UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
________________________________
FORM 10-KSB/A NO. 3
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-3743
________________________________
CONTINENTAL INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-0705228
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10254 Miller Road, Dallas, Texas 75238
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 691-1100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.50 par value
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of December 27, 1996, is approximately $113,378,973 based
upon the closing bid price of $21.125 per share as reported for such date by
Trading and Market Services of The NASDAQ Stock Market, Inc.
As of December 27, 1996, the registrant had outstanding 11,313,195
shares of Common Stock.
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS.
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Background
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Continental Investment Corporation (the "Company") was incorporated on
October 3, 1958, in the State of Georgia, as a real estate investment and
development company. In 1965, the Company purchased 133 acres of land (the
"Property") located approximately 10 miles southwest of downtown Atlanta,
Georgia. From 1966 to 1993, 65 acres of the Property along with mineral
rights were leased to a mining and quarrying company. The lease and mineral
rights to the Property expired in 1993, and the Company subsequently engaged
in reclamation activities in preparation for an alternative use of the
Property. During the fiscal year ending ("fiscal") September 30, 1996, the
Company purchased an additional 96 acres adjacent to the Property.
Effective January 5, 1994, in order to diversify the Company's business
operations and to provide the Company with operating revenue, the Company
acquired all of the capital stock of FIBER-SEAL Holdings, Inc. ("FSH") through
the merger of a wholly-owned subsidiary of the Company with and into FSH.
During fiscal 1995, all unexploited marketing rights to the intellectual
property of the FIBER-SEAL(R) Fabric Care System were transferred to FIBER-
SEAL Franchise Corporation ("FSFC"), a wholly-owned subsidiary of the Company
which was formed to facilitate the expansion of the FIBER-SEAL business. In
September 1996, the Company acquired all of the operating assets and
liabilities of FIBER-SEAL of Dallas ("FSD") and FIBER-SEAL SERVICES
INTERNATIONAL, INC. ("FSSI") from Sterritt Properties, Inc. ("SPI"), the
majority shareholder of the Company, in exchange for a promissory note in the
principal amount of $1,150,000. Pursuant to this transaction, the Company
acquired all operations of FSSI and FSD, and all trademarks, servicemarks,
logos, and tradenames, of or related to, FIBER-SEAL.
The Company currently is engaged in the business of fabric care and
service protection through its FIBER-SEAL subsidiaries and the
commercialization and development of the Property.
FIBER-SEAL Fabric Care System(R)
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Since 1971, FIBER-SEAL Fabric Care System(R) brand services and products
have provided customers with cleaning, stain removal and lasting protection
for carpets and other fine interior fabric coverings and surfaces and cleaner,
newer looking interiors. The products and services are currently being
provided in the United States and other countries through FSSI which has
licensing agreements with approximately 60 service centers. With over 25 years
of continuous operations, the FIBER-SEAL business has established long-term
relationships, credibility and brand awareness with architects, interior
designers and manufacturers. FIBER-SEAL customers include individual
residences, real estate developments, restaurants, offices, and commercial
aircraft.
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The Company's current goal is to convert the primary basis by which it
conducts its FIBER-SEAL business from licensing to franchising during fiscal
1997 and fiscal 1998. The Company believes that through franchising its FIBER-
SEAL revenues can be increased significantly. The Company believes that it
will be able to derive greater revenue from initial and periodic franchise
payments which will be charged to franchisees in addition to revenue-based
royalties as opposed to the revenues derived from its licensees, which
historically have been exclusively revenue-based royalty payments. The Company
believes it can accomplish this conversion to a franchise-based business
without jeopardizing its gross revenues derived from the FIBER-SEAL business.
It is the Company's belief that the conversion will not subject the Company
to any material adverse risks to the Company's financial position and results
of operations. Concurrently, the Company intends to institute a program for
the expansion of FIBER-SEAL operations in all unexploited geographic areas in
the United States during fiscal 1998. While the Company believes that FIBER-
SEAL revenues can be significantly enhanced through franchising and geographic
expansion, there can be no assurance that the Company will be able to
accomplish any of these goals.
Proposed Atlanta Region Waste Management Facility
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In 1994, the Company undertook an analysis of potential uses of the
Property. The study concluded that the Property was potentially viable as a
multi-use waste disposal, transfer, and management recycling facility. The
Company believes that a regional waste management facility is the most
beneficial potentially viable use of the Property. According to the National
Solid Wastes Management Association, the solid waste industry had estimated
revenues of approximately $32 billion in 1994. The Company presently is
evaluating the development and commercialization of the Property as an inert
waste landfill disposal facility (i.e., one that may accept only wastes that
will not or are not likely to generate contamination to surrounding soils or
groundwater); a municipal solid waste landfill (which can accept any
household or commercial waste); and/or a transfer station which is a waste
management facility where solid waste is received from collection vehicles
and transferred by road or rail to, and compacted in, large, specially
designed and constructed trailers for transportation to distant disposal
facilities. While The Company hopes to commence waste management operations
at the Property during fiscal 1997 or 1998, there can be no assurance that
the Company will be able to do so.
The Atlanta Property
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The Property consists of 229 acres in Fulton County, Georgia, within the
Atlanta city limits approximately 10 miles southwest of downtown Atlanta.
Fulton County is one of the nine counties that comprise the "Atlanta Region"
which includes Fulton (City of Atlanta), Gwinnett, DeKalb, Rockdale, Henry,
Clayton, Fayette, Douglas, and Cobb. The Property is effectively at the
epicenter of the 9-county region which the Company anticipates would be the
primary market for its proposed waste management services.
