Agreements").
The Company, pursuant to the terms of the Operating Agreement for each
hotel managed, would be entitled to management fees equal to three percent of
gross revenues plus ten percent of gross operating profits. In addition, the
Company would receive service fees equal to four percent of gross revenues for
marketing, promotion and advertising expenses as well as an additional one-half
of one percent of gross revenues for training costs which would be used in turn
to fund such expenses. Each Operating Agreement would further provide that in
the event Dorsett terminates the Operating Agreement for any reason other than
for a material breach by the Company, the Company would be entitled to a
termination fee. The termination fee shall be calculated based on the formula
which is the remaining number of years under such Operating Agreement multiplied
by a factor which is: (i) in the event of a termination during the first five
years of the Agreement, the factor shall be the sum of the actual fees paid or
payable to the Company based on revenues generated to date plus fees payable to
the Company based on projected revenues for the rest of the year, (ii) in the
event of a termination after the first five years, the factor shall be the
average of the fees paid or payable to the Company for the preceding two years,
or (iii) in the event of a termination after the first ten years, the factor
shall be the average of the fees paid or payable to the Company for the
preceding three years. If the Hotel Management Agreement is consummated the
Company plans to add a management team with experience with major international
hotel chains in the operation and management of hotels and leisure time
activities worldwide.
Dorsett agreed that it shall not for a period of three years from the
date of issuance or transfer, as applicable, of the shares received under the
Hotel Management Agreement, voluntarily or involuntarily, directly or
indirectly, sell, contract to sell, grant a right to purchase, exchange,
mortgage, pledge, hypothecate, give, bequeath, transfer, assign, encumber,
alienate or in any other way whatsoever dispose of (hereinafter collectively
called "transfer") any of such shares, including any options and warrants with
respect to such shares, received by way of dividend or upon an increase,
reduction, substitution or reclassification or combination of stock of the
Company or upon any reorganization of the Company, as applicable.
Notwithstanding any of the foregoing, Dorsett may transfer the shares to any
subsidiary or affiliate of Dorsett, subject to the Company's consent, which
consent shall not be unreasonably withheld. Dorsett also agreed, until three
years from the issuance date of the shares, to give the Company an irrevocable
proxy, with full power of substitution, to vote on all matters as the Company
deems appropriate, with respect to the shares at all meetings of the
stockholders of the Company and by means of any written consent of stockholders
with respect to all matters. The Company has designated Charles H. Stein, the
Chairman, President and Chief Executive Officer of the Company as the
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authorized person to exercise the aforementioned voting rights on behalf of the
Company, until such time as Mr. Stein is incapacitated to act.
Furthermore, the Hotel Management Agreement provides that, in the event
that Dorsett wishes to sell all or any part of the shares after the three-year
period described above, the Company shall have the first option to purchase all
or any part of the shares from Dorsett. Dorsett agreed to give the Company
written notice thereof of its intent to sell any or all of the shares received
under the Hotel Management Agreement.
The Company has a right to purchase said shares at a price equal to the
(i) closing price per share as reported on the Nasdaq (as reported in The Wall
Street Journal) on the date written notice is given to the Company or (ii) the
price offered to Dorsett by an unaffiliated third party (not a competitor of the
Company) in an irrevocable and unconditional bona fide written offer (the "Bona
Fide Offer"), as applicable. The Company has the right to purchase all or a
portion of the shares by giving Dorsett written notice no later than 10 business
days after written notice is provided to the Company. In the event that the
Company fails to exercise its option, Dorsett has the right to sell the shares
to such third party at the price offered to the Company without any further
obligations to sell the shares to the Company. If, however, any or all of the
shares are not sold pursuant to the Bona Fide Offer within 30 days from the
receipt by the Company of Dorsett's notice of intent to sell, the unsold shares
shall remain subject to the terms of the Hotel Management Agreement.
Subsequent to the execution of the Hotel Management Agreement with
Dorsett, the Company was notified by Mr. Chiu that Far East Consortium
International, Ltd. ("FEC") is the owner of certain hotels included in the
agreement and as such, would require a separate agreement with the Company under
terms and conditions similar to the Dorsett Hotel Management Agreement. The
Company is currently in the process of negotiating the final structure and
implementation of its agreements with Dato David Chiu, Dorsett and FEC. It is
contemplated that each of these parties will enter into an agreement with the
Company whereby they shall engage the Company as their exclusive operator and
manager of certain hotels in consideration for cash, shares of the Company's
Common Stock and/or options to purchase shares of the Company's Common Stock or
any combination thereof.