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The Company anticipates that most local wastes would be transported to
the Property by truck or trailer. The strategic location of the Property is
particularly important in the Atlanta market where traffic congestion and
distance materially impact truck or trailer downtime to and from a landfill
facility, which, in turn, affect hauling efficiency and competitive bidding
practices. Waste transport beyond 50 miles is generally considered
economically unsound. The Property also is particularly well suited to serve
as a waste transfer station for transfer of waste outside the nine county
region because of its proximity to a railroad line. As part of its effort to
develop the Property as a waste management facility, the Company may seek to
acquire a rail spur to the Property.
A section of the westerly portion of the Property underwent granite
surface mining from 1966 to 1993. Approximately 20 acres have been excavated
to depths in excess of 500 feet (maximum depth of 641 feet). A smaller
excavation on the Property has been mined to a depth of approximately 150
feet. Studies obtained by the Company indicate that these excavations are
suitable for landfill use. Soil borings evidence significant amounts of
overburden that can be used for cover material in landfill operations, as
well as large amounts of granite. Granite mining also is being evaluated as
a potential source of additional income from the Property. The potential
resumption of granite mining activities represents a possible additional
benefit to the Company because it could also increase the landfill capacity
of the Property.
Municipal Solid Waste Disposal Business Risks
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There are potential, often unforeseeable, business risks and costs to
which the Company will be subject in its efforts to establish a solid waste
management facility at the property. Such risk factors include, but are not
limited to: a future reduction in the volume of solid waste available for
landfill disposal resulting from legislative or regulatory action focused on
the reduction of waste volume; public concern regarding the potential for
adverse effects on public health, the environment, and land property values
attributable to wastes disposed of at landfills; the difficulty of obtaining
permits to expand or establish disposal sites and public and private
opposition to the location, expansion and operation of landfills; stringent
environmental laws and regulations and substantial potential liability for
the violation of those laws and regulations; expanding governmental actions
attempting to restrict the interstate movement of waste for disposal; costs
associated with liner requirements, groundwater monitoring, leachate and
landfill gas control, surface water control, post-closure monitoring, site
clean-up, site remedial work, maintenance and long-term care obligations;
the obligation to manage any adverse affects on the environment that may
materialize at the Property; possible judicial and administrative proceedings
regarding alleged adverse environmental and health effects occasioned by
landfill operations; and potential regulations requiring a landfill operator
to demonstrate financial strength that would enable compliance with
prescribed or changing standards and methods of operation, as well as closure
and post-closure care requirements.
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Although environmental impairment liability insurance which provides
coverage against clean-up costs and bodily injury to non-employees and
property damage caused by off-site pollution emanating from a landfill is
available, the Company may be unable to obtain such insurance, or decide to
operate without such insurance. In that event, a partially or completely
uninsured claim against the Company, if successfully prosecuted and of
sufficient magnitude, could have a material adverse effect upon the Company's
business or financial condition. The lack of insurance also could impair the
Company's ability to secure future contracts, which may be conditioned upon
the availability of adequate insurance coverage.
Municipal and governmental waste management contracts typically require
performance bonds or bank letters of credit to secure performance. The
Company could be required to demonstrate satisfactory financial assurances to
secure its closure and post-closure care obligations with respect to each
landfill cell, some of which may be in the form of a surety bond or letter of
credit. If the Company is unable to obtain surety bonds or letters or credit
in sufficient amounts or at acceptable rates, it may be precluded from
entering into disposal contracts or obtaining or retaining landfill operating
permits.
Environmental and Other Regulations
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Authority to issue Georgia permits for construction and operation of
municipal solid waste landfills, provided they are issued subject to facility
compliance with Subtitle D of The Federal Resource Conservation and Recovery
Act of 1976 (the "RCRA"), rests with the Environmental Protection Division of
the State of Georgia Department of Natural Resources ("EPD"). The Company will
prepare an application that meets the requirements of the EPD and that
demonstrates facility compliance with RCRA, Subtitle D requirements. Locally,
the City of Atlanta will be requested to issue a Special Use Permit granting
the Company authority to operate a landfill on the Property.
In the event that the Company's applications are granted, construction of
the landfill will be required to comply with RCRA, Subtitle D standards.
Further, in granting a Special Use Permit, the city of Atlanta may require
other operating protocols with which the Company will be required to comply.
Once in operation, both the city and the state may inspect the landfill on an
unannounced basis to investigate for regulatory and permit compliance. Once
the landfill is full, post-closure care operations and maintenance will be
required for 30 years.
The Company will be subject to comprehensive federal, state and local
environmental, health and safety laws and regulations. These regulations are
administered by various federal, state and local environmental, zoning, health
and safety agencies. All of these agencies are empowered to monitor Company
compliance with such laws and regulations via periodic and unannounced
inspections.
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Operation of the potential landfill will require that significant costs
be incurred relating to liner requirements, groundwater monitoring, leachate
and landfill gas control, surface water control, post-closure monitoring,
site clean-up, site remedial work, maintenance and post-closure care
obligations. These costs may adversely impact the profit potential of the
Company's potential landfill operations by increasing the cost to construct
and operate the landfill. The Company will require substantial additional
financing to develop the Property, and there can be no assurance that such
financing will be available.
Resource Conservation and Recovery Act ("RCRA"), Subtitle D regulations
require landfill operators to demonstrate financial responsibility enabling
the operator to comply with landfill construction and operation standards, as
well as closure and post-closure care requirements. The Company will be
required to obtain insurance and performance bonds at potentially high cost
to meet this requirement.