Other. On December 2, 1997, in connection with the Company entering
into the New Line of Business, options to purchase 300,000 and 200,000 shares of
Common Stock at an exercise price equal to $6.125 per share were issued to Brian
J. Bryce and Jay M. Haft, respectively. These options were valued at $1,220,000
and capitalized as part of the purchase price of SGTI.
The Surinam Project. As of October 3, 1997, the company entered into an
agreement in principle with Parbhoe Handelmij NV, a Surinamese limited
liability, to create a joint venture company to develop a casino project (the
"Surinam Project") in Paramaribo, the capital city of Surinam (the former Dutch
Guyana). Pursuant to the agreement, the joint venture company will also enter
into an operating agreement with the Company to manage the casino. If the
Surinam Project is developed as contemplated, the amount of cash to be advanced
by the Company or financing from outside sources to be arranged by the Company
is expected to aggregate approximately $4,800,000.
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(Note G) Subsequent Events:
Tier II Private Placement Offering. On February 10, 1998 the Company
completed a portion of its Tier II Private Offering receiving net proceeds of
$3,344,000 from the sale of 751,722 shares of its Common Stock at a per share
price of $5.14. Also in connection with the PPO, the Company sold to the
placement agent, for nominal consideration, warrants to purchase 262,751 shares
of Common Stock exercisable for a period of four years at $5.14 per share.
On February 20, 1998 the Company completed a second portion of its Tier
II Private Offering receiving net proceeds of $1,296,000 from the sale of
290,162 shares of its Common Stock at a per share price of $5.14. Also in
connection with the PPO, the Company sold to the placement agent, for nominal
consideration, warrants to purchase 101,557 shares of Common Stock exercisable
for a period of four years at $5.14 per share.
Advances to CPC. On February 9, 1998, the Company advanced $250,000 to
CPC which CPC in turn advanced to Atmos under its December 9, 1997 agreement
with Sitedev. (See Note E)
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results of Operation
The following discussion and analysis of significant factors affecting
the Company's operating results and liquidity and capital resources should be
read in conjunction with the accompanying financial statement and related notes.
Overview
The Company, which was organized in March 1996, is in the development
stage and its activities since the date of incorporation have been primarily
focused on raising both debt and equity financing (public and private),
recruiting management personnel, testing, developing and exploiting Conserver
21(TM) and negotiating distribution and other arrangements. Since the first
quarter of fiscal 1998, management of the Company has also been engaged in
exploring new business opportunities for the Company.
The Company's operations are subject to all of the risks inherent in
the establishment of a new business enterprise, including the need to obtain
financing, lack of revenues, reliability of sources of supply and the
uncertainty of market acceptance of its business. The company has incurred
losses since inception. From March 6, 1996 to June 30, 1997, the Company did not
derive any revenues from operations. During the six months ended December 31,
1997, the Company had nominal revenues of $8,028 from the preliminary sales of
its Conserver 21(TM) products. The Company's accumulated deficit at December 31,
1997 was $13,005,704, which included $6,681,307 of non-cash compensation charges
related to the value attributed to stock options and warrants issued by the
Company.
From March 1996 to November 1996, the Company raised the capital
necessary for its initial business development through debt and equity private
placements. In June 1997, the Company completed an initial underwritten public
offering (the "IPO") in which it received net proceeds of approximately
$8,900,000 from the sale of 2,200,000 shares of its Common Stock at a per share
price of $5.00. In July 1997, the Company's underwriter exercised it
over-allotment
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option to purchase an aggregate of 330,000 shares of Common Stock at $5.00 per
share resulting in the Company receiving additional net proceeds of
$1,448,000. Aggregate net proceeds to the Company from the IPO amounted to
$10,348,000. Also in connection with the IPO, the Company sold to the
underwriters, for nominal consideration, Underwriters' Warrants to purchase
220,000 shares of Common Stock exercisable for a period of four years at $8.25
per share. During the six months ended December 31, 1997, approximately
$2,820,000 of the proceeds from the IPO were used for general business purposes,
including payments for the retirement of convertible debentures in the amount of
$385,000 and advances of $462,000 made to Conserver Purchasing Corporation. At
June 30, 1997, approximately $2,130,000 of the proceeds from the IPO were used
for general business purposes, including the $1,000,000 loan to Agrotech under
the Distribution Agreement and the repayment of a $1,000,000 convertible
debenture, together with the accrued interest thereon. The Company anticipates
that the balance of the proceeds from the IPO will be used for working capital
and general business purposes primarily in connection with its Conserver 21(TM)
or related Principal Line of Business.
There are several methods of food preservation commercially available
that compete directly or indirectly with the Company's Conserver 21(TM). In
order to market and sell Conserver 21(TM) or Atmos product, the Company will
need to maintain a sales force with technical expertise in the food preservation
and food transportation industries. The success of the Company's Principal Line
of Business will depend on its ability to demonstrate the commercial viability
and effectiveness of Conserver 21(TM) or the Atmos product.
Initial marketing efforts of the Conserver 21(TM) product in the United
States have indicated a need for improvement in the packaging and pricing of the
Conserver 21(TM) product. These problems have affected the Company's ability to
market Conserver 21(TM) and to generate revenue. The Company and Agrotech are
currently in negotiations with respect to reducing the pricing arrangements for
the Conserver 21(TM) product and to modify the manufacturing arrangements so
that packaging can be done in the United States. Management of the Company is
currently in discussions with a U.S.-based company that specializes in packaging
products comparable to Conserver 21(TM), and has identified other U.S.-based
packaging plants capable of packaging Conserver 21(TM). Estimated packaging
costs provided by these entities indicate that the Company would be able to
reduce the wholesale costs of the Conserver 21(TM) product if the product were
packaged in the United States. There can be no assurance, however, that the
Company will be able to successfully renegotiate the Distribution Agreement on
more favorable terms or enter into a packaging arrangement with a third party to
its satisfaction.
While the Company is continuing to try to resolve the outstanding
issues with Agrotech, because of the delay in completing these negotiations, the
Company has attempted to identify alternative sources of products similar to
Conserver 21(TM). After extensive research, the Company has identified only one
other product that, from independent tests, the Company believes is as
efficacious as Conserver 21(TM).
Conserver Purchasing Corporation ("CPC") has entered into two
agreements, each dated December 9, 1997, with Sitedev S.a.r.l. ("Sitedev"), the
owner of the French company Atmos Concept S.A. ("Atmos"), which manufactures
this alternative similar product. The Company believes, although there can be no
assurance, that the Atmos product does not infringe upon the patents of
Conserver 21(TM) held by Agrotech. While the Company is not a party to either of
these agreements with Sitedev, the Company has advanced CPC $650,000 to fund the
transactions and has received an option in return which the Company can, in its
sole discretion, require CPC to assign all of its rights under these two
agreements to the Company and to purchase the Atmos
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shares from CPC at the same price and on the same terms and conditions as CPC
purchased such shares from Sitedev.
The Atmos product, like Conserver 21(TM), has not been successfully
commercialized, and there can be no assurance that the Atmos product can be
successfully commercialized. Successful commercialization of the Atmos product
is subject generally to similar difficulties and uncertainties that
commercialization of Conserver 21(TM) faces.
Although the Company is generally prohibited under the Distribution
Agreement from dealing in products competitive with the Conserver 21(TM)
product, the Company does have the right, upon appropriate notice to Agrotech,
to use competing products if Agrotech is unable to supply the Conserver 21(TM)
product on a timely basis in the quantities required by the Company. As a result
of the transactions described herein with CPC and Sitedev, the Company may lose
its exclusive distribution rights to Conserver 21(TM) in the United States and
Canada under the Distribution Agreement.
In August 1997, the Company announced that it was considering
diversifying beyond its sole line of business of marketing, distributing and
otherwise commercially exploiting Conserver 21(TM) (the "Principal Line of
Business") and was exploring a possible new line of business in the hotel and
casino industry (the "New Line of Business"). At a Special Meeting of
Stockholders, which the Company held on December 2, 1997, the Company's
stockholders voted on and approved various proposals regarding the New Line of
Business and New Business Opportunities which: (i) permit the Company to enter
into the New Line of Business in the hotel and casino industry and the New
Business Opportunities, and to authorize the issuance of up to 5,500,000 shares
of the Company's Common Stock and options to purchase 600,000 shares of Common
Stock in connection with the proposal; (ii) amend the Company's Certificate of
Incorporation to change the Company's name from "Conserver Corporation of
America" to "CCA Companies Incorporated"; (iii) amend the Company's Certificate
of Incorporation to increase the number of authorized shares of the Common Stock
from 30,000,000 shares to 50,000,000 shares and Preferred Stock from 5,000
shares to 5,000,000 shares; and (iv) amend the Company's 1996 Stock Option Plan
to increase the number of Common Stock shares authorized for issuance
thereunder.