Recycling and other waste minimization efforts can be expected to reduce
waste generation rates not only as more recyclables are regulated, but as
manufacturers take more responsibility for the recyclability of packaging.
Recycling regulations and procurement requirements for recycled goods will
continue to create business opportunities in recycling while simultaneously
diminishing the volume of waste available for disposal in landfills.
The waste disposal industry is subject to extensive and evolving
environmental laws and regulations that have been enacted in response to
technical advances and the public's increased concern over environmental
issues. These regulations are administered by the United States Environmental
Protection Agency ("EPA") and various other federal, state and local
environmental, health and safety agencies. The Company believes that there
will be increased regulation and legislation related to the solid waste
collection and disposal industry.
In order to operate a landfill or transfer station, the Company typically
will have to undergo several governmental review processes and obtain one or
more operating permits and often zoning and other land use approvals. These
permits and zoning or land use approvals are difficult, time consuming, and
expensive to obtain and are usually opposed by various local elected officials
and citizens groups. There can be no assurance that the Company will be able
to obtain any permit necessary to its proposed waste management operations.
The Company's proposed waste management business would subject it to
certain operational, monitoring, site maintenance, closure and post-closure
and financial assurance obligations which change from time to time and could
give rise to increased costs for monitoring and corrective measures. In
connection with any possible acquisition of existing landfills, which the
Company may undertake in the future, it often will be necessary to expend
considerable time, effort and money in complying with the governmental review
and permitting process necessary to maintain or increase the capacity of
these landfills. Governmental authorities enforce compliance with these laws
and regulations and to obtain injunctions or impose civil or criminal
penalties in case of violations. The Company's proposed waste management
operations will be subject to regulation, principally under the following
federal statutes:
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The Solid Waste Disposal Act ("SWDA"), as amended by the
Resource Conservation and Recovery Act of 1976, as amended ("RCRA")
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The SWDA and its implementing regulations establish a framework for
regulating the handling, transportation, treatment, and disposal of hazardous
and non-hazardous wastes. It also requires states to develop programs to
ensure the safe disposal of solid wastes in landfills.
Subtitle D of RCRA establishes a framework for federal, state, and local
government cooperation in controlling the management of non-hazardous solid
wastes. While the role of the EPA is to provide overall regulatory direction,
the actual planning and implementation of solid waste programs under Subtitle
D are largely state and local functions. In October 1993, the EPA adopted
regulations under Subtitle D with respect to solid waste disposal facility
criteria, which include location standards, hydrogeological investigations,
facility design requirements (including liners and leachate collection
systems), enhanced operating and control criteria, groundwater and methane
gas monitoring, corrective action standards, closure and extended post-
closure requirements, and financial assurance standards, many of which have
not commonly been in place or enforced at landfills. All Subtitle D
regulations are in effect, except for financial responsibility requirements,
which were to take effect in April 1997 although many states have already
implemented financial assurance programs. These federal regulations must be
implemented by the states, although states may impose requirements for
landfill sites that are more stringent than the federal Subtitle D standards.
Once a state has an approved program, it will review all existing landfill
permits to ensure that they comply with the new regulations. Although the
states were required to submit proposed permitting programs designed to
implement the Subtitle D regulations to the EPA by April 1993, some states
have not submitted their programs to the EPA and others have not fully
completed their implementation. Because the new regulations did not take
effect until late 1993 and have not been fully implemented by the states,
their full impact may not be apparent for several years. The Company could
incur significant costs in complying with such regulations.
The Federal Water Pollution Control Act of 1972
("The Clean Water Act")
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The Clean Water Act establishes rules regulating the discharge of
pollutants from a variety of sources, including solid waste disposal sites,
into streams, groundwater or other surface or subsurface waters. If runoff
from the Company's proposed waste management facility is discharged into
surface waters, the Clean Water Act would require the Company to apply for
and obtain a discharge permit, conduct sampling and monitoring and, under
certain circumstances, reduce the quantity of pollutants in such discharge.
Also, virtually all landfills are required to comply with the new federal
storm water regulations, which are designed to prevent possibly contaminated
storm water from flowing into surface waters. The Company will work with the
appropriate regulatory agencies to ensure that its facilities are in
compliance with Clean Water Act requirements, particularly as they apply to
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treatment and discharge of leachate and storm water. In addition, where
development may alter or affect wetlands, a permit must be obtained before
such development may be commenced. This requirement is likely to affect the
construction or expansion of many solid waste disposal sites. The Clean Water
Act provides for civil, criminal and administrative penalties for violations
of specified sections of the Clean Water Act.
The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (Superfund or "CERCLA")
----------------------------------------------------------
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities from which there has been, or
is threatened, a release of any hazardous substance into the environment.
CERCLA's primary mechanism for remedying such programs is to impose strict
joint and several liability for cleanup of facilities on current owners and
operators of the land, former owners and operators of the land at the time of
the disposal of the hazardous substances, as well as the generators of the
hazardous substances and the transporters who arranged for disposal or
transportation of the hazardous substances. The costs of CERCLA investigation
and cleanup can be very substantial. Liability under CERCLA does not depend
upon the existence or disposal of "hazardous waste" but can also be founded
upon the existence of even very small amounts of the more than 700 "hazardous
substances" listed by the EPA, many of which can be found in household waste.
If the Company were found to be a responsible party for a CERCLA cleanup,
the company could be held completely responsible for all investigative and
remedial costs even if others also are liable. CERCLA also authorized the
imposition of a lien in favor of the United States upon all real property
subject to or affected by a remedial action for all costs for which a party
is liable. The Company's ability to obtain reimbursement from others for
their allocable share of such costs would be limited by the Company's ability
to find other responsible parties and prove the extent of their
responsibility and by the financial resources of such other parties. In the
past, legislation has been introduced in Congress to limit the liability of
municipalities and others under CERCLA as generators and transporters of
municipal solid waste. Although such legislation has not been enacted, if it
were to pass it would limit the Company's ability to seek full contribution
from municipalities for CERCLA cleanup costs even if hazardous substances
that were released and caused the need for cleanup at the Company's proposed
landfill were generated by or transported to the landfill by a municipality.
Depending upon whether and how Congress acts, it is possible that each of
these laws may be changed in ways that may significantly affect the Company's
proposed waste management business.
The Occupational Safety and Health Act of 1970 (the "OSHA Act")
-------------------------------------------------------------
The OSHA Act authorizes the Occupational Safety and Health
Administration to promulgate occupational safety and health standards.
Various of these standards, including standards for notices of hazards,
safety in excavation and demolition work, and the handling of asbestos, may
apply to the Company's proposed waste management operations.
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The Clean Air Act
-----------------
The Clean Air Act provides for regulation, through state implementation
of federal requirements, of the emission of air pollutants from certain
landfills based upon the date of the landfill construction and volume per
year of emissions of regulated pollutants. The EPA proposed a New Source
Performance Standard and Emission Guidelines for municipal solid waste
landfills. Current regulations impose limits on air emissions from municipal
solid waste landfills. The New Source Performance Standard will apply to all
municipal solid waste landfills that commence construction after the date of
the proposal. The Emission Guidelines are a set of standards that must be
adopted by the states and will apply to all municipal solid waste landfills
that received waste after November 8, 1987. The EPA may also issue regulations
controlling the emissions of particular regulated air pollutants from
municipal solid waste landfills. Landfills located in areas with air
pollution problems may be subject to even more extensive air pollution
controls and emission limitations. Atlanta has been designated as a serious
nonattainment area for ozone. As a result, the Company's proposed waste
management facility will be required to comply with more stringent standards
than landfills in attainment areas.
State and Local Regulation
--------------------------
Each state in which the Company may operate in the future has laws and
regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, water and air pollution and, in
most cases, siting, design, operation, maintenance, closure and post-closure
of landfills and transfer stations. There has also been an increasing trend
in various states seeking to regulate the disposal of out-of-state waste in
their landfills. Legislative and regulatory measures to mandate or encourage
waste reduction at the source and waste recycling have been adopted by many
states and are also under consideration by Congress and the EPA.
The Company's potential collection and landfill operations may be
affected by the trend toward laws requiring the development of waste
reduction and recycling programs. For example, California, Georgia, Florida,
Illinois, Indiana, Kentucky, Pennsylvania, Ohio, South Carolina and West
Virginia have enacted laws that will require counties to adopt comprehensive
plans to reduce the volume of solid waste deposited in landfills, through
waste planning, composting and recycling or other programs, within the next
few years. A number of states have taken, or are considering, steps to ban
the landfilling of certain wastes, such as yard wastes, beverage containers,
newspapers, unshredded tires, lead-acid batteries and white goods, such as
refrigerators. The enactment of regulations reducing the volume and types of
wastes available for transport to and disposal in landfills could affect
adversely the Company's ability to operate its proposed waste management
facility at full capacity.
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Many municipalities also have ordinances, local laws and regulations
affecting the waste disposal industry. These include zoning and health
measures that limit solid waste management activities to specified sites or
activities, flow control provisions that direct the delivery of solid wastes
to specified facilities, and bans or other restrictions on the movement of
solid wastes into a municipality.
The permits or other land use approvals with respect to a landfill, as
well as state or local regulations, may (i) restrict a landfill to accepting
waste that originates from a specified geographic area and/or (ii) specify
the quantity of waste that may be accepted at a landfill during a given time
period and/or (iii) specify the types of waste that may be accepted at the
landfill.
Proposed Atlanta municipal solid waste landfills must file for a Special
Use Permit ("SUP") with the City of Atlanta, and a Permit to Construct and
Operate a Landfill ("PCO") with the Environmental Protection Division of The
State of Georgia Department of Natural Resources ("EPD"). Notice of such
applications must be filed with counties lying contiguous to the county
within which the Property is located. These permits, if granted, would give
the Company authority to accept municipal solid waste as well as inert waste,
and construction and demolition debris. Upon filing these permit
applications, opposition may arise from city of Atlanta and surrounding
county residents regarding environmental and quality of life issues. It is
anticipated that the city of Atlanta may impose operating protocols on which
the SUP permits are contingent. Once in operation, both the city and state
may inspect the Property, without notification to the operator, to
investigate regulatory and permit compliance. Compliance issues covered in
the required permits include liner installation, leachate collection system
installation, periodic cover requirements and groundwater monitoring systems.
Landfill operators may also petition the various permitting authorities,
provided that there is sufficient justification, for regulatory variances
that eliminate or reduce some requirements outlined in the petitions. In the
case of the Property, this would include petitioning to diminish/lessen the
liner requirement, as based on water levels, there will be little or no
groundwater seepage/contamination. Although a variance would significantly
reduce costs associated with the construction of the landfill, there can be
no assurance that the Company would be able to obtain a variance for its
proposed waste management facility.