In connection with the New Line of Business, the Company has (i)
acquired certain rights to develop a hotel and casino project in
Yuzhno-Sakhalinsk on the Sakhalin Island of the Russian Federation (the
"Sakhalin Project"), located 20 minutes by air from Sapporo, Japan, (ii) entered
into an agreement with Dato David Chiu to provide certain development services
with respect to the Sakhalin Project, (iii) reached an agreement to manage
certain hotels of Dorsett Hotels and Resorts International, and (iv) entered
into several other related agreements, including the Surinam Project, as
hereinafter described (collectively, the "New Business Opportunities"). The
foregoing agreements and transactions (other than the agreement relating to the
Surinam Project) obligated the Company to pay approximately $6.75 million, to
provide for the issuance by the Company, under certain circumstances and subject
to the completion of certain terms and obligations thereunder, of up to
5,500,000 million shares of Common Stock and options to purchase 600,000 shares
of Common Stock. In connection with the Company seeking New Business
Opportunities, the Company entered into an agreement in principle, as of October
3, 1997, with Parbhoe Handelmij NV, a Surinamese limited liability company, to
create a joint venture company to develop a casino project (the "Surinam
Project") in Paramaribo, the capital city of Surinam (the former Dutch Guyana).
Pursuant to the agreement, the joint venture company will also enter into an
operating agreement with the Company to manage the casino. If
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the Surinam Project is developed as contemplated, the amount of cash to be
advanced by the Company or financing from outside sources to be arranged by the
Company is expected to aggregate approximately $4,800,000.
In addition to the direct issuance of shares of the Company's Common
Stock in connection with the proposed transactions, the Company anticipates
funding the cash portion of the initial capital required for the proposed New
Line of Business and New Business Opportunities with the proceeds from the
private offering of shares of additional Common Stock and/or other securities of
the Company.
Changes in Fiscal Year
The Company initially adopted a fiscal year ending August 31, when it
incorporated on March 6, 1996. During the 1997 calendar year, the Company
elected to change its fiscal year end to June 30. Accordingly, the following
discussion of the Company's results for the three and six months ended December
31, 1997 is compared to the three and six months ended December 31, 1996.
Results of Operations
The Company has a limited operating history upon which an evaluation of
its performance and prospects can be made. During the period from March 6, 1996
to December 31, 1997, the Company's activities were primarily limited to
organization efforts and raising public and private capital to defray its
organizational expenses and the development and initial implementation of its
business plan for its Principal Line of Business. Commencing in August 1997, the
Company's activities also included organizational and fund raising efforts
relating to its New Line of Business and New Business Opportunities. From March
6, 1996 to June 30, 1997 the Company had no revenues. During the six months
ended December 31, 1997 the Company had nominal revenues of $8,028.
Comparison of Three Months Ended December 31, 1997
to Three Months Ended December 31, 1996
Net Loss. The Company incurred a net loss of $1,649,340, or $0.19 per
share, for the three months ended December 31, 1997, as compared to a net loss
of $583,837, or $0.12 per share, for the three months ended December 31, 1996.
This increase was primarily due to increases in both general and administrative
expenses and compensation charges in connection with the issuance of options and
warrants.
Revenues. For the three months ended December 31, 1997, the Company had
nominal revenues of $2,558 from the preliminary sales of its Conserver 21(TM)
products. During the three months ended December 31, 1996, the Company had no
revenues.
Compensation Charges. During the three months ended December 31, 1997,
non-cash compensation charges were $551,000 while the Company incurred no such
charges for the three months ended December 31, 1996. This represents an
increase during the current period in the Company's utilization of the issuance
of stock options and warrants in lieu of cash compensation payments.
General and Administrative Expenses. General and administrative
expenses, which include travel expenses, salaries and professional and
consulting fees, were $1,081,956 for the
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three months ended December 31, 1997 compared to $466,203 for the three months
ended December 31, 1996. This 132% increase was primarily the result of costs
associated with increases in the Company's business activities for its Principal
Line of Business, additional expenses incurred as a result of the Company's
status as a publicly traded entity and expenses incurred in exploring and
entering into the New Line of Business and New Business Opportunities.
Marketing and Sales. During the three months ended December 31, 1997,
the Company incurred $61,695 in marketing and sales expenses in connection with
its preliminary marketing and sales efforts for Conserver 21(TM). The Company
incurred no marketing and sales expenses for the three months ended December 31,
1996.
Research and Development. During the three months ended December 31,
1997, the Company incurred $19,262 in research and development expenses for
Conserver 21(TM) which consisted primarily of product testing for the Conserver
21(TM) products. The Company incurred $11,000 in research and development
expenses for the three months ended December 31, 1996.
Interest Income. For the three months ended December 31, 1997 interest
income was $73,415, compared to $15,044 for the three months ended December 31,
1996. This increase was due to additional cash being available for investment
from the proceeds of the IPO.
Interest Expense. For the three months ended December 31, 1997,
interest expense including amortization of debt discount was $1,400 compared to
$121,678 for the three months ended December 31, 1996. For the three months
ended December 31, 1996, interest expense included non-cash charges related to
the amortization of $74,178 on debt discount recorded for the value of Common
Stock shares issued to convertible debentureholders. The decrease in actual
accrued interest expense from $47,500 during the 1996 period to $1,400 in the
1997 period was the result of the repayment of certain outstanding obligations
by the Company from the proceeds of the IPO.