Disclosure Regarding Forward Looking Statements
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This Annual Report on Form 10-KSB includes forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended ("Forward
Looking Statements"). All statements other than statements of historical fact
included in this report are Forward Looking Statements. In the normal course
of its business, the Company, in an effort to help keep its shareholders and
the public informed about the Company's operations, may from time-to-time
issue certain statements, oral or written, containing Forward Looking
Statements. Although the Company intends that any such Forward Looking
Statements will be based upon reasonable expectations, it can give no
assurance that such expectations will prove to be correct. Generally, these
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statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of such plans or strategies, past and possible
future, of acquisitions and projected or anticipated benefits from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings, levels of capital expenditures or other
aspects of operating results. All phases of Company operations are subject to
a number of uncertainties, risks and other influences, many of which are
outside the control of the Company and any one of which, or a combination of
which, could materially affect the results of the Company's proposed
operations and whether Forward Looking Statements made by the Company
ultimately prove to be accurate. All subsequent written and oral Forward
Looking Statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the important factors
described below that could cause actual results to differ materially from the
Company's expectations as set forth in any Forward Looking Statement made by
or on behalf of the Company.
Competition: The waste collection/disposal business and the fabric care
business are both highly competitive and require substantial amounts of
capital. If permitted and operational, the Company's proposed waste
management facility would compete with numerous enterprises, many of which
have significantly larger operations and greater resources than the Company.
The Company would also compete with those counties and municipalities that
maintain their own waste collection and disposal operations. Forward Looking
Statements assume that the Company will be able to effectively compete with
these other entities.
Ongoing Capital Requirements: In order to satisfy the liquidity needs of
the Company for the following twelve months, the Company will be primarily
dependent upon proceeds from the sale of the Company's $.50 par value common
(the "Common Stock") stock and, the revenues generated from the operation of
its fabric care business. Historically, revenues from the fabric care
operation have not been adequate to fund the operations of the Company. The
Company raised $5,500,000 through the sale of the common stock in private
placements and pursuant to the exercise of outstanding options during fiscal
1996. If the Company is unable to obtain adequate funds from operating
revenues, sales of Common stock or through alternative financing
arrangements, it may be necessary to delay the development of the Property as
a municipal solid waste landfill. Should this delay occur, the Company may
pursue one or more of its potential alternative plans to produce revenues
from the Property, including re-opening the Property as a granite quarry,
and/or using the Property for the disposal of inert debris and/or the storage
of recyclable materials. Because of potential political, legal, and other
unforeseeable factors, there can be no assurance that the Company will be
able to accomplish any of its goals for the Property.
Economic Conditions: As with any business, the Company's fabric care and
potential waste management business would be affected by general economic
conditions.
Dependence on Senior Management: The Company is highly dependent upon
its senior management. In addition, as the Company continues to grow, its
requirements for operations management with franchising and waste management
industry experience will also increase. The future availability of such
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experienced management cannot be predicted. The Forward Looking Statements
assume that experienced management will be available when needed by the
Company at compensation levels that are within industry norms. The loss of
the services of any member of senior management or the inability to hire
experienced operations management could have a material adverse effect on the
Company.
Influence of Government Regulation: The Company's proposed waste
management operations will be subject to and substantially affected by
extensive federal, state and local laws, regulations, orders and permitting
procedures, which govern environmental protection, health and safety, zoning
and other matters. These regulations may impose restrictions on operations
that could adversely affect the Company's results, such as limitations on the
expansion of disposal facilities, limitations on or the banning of disposal
of out-of-state waste or certain categories of waste or mandates regarding
the disposal of solid waste. Because of heightened public concern, companies
in the waste management business may become subject to judicial and
administrative proceedings involving federal, state or local agencies. These
governmental agencies may seek to impose fines or to revoke or deny renewal
of operating permits or licenses for violations of environmental laws or
regulations or to require remediation of environmental problems at sites or
nearby properties, or resulting from transportation or predecessors'
transportation and collection operations, all of which could have a material
adverse effect on the Company. Liability may also arise from actions brought
by individuals or community groups in connection with the permitting or
licensing of operations, any alleged violations of such permits and licenses
or other matters. The Forward Looking Statements assume that there will be no
materially negative impact on its operations due to governmental regulation.
Potential Environmental Liability: The Company may incur liabilities,
some of which could be substantial, for damage to, or the deterioration of
the environment as a result of its proposed waste management operations. Any
substantial liability for environmental damage could materially adversely
affect the operating results and financial condition of the Company. Due to
the possible unavailability or limited nature of insurance coverage for
environmental liability, if the Company were to incur liability for
environmental damage, its business and financial condition could be
materially adversely affected.
Inflation and Prevailing Economic Conditions
- --------------------------------------------
To date, inflation has not had a significant impact on the Company's
operations. The Company is unable to determine the future impact of a
sustained economic slowdown other than that a general decline in economic
conditions could have a corresponding adverse effect on the Company's results
of operations.
Employees
As of December 27, 1996, the Company employed 14 people, none of whom
are subject to a collective bargaining agreement. The Company considers its
relations with its employees to be satisfactory.
-12-
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The principal fixed asset of the Company is the Property and 283.5 acres
of real estate located approximately 50 miles from Dallas in Ellis County,
Texas. The Texas property is held for future development or resale. The
Company has no timetable for such development or resale.