Income Taxes. For the three months ended December 31, 1997 and December
31, 1996, the Company was in the development stage and incurred net operating
losses. As a result, no provision for income taxes was established.
Comparison of Six Months Ended December 31, 1997
to Six Months Ended December 31, 1996
Net Loss. The Company incurred a net loss of $3,056,566, or $0.38 per
share, for the six months December 31, 1997, as compared to a net loss of
$1,480,281, or $0.31 per share, for the six months ended December 31, 1996. This
increase was primarily due to increases in general and administrative expenses,
sales and marketing expenses and compensation charges in connection with the
issuance of options and warrants.
Revenues. For the six months ended December 31, 1997, the Company had
nominal revenues of $8,028 from the preliminary sales of its Conserver 21(TM)
products. During the six months ended December 31, 1996, the Company had no
revenues.
Compensation Charges. During the six months ended December 31, 1997,
non-cash compensation charges were $779,000 compared to $457,201 for the six
months ended December 31, 1996. This represents a 70% increase during the
current period in the Company's utilization of the issuance of stock options and
warrants in lieu of cash compensation payments.
18
<PAGE>
General and Administrative Expenses. General and administrative
expenses, which include travel expenses, salaries and professional and
consulting fees, were $2,160,586 for the six months ended December 31, 1997
compared to $886,792 for the six months ended December 31, 1996. This 144%
increase resulted from costs associated with increases in the Company's business
activities for its Principal Line of Business, additional expenses incurred as a
result of the Company's status as a publicly traded entity and expenses incurred
in exploring and entering into the New Line of Business and New Business
Opportunities.
Marketing and Sales. During the six months ended December 31, 1997, the
Company incurred $164,007 in marketing and sales expenses in connection with its
preliminary marketing and sales efforts for Conserver 21(TM). The Company
incurred no marketing and sales expenses for the six months ended December 31,
1996.
Research and Development. During the six months ended December 31,
1997, the Company incurred $53,290 in research and development expenses for
Conserver 21(TM) which represented an increase in product testing for the
Conserver 21(TM) products. The Company incurred $11,000 in research and
development expenses for the six months ended December 31, 1996.
Interest Income. For the six months ended December 31, 1997 interest
income was $176,967, compared to $26,390 for the six months ended December 31,
1996. This increase was due to additional cash being available for investment
from the proceeds of the IPO.
Interest Expense. For the six months ended December 31, 1997, interest
expense including amortization of debt discount was $74,678 compared to $151,678
for the six months ended December 31, 1996. These amounts include non-cash
charges related to the amortization of $60,328 and $74,178, respectively, on
debt discount recorded for the value of Common Stock shares issued to
convertible debentureholders. The decrease in actual accrued interest expense
was the result of the repayment of certain outstanding obligations by the
Company from the proceeds of the IPO.
Income Taxes. For the six months ended December 31, 1997 and December
31, 1996, the Company was in the development stage and incurred net operating
losses. As a result, no provision for income taxes was established.
Liquidity and Capital Resources
From its date of incorporation through June 1997, the Company relied
primarily upon privately raised debt and equity financing to fund its operations
which included raising $3,172,000 through the private placement of its Common
Stock at $5.00 per share.
In June 1997, the Company completed its initial public offering in
which it received net proceeds of approximately $8,900,000 from the sale of
2,200,000 shares of its common stock, $0.001 par value (the "Common Stock") at a
per share price of $5.00. In July 1997, the Company's underwriter exercised its
over-allotment option to purchase an aggregate of 330,000 shares of Common Stock
at $5.00 per share, resulting in the Company receiving additional net proceeds
of approximately $1,448,000. Aggregate net proceeds to the Company from the IPO
amounted to approximately $10,348,000. Also in connection with the IPO, the
Company sold to the underwriters, for nominal consideration, Underwriters'
Warrants to purchase 220,000 shares of Common Stock exercisable for a period of
four years at $8.25 per share.
19
<PAGE>
In December 1997, the Company completed the Tier I Private Offering
which it commenced in November 1997 and received net proceeds of $3,709,000 from
the sale of 876,331 shares of its Common Stock at a per share price of $5.14.
Also in connection with the PPO, the Company sold to the placement agent, for
nominal consideration, warrants to purchase 306,716 shares of Common Stock
exercisable for a period of four years at $5.14 per share. Following the Tier I
completion, the Company commenced the Tier II Private Offering and raised
additional funds which were received in February 1998.