The Company leases approximately 8,481 square feet of office and
warehouse space in Dallas, Texas.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
Sterritt Properties, Inc. v. Raymond Donner, et al, District Court of
Dallas County Texas: On September 19, 1996 Sterritt Properties, Inc., the
majority shareholder of the Company, filed an Original Petition and
Application For Temporary Restraining Order and Temporary Injunction (the
"Petition") against Raymond Donner, Ronnie Davidson, Richard Jepson Egglishaw,
Business Ventures, Inc. ("BVI"), Hilvick Investments Limited and Strachens
Management Services, Ltd. The Petition, as amended, alleges that the
defendants breached a contract with the plaintiff and committed fraud in
connection with a transaction whereby the plaintiff transferred to BVI an
$800,000 promissory note from the Company which was convertible into
1,600,000 shares of the Company's Common Stock. The Note subsequently was
converted by BVI and 1,600,000 shares (the "Disputed Shares") of the Common
Stock were issued to BVI. The Petition, as amended, seeks recision, monetary
and injunctive relief against the defendants other than the Company, and that
the Company be enjoined from transferring the Disputed Shares and ordered to
cancel the Disputed Shares. On October 14,1996 the District Court of Dallas
entered an Agreed Temporary Injunction enjoining the sale transfer or
assignment of any of the Company's Common Stock held directly or indirectly
by any of the defendants. On November 22, 1996 the Company was named as a
defendant to this action in order that it would be bound by any order of the
District Court concerning the ultimate disposition of the Disputed Shares.
The Company is not alleged to have breached any contract with, or to have
participated in any fraud against, the plaintiff. Thus far, based upon the
nature of the allegations of the Petition, the Company has not taken an
active role in this matter. As and if necessitated by the development of the
facts underlying this dispute, the Company will take any action against any
party it deems necessary and appropriate to protect its interests and those
of its shareholders. The Company will comply with any final orders of the
District Court (or any appropriate appellate court) concerning the Disputed
Shares.
The Company also is currently a party to routine litigation incidental
to its business. Based upon the scope and magnitude of these actions, the
Company does not believe these claims, if determined adversely to the Company,
would have a material adverse effect on the Company.
-13-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year.
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------------------------------------------------------------------
The Company's Common Stock is registered with the United States
Securities and Exchange Commission under Section 12(g) of the Securities
Exchange Act of 1934 but is not quoted on a national or regional securities
exchange or on the National Association of Securities Dealers, Inc. Automated
Quotation System. The Common Stock is traded on the Over-the-Counter Bulletin
Board.
The following table sets forth the quarterly high and low closing bid
prices per share for the Company's Common Stock for the periods indicated.
These prices represent prices between dealers, do not include retail mark-up,
mark-down or commissions and may not necessarily represent actual
transactions.
Year Ended Year Ended
September 30, 1996 September 30, 1995
------------------- ------------------
High Low High Low
--------- --------- -------- --------
4th Quarter $30.50 $16.50 $6.00 $4.00
3rd Quarter $26.00 $ 3.50 $6.25 $2.88
2nd Quarter $ 5.00 $ 4.13 $5.63 $2.88
1st Quarter $ 5.13 $ 4.00 $6.00 $4.00
There were 1,222 holders of record of the Common Stock as of December
27, 1996. This number does not include an indeterminate number of shareholders
whose shares are held by brokers in street name. The Company has not declared
any dividends on its Common Stock during fiscal years 1995 or fiscal 1996. The
Board of Directors of the Company has made no determination to date to declare
cash dividends during the foreseeable future. There are no restrictions on the
Company's present or future ability to pay cash dividends other than those
restrictions imposed by law on all Georgia corporations.
-14-
<PAGE>
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
- --------------------------------------------------------
Results of Operations
---------------------
Revenues
- --------
Revenues of the Company are currently derived solely from the FIBER-SEAL
fabric care and treatment business. Revenues for fiscal 1996 decreased
$84,050 (9.31%) to $818,978 from $903,028 in fiscal 1995. Such decrease was
due to a $30,002 (representing 3.32% out of the total 9.31% decrease) non-
recurring sale of mined rock from the Atlanta quarry site in fiscal year
1995, and a $54,048 (representing 5.98% out of the total 9.31% decrease)
decline in revenue from FIBER-SEAL. The decline in FIBER-SEAL revenues was
primarily caused by normal periodic business fluctuations and to a lesser
extent., disruptions resulting from management changes at FIBER-SEAL. The
Company has made a strategic decision to convert its FIBER-SEAL business from
a licensing mode to a franchising operation during fiscal years 1997 and
1998. It is the Company's opinion that the conversion will not result in the
creation of any material risks that could potentially have an adverse impact
upon the Company's financial condition and results of operations. Further,
the Company intends to institute a program for the expansion of FIBER-SEAL
operations in all unexploited geographic areas in the U.S. during fiscal year
1998. It is the Company's opinion that the revenues derived from the FIBER-
SEAL business can be significantly enhanced.
Cost of Revenues
- ----------------
Cost of revenues for fiscal 1996 decreased $41,980 (10.21%) to $369,435
from $411,415 in fiscal 1995 as a result normal periodic business
fluctuations. Cost of revenues for fiscal 1996 was 45.11% as compared to
45.56 % in fiscal 1995.
Selling, General and Administrative (SG&A) Expenses
- ---------------------------------------------------
Selling, general and administrative (SG&A) expenses for fiscal 1996
increased $307,599 (29.26%) to $1,358,719 from $1,051,120 in fiscal 1995. The
increase was due to a variety of factors related to the development and
potential use of the Property as a waste management site, including consulting
fees, increased legal fees, increased public relations expenses, and increased
travel expenses. Additional SG&A expenses for FIBER-SEAL were due primarily to
expenses related to the development of a plan to begin conversion from the
current licensing method to a franchise operation.
Operating Loss
- --------------
Operating loss for fiscal 1996 increased $349,669 ( 62.49%) to $909,176
from $559,507 in fiscal 1995. This was due to the decrease in revenues in
fiscal 1996 of $84,050 (a 9.31% decrease) to $818,978 from $903,028 in
fiscal 1995 and the increase in selling, general and administrative (SG&A)
expenses for fiscal 1996 of $307,599 (a 29.26% increase) to $1,358,719 from
$1,051,120 in fiscal 1995, offset in part by the decrease in cost of revenues
for fiscal 1996 of $41,980 (a 10.21% decrease) to $369,435 from $411,415 in
fiscal 1995.
-15-
<PAGE>
Interest Income
- ----------------
Interest income was $8,946 in fiscal 1996. There was no interest income
in fiscal 1995.
Interest Expense
- ----------------
Interest expense in fiscal 1996 increased by $3,462 (3.64%) to $ 98,564
from $95,102 in fiscal 1995.
Loss Before Income Taxes
- ------------------------
The loss before income taxes for fiscal 1996 increased $344,185 (52.58%)
to $998,794 from $654,609 in fiscal 1995.
Deferred Income Tax Expense
- ---------------------------
In fiscal 1996 there was no deferred income tax expense. Fiscal 1995 had
a deferred income tax expense of $1,321.
Extraordinary Credit - Gain on Debt Forgiveness
- -----------------------------------------------
In fiscal 1996 there were no extraordinary credits as compared to fiscal
1995 which had an extraordinary credit of $39,246 due to a gain on debt
forgiveness from a legal settlement.
Net Loss
- --------
The net loss for fiscal 1996 increased $382,110 (61.96%) to $998,794
from $616,684 in fiscal 1995. Such increase was due primarily to the lower
revenues and higher selling, general and administrative expenses, offset in
part by the lower cost of revenues.
If the Company is unable to obtain adequate funds from operations, the
sale of the Common stock, or alternative financing arrangements, it may be
necessary to delay the development of the Property as a municipal solid waste
management facility. Should this delay occur, the Company may pursue one or
more of its potential alternative plans to produce revenues from the Property,
which include possibly re-opening the Property as a granite quarry, and/or
using the Property for the disposal of inert debris and/or the storage of
recyclable materials. There can be no assurance that the Company will be able
to accomplish any of its goals for the Property.
Liquidity and Capital Reserves
- ------------------------------
Cash
- ----
Cash at September 30,1996 was $2,763,129, an increase of $2,744,964 as
compared with the cash position of $18,165 at September 30, 1995. Such
increase was due to capital raised by the sale of shares of common stock of
the Company in private placements and pursuant to the exercise of outstanding
options.
-16-
<PAGE>
Working Capital
- ---------------
At the end of fiscal 1996 the Company had working capital of $3,224,268
and a current ratio of 7.8 to 1 as compared to a working capital deficit of
$615,301 and a current ratio of .03 to 1 at the end of fiscal 1995.
Cash Flows
- ----------
Net cash used in operating activities during fiscal 1996 increased
$832,165 (238.44%) to $1,181,166 as compared with the $349,001 of net cash
used in operating activities during fiscal 1995. Such increase was primarily
due to payment of accrued expenses, prepaid expenses and accounts payable.
Net cash used in investing activities during fiscal 1996 increased
$1,564,397 to $1,573,870 from $9,473 in fiscal 1995. Such increase was due to
the issuance of a note receivable and purchases of property.
Net cash provided by financing activities during fiscal 1996 increased
$5,125,576 (1,368.92%) to $5,500,000 from $374,424 in fiscal 1995. Such
increase was due to significant larger sales of common stock in private
placements and pursuant to the exercise of outstanding options.
Capital Expenditures
- --------------------
The Company has no material commitments for capital expenditures. The
Company expects to continue to explore opportunities to acquire real property
in the future.
Dilution
- --------
During fiscal year 1996 the Company sold common stock in private
placements, pursuant to the exercise of outstanding options and in
consideration for services rendered or for real property acquired by the
Company. The shares of the Common Stock sold during fiscal 1996 for these
purposes constituted approximately 27.3% of the shares of Common Stock
outstanding at the close of fiscal 1995, and, in the aggregate, diluted the
ownership interest of the Company's shareholders as of the close of fiscal
1995. Any future issuance's of the Common Stock, whether for cash, as
consideration for the Company's property or services, or otherwise will
dilute the ownership interest of the Company's existing shareholders.
Capital Resources
- -----------------
The primary source of capital during fiscal 1996 was derived from the
sale of common stock in private placements and pursuant to the exercise of
outstanding options. Capital resources continue to be utilized primarily to
(1) fund the operating losses of the Company, which have been created
primarily by costs associated with planning for the development of the
Property as a waste management facility and (2) to acquire additional land
adjacent to the Property. The Company invested $5,352,691 during fiscal 1996
in additional land adjacent to the Property in Atlanta. None of the
Company's real estate holdings are encumbered by any debt.
-17-
<PAGE>
In order to satisfy the liquidity needs of the Company for fiscal 1997,
the Company will be dependent primarily upon proceeds from the sale of the
Company's stock and revenues generated from the operation of its fabric care
business. Historically, revenues from the fabric care operation have not been
adequate to fund the operations of the Company. The Company raised
approximately $5,500,000 through the sale of Common Stock in private
placements and pursuant to the exercise of outstanding options during fiscal
1996.
Historically, the Company has issued shares of the common stock as
consideration for obligations, and expects to continue to do so in connection
with the acquisition of services, satisfaction of indebtedness and/or for
acquisitions.
ITEM 7. FINANCIAL STATEMENTS.