During the six months ended December 31, 1997, approximately $2,820,000
of the proceeds from the IPO were used for general business purposes, including
payments for the retirement of convertible debentures in the amount of $385,000
and advances of $462,000 made to Conserver Purchasing Corporation. At June 30,
1997, approximately $2,130,000 of the proceeds from the IPO were used for
general business purposes, including the $1,000,000 loan to Agrotech under the
Distribution Agreement and the repayment of a $1,000,000 convertible debenture,
together with the accrued interest thereon. The Company anticipates that the
balance of the proceeds from the IPO will be used for working capital and
general business purposes primarily in connection with its Conserver 21(TM) or
related business.
At June 30, 1997 and at December 31, 1997, the Company had available
cash and cash equivalents of $7,715,460 and $7,236,885, respectively.
During the six months ended September 30, 1997, in connection with the
convertible debentures issued by the Company in September and November 1996 in
the aggregate principal amounts of $600,000 and $150,000, respectively, the
$150,000 debenture issued in November 1996 was repaid in full from the proceeds
of the IPO, and of the $600,000 debenture issued in September 1996, $365,000 of
such debenture was converted into Common Stock at $5.00 per share and $235,000
was repaid from the proceeds of the IPO.
The Company's 1996 Stock Option Plan (the "Plan") was adopted in
November 1996, and amended in December 1996, April 1997 and December 1997. Under
the Plan, which authorizes the granting of incentive stock options or
nonincentive stock options, the maximum number of shares of common stock for
which options may be granted is 5,000,000 shares. During the six months ended
December 31, 1997, the Company issued to employees stock options under the Plan
to purchase an aggregate of 115,000 shares of Common Stock and to consultants
stock options to purchase 827,500 shares of Common Stock. As at December 31,
1997, options to purchase 1,997,500 shares of Common Stock had been granted
under the Plan. During the six months ended December 31, 1997, the Company also
issued to a consultant 5,000 shares of Common Stock and issued to another
consultant currently exercisable warrants to purchase 100,000 shares of Common
Stock at $6.50 per share which expire in August 2001. Historically, the Company
has used Common Stock issuances and stock option grants and warrants to pay a
significant portion of its compensation expenses.
In connection with the Company's Principal Line of Business, the
Distribution Agreement requires the Company to make loans to Agrotech of up to
$1,500,000 for the enhancement of Agrotech's manufacturing capacity. Under the
terms of the Distribution Agreement, the first $1,000,000 of such loan is
repayable over a three-year period as an offset against Conserver 21(TM)
purchases by the Company in excess of $2,000,000 annually and the balance of any
such loan is payable out of royalties which may be due to Agrotech from such
sales over a three- to four-year period. At December 31, 1997, the Company had
advanced Agrotech $1,000,000 under the terms of the Distribution Agreement. The
Company has established a reserve equal to the amount advanced to Agrotech.
20
<PAGE>
Under the terms of the Distribution Agreement, the Company may be
obligated to extend an additional loan of $500,000 to Agrotech. Due to the
current renegotiations, the Company cannot determine at the present time whether
any additional loans, under the terms of the Distribution Agreement, will be
made or whether any offsets under the Distribution Agreement will be available.
Pursuant to the first agreement between CPC and Sitedev, CPC acquired
51% of the shares of Atmos in return for advancing $400,000 to Atmos in December
1997 and $250,000 in February 1998. These funds are required for the discharge
of certain debts and obligations of Atmos. The Company advanced these amounts to
CPC to fund the payments to Atmos. Since CPC will be unable to repay any of the
loans made to it by the Company, the Company will be required to exercise its
option with CPC to acquire Atmos in order to recoup the value of its loans to
CPC.
Under the second agreement between CPC and Sitedev, CPC is obligated to
deliver to Sitedev Common Stock of the Company having a market value of
$1,000,000 in February 1998, subject to Atmos having received assignments
satisfactory to CPC of certain patent rights in respect of its food preservation
product from a former Atmos shareholder. The Company intends to issue $1,000,000
of its Common Stock for delivery of the patent rights assigned to Atmos. There
can be no assurance that such assignments of the patent rights will be obtained.
If such satisfactory assignments are not obtained, there will be no obligation
to deliver any shares of the Company's common stock to Sitedev, and while CPC
(or the Company, if it has exercised its option under the loan agreement) would
retain its 51% stake in Atmos, the rights of CPC and the Company to utilize the
alternative product may be diminished.
During the six months ended December 31, 1997, the Company incurred
$164,007 and $53,290 in marketing and sales expenses and research and
development costs for Conserver 21(TM), respectively. Although the Company has
completed some of the initial testing of Conserver 21(TM) and the alternative
product of Atmos, the Company has not completed all of its own comprehensive
independent tests. Thus, it is possible that the Company's product may require
further research, development, design and testing, as well as regulatory
clearances, prior to larger-scale commercialization. During the fiscal year
ending June 30, 1998, the Company anticipates a significant increase in
marketing and sales costs and research and development costs for Conserver
21(TM) or the Atmos product.
The Company is in the development stage and its operations are subject
to all of the risks inherent in the establishment of a new business enterprise,
including the need to obtain financing, lack of revenues and the uncertainty of
market acceptance of its business. The Company has derived only nominal revenues
from operations and has incurred losses since inception. No significant
operating revenues are anticipated until such time, if ever, as the Company can
demonstrate the commercial viability of Conserver 21(TM) or the Atmos product.
The Company currently has nominal orders for Conserver 21(TM) and there can be
no assurance that potential customers will be willing to incur the costs of
Conserver 21(TM) or the Atmos product. There can be no assurance regarding
whether or when the Company will successfully implement its food technology
business plan or operate profitably.
The Company anticipates that during the fiscal year ended June 30, 1998
it will enter the operating stage for its food technology Principal Line of
Business and as a result will incur additional costs in connection with
inventory purchases, warehousing and shipping and hiring additional employees
and consultants. The Company currently estimates that its available cash
reserves will be sufficient to meet the Company's liquidity and working capital
requirements for
21
<PAGE>
its Principal Line of Business, including additional expenditures for inventory
purchase, hiring additional employees, consultants and warehouse space through
June 1999. The continued expansion and operation of the Company's Principal Line
of Business beyond such period may be dependent on its ability to obtain
additional financing.
The Company currently has 11 employees. The Company anticipates a
significant increase in the number of employees and consultants during the next
12 to 18 months. This increase in the number of employees and consultants and
the attendant costs cannot be estimated at this time. Management does not
anticipate, however, such workforce increases until such time the Company's
Principal New Line of Business and/or proposed New Line of Business have the
potential to generate sufficient revenues to offset such costs.
In addition to the direct issuance of shares of the Company's Common
Stock, the Company anticipates funding the cash portion of the initial capital
required for the New Line of Business and New Business Opportunities with the
proceeds from its Tier I and Tier II private sale of additional Common Stock
and/or other securities of the Company. Issuances of securities would be
dilutive to stockholders and any other types of financing would likely constrain
the Company's financial and operating flexibility. With respect to the New Line
of Business and the New Business Opportunities, the Company during the six
months ended December 31, 1997 funded $3,000,000 under the Sakhalin Agreement
and is further obligated to pay an aggregate of approximately $3.75 million
under the Hotel Management Agreement, the Development Services Agreement and the
Casino Consulting Agreement. Further, if the Surinam Project is developed as
contemplated, the amount of cash to be advanced by the Company or financing from
outside sources to be arranged by the Company is expected to aggregate
approximately $4,800,000
In addition, the Company issued in December 1997 pursuant to the
Sakhalin Agreement, 2,000,000 shares of its Common Stock and is further required
to issue, under certain circumstances and subject to the completion of certain
terms and obligations thereunder, up to 3,500,000 shares of Common Stock under
the Hotel Management Agreement and Development Services Agreement. Further, the
Company issued options to purchase 600,000 shares of Common Stock in December
1997 relating to obligations created by the aforementioned transactions. The
Company's stockholders will experience significant dilution in their percentage
ownership interest in the Company upon the issuance of the shares of Common
Stock as contemplated under the agreements related to the New Line of Business
and the New Business Opportunities.
In the event the Company's plans change, its assumptions prove to be
inaccurate or its available cash reserves together with the privately raised
funds prove to be insufficient to fund its operations (as a result of future
changes in the industry, general economic conditions, unanticipated increases in
expenses or other factors), the Company may be required to seek additional
financing. Any additional equity financing may be dilutive to stockholders and
debt financing, if available, will likely include restrictive covenants,
including financial maintenance covenants restricting the Company's ability to
incur additional indebtedness and to pay dividends. Except as disclosed herein
with respect to the New Line of Business and the New Business Opportunities, the
Company has no current arrangement with respect to, or sources of, additional
financing and there can be no assurance that any needed financing would be
available to the Company on acceptable terms, or at all. The Company's ability
to obtain additional financing will depend upon, among other things, the
willingness of financial organizations to participate in the funding and the
Company's financial condition and results of operations.
22
<PAGE>
The Company's future performance will be subject to a number of
business and other factors, including many factors beyond the Company's control,
such as economic downturns and changes in the marketplace, as well as the level
of competition and the ability of the Company to successfully implement its
business strategy and effectively monitor and control its costs. There can be no
assurance that the Company will be able to generate significant revenues or
achieve profitable operations.
Subsequent Events
Tier II Private Placement Offering. On February 10, 1998 the Company
completed a portion of its Tier II Private Offering receiving net proceeds of
$3,344,000 from the sale of 751,722 shares of its Common Stock at a per share
price of $5.14. Also in connection with the PPO, the Company sold to the
placement agent, for nominal consideration, warrants to purchase 262,751 shares
of Common Stock exercisable for a period of four years at $5.14 per share.
On February 20, 1998 the Company completed a second portion of its Tier
II Private Offering receiving net proceeds of $1,296,000 from the sale of
290,162 shares of its Common Stock at a per share price of $5.14. Also in
connection with the PPO, the Company sold to the placement agent, for nominal
consideration, warrants to purchase 101,557 shares of Common Stock exercisable
for a period of four years at $5.14 per share.
Advances to CPC. On February 9, 1998, the Company advanced $250,000 to
CPC which CPC in turn advanced to Atmos under its December 9, 1997 agreement
with Sitedev.
Other
Certain statements in this Quarterly Report on Form 10-Q are "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 and involve known and unknown risks, uncertainties and other
factors that may cause the Company's actual results, performance or achievements
to be materially different form the results, performance or achievements
expressed or implied by the forward looking statement. Factors that impact such
forward looking statements include, among others, risk factors included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1997.
23
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The following information is furnished pursuant to Item 701(f) of
Regulation S-K in connection with the Company's IPO:
The effective day of the Securities Act registration: June 5, 1997
The commission file number assigned to the subject registration
statement: 333-15639
The date on which the offering commenced: June 6, 1997
The date on which the offering terminated: June 13, 1997; the offering
terminated after all of the securities were sold.
The names of the sole underwriter(s): Janssen/Meyers Associates, L.P.
The title of securities registered: Common Stock, $0.001 par value
For each of securities registered, the amount registered: 2,530,000
shares (including underwriter's overallotment)
Aggregate price of the offering amount registered: $12,650,000
For each of securities, the amount sold: 2,530,000 shares (including
underwriter's overallotment)
Aggregate offering price of the amount of each securities sold:
$12,650,000
From the effective date of the Securities Act registration statement to
the ending date of the reporting period, the amount of expenses
incurred for the Company's account in connection with the issuance and
distribution of the Securities registered: $2,302,000.
Underwriters discounts and commissions $1,075,250
Expenses paid to or for underwriter $ 561,750
Auditors Fees 85,000
Legal Fees $ 280,000
Printing Expenses $ 233,000
Miscellaneous Filing Fees and Other Expenses $ 67,000
Such payments referred to above were not direct or indirect payments to
officers, directors, general partners of the issuer or their
associates, affiliates of the issuer or any person owning 10% or more
of any class of equity securities of the issuer, nor were such payments
referred to above were direct or indirect payments to others, except as
indicated.
Net offering proceeds were: $10,348,000
From the effective date of the Securities Act registration to the end
of the reporting period the amount of net offering proceeds used for
any purpose for which at least 5% of the issuer's total offering
proceeds, whichever is less, has been used were:
24
<PAGE>
Retirement of Convertible Debentures, together
with accrued interest thereon $1,583,000
Loan pursuant to Distribution Agreement $1,000,000
Working Capital and General Business Purposes $1,923,000
Such payments referred to above were not direct or indirect payments to
officers, directors, general partners of the issuer or their
associates, affiliates of the issuer or any person owning 10% or more
of any class of equity securities of the issuer, nor were such payments
referred to above were direct or indirect payments to others, except as
indicated.
If the use of proceeds disclosed represents a material change in the
use of proceeds described in the prospectus, describe the material
change:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Documents
27 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K was filed with the Securities and
Exchange Commission on December 18, 1997, noticing resignation
of Richard A. Eisner & Company, LLP as independent accountants
for the Company as a result of the Company's need for an
accounting firm capable of providing international accounting
and auditing services.
25
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSERVER CORPORATION OF AMERICA
Dated: February 23, 1998 By: /s/ Charles H. Stein
---------------------
Charles H. Stein
Chairman, Chief Executive Officer
and President
By: /s/ Miles R. Greenberg
----------------------
Miles R. Greenberg
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,236,885
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 10,000
<CURRENT-ASSETS> 7,972,209
<PP&E> 81,257
<DEPRECIATION> 6,308
<TOTAL-ASSETS> 22,798,262
<CURRENT-LIABILITIES> 721,290
<BONDS> 0
0
0
<COMMON> 9,670
<OTHER-SE> 22,076,972
<TOTAL-LIABILITY-AND-EQUITY> 22,798,262
<SALES> 8,028
<TOTAL-REVENUES> 8,028
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,166,883
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,678
<INCOME-PRETAX> (3,056,566)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,056,566)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