- ------------------------------
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants ......... F-1
Consolidated Balance Sheet as of
September 30, 1996 ...................................... F-2
Consolidated Statements of Operations for the years ended
September 30, 1996 and 1995 ............................. F-4
Consolidated Statement of Stockholders' Equity
for the years ended September 30, 1996
and 1995 ................................................ F-5
Consolidated Statements of Cash Flows
for the years ended September 30, 1996
and 1995 ................................................ F-6
Notes to Financial Statements ............................. F-8
-18-
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Continental Investment Corporation
We have audited the accompanying consolidated balance sheet of Continental
Investment Corporation (a Georgia corporation) and Subsidiaries as of
September 30, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Continental
Investment Corporation and Subsidiaries as of September 30, 1996, and the
consolidated results of their operations and their consolidated cash flows
for each of the two years in the period then ended, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
November 27, 1996
F-1
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
September 30, 1996
ASSETS
CURRENT ASSETS
Cash $ 2,763,129
Note receivable 880,000
Accounts receivable 12,832
Inventories 42,491
-----------
Total current assets 3,698,452
PROPERTY, at cost 9,497,582
OTHER ASSETS
Intangibles, net of accumulated amortization
of $8,361 26,639
Other 33,424
-----------
Total assets $13,256,097
===========
The accompanying notes are an integral part of this statement.
F-2
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET - CONTINUED
September 30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 161,185
Accrued expenses 15,000
Amounts due to related parties 67,999
Current portion of long-term note payable 230,000
-----------
Total current liabilities 474,184
LONG-TERM LIABILITIES
Note payable 920,000
Deferred income taxes 747,000
-----------
1,667,000
-----------
Total liabilities 2,141,184
COMMITMENTS -
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value;
1,000,000 shares authorized; no
shares issued or outstanding -
Common stock, $.50 par value;
25,000,000 shares authorized;
11,310,058 issued and outstanding 2,781,029
Additional contributed capital 11,502,794
Accumulated deficit (3,168,910)
-----------
Total stockholders' equity 11,114,913
Total liabilities and
stockholders' equity $13,256,097
===========
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
1996 1995
---------- ----------
Revenues $ 818,978 $ 903,028
Costs and expenses
Cost of revenues 369,435 411,415
Selling, general and
administrative expenses 1,358,719 1,051,120
---------- ----------
1,728,154 1,462,535
Operating loss (909,176) (559,507)
Other income (expense)
Interest income 8,946 -
Interest expense (8,472) (12,068)
---------- ----------
474 (12,068)
---------- ----------
Loss before income taxes (908,702) (571,575)
Deferred income tax expense - 1,321
---------- ----------
Loss before extraordinary credit (908,702) (572,896)
Extraordinary credit - gain on
debt forgiveness - 39,246
---------- ----------
NET LOSS $ (908,702) $ (533,650)
========== ==========
Per share data
Loss before extraordinary
credit per common share $(.09) $(.07)
===== =====
Loss per common share $(.09) $(.07)
===== =====
Weighted average number of
common and common equivalent
shares outstanding 9,746,092 8,181,482
========== ==========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
As of September 30, 1996
<CAPTION>
Additional
Common stock contributed Treasury Stock Accumulated
Shares Par value capital Shares Amount deficit Total
--------- ---------- ------------ ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at October 1, 1994 7,027,327 $ 639,664 $ 238,930 7,209 $(26,771) $ (387,827) $ 463,996
Accumulated deficit of
acquired business - - - - - (188,731) (188,731)
Reclassification of
equity related to
acquired businesses - - 1,150,000 - - (1,150,000) -
---------- ---------- ----------- ------- -------- ----------- -----------
Balances at October 1, 1994
- as restated 7,027,327 639,664 1,388,930 7,209 (26,771) (1,726,558) 275,265
Conversion of debt to stock 1,600,000 800,000 100 - - - 800,100
Sales of stock in
private placement 80,000 40,000 360,000 - - - 400,000
Purchase of land for stock 150,000 75,000 675,000 - - - 750,000
Issuance of stock for services 16,200 8,100 77,899 - - - 85,999
Stock issued for
debt forgiveness 10,000 5,000 45,000 - - - 50,000
Net loss - - - - - (533,650) (533,650)
---------- ---------- ----------- ------- -------- ----------- -----------
Balances at September 30, 1995 8,883,527 1,567,764 2,546,929 7,209 (26,771) (2,260,208) 1,827,714
Retirement of treasury stock (7,209) (3,604) (23,167) (7,209) 26,771 - -
Sale of stock in private placement 955,000 477,500 5,022,500 - - - 5,500,000
Issuance of stock for services 50,800 25,400 228,680 - - - 254,080
Issuance of stock for land 1,427,940 713,969 4,877,852 - - - 5,591,821
Distribution to shareholder - - (1,150,000) - - - (1,150,000)
Net loss - - - - - (908,702) (908,702)
---------- ---------- ----------- ------- -------- ----------- -----------
Balances at September 30, 1996 11,310,058 $2,781,029 $11,502,794 - $ - $(3,168,910) $11,114,913
========== ========== =========== ======= ======== =========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
F-5
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
1996 1995
----------- ----------
Cash flows from operating activities:
Net loss $ (908,702) $(533,650)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization and depreciation expense 2,333 2,334
Common stock issued as consideration
for services 254,080 85,999
Deferred income taxes - 1,321
Change in operating assets
and liabilities
Accounts receivable - trade (12,832) -
Other current assets (67,711) (24,792)
Accounts payable - trade (39,264) 48,760
Accrued expenses (67,091) 48,705
Income taxes payable - (23,921)
Accrued expenses to related parties (274,106) 165,908
Deferred rent - (8,807)
Other (67,873) (120,678)
---------- ---------
Net cash used in
operating activities (1,181,166) (349,001)
Cash flows from investing activities:
Issuance of note receivable (880,000) -
Purchases of property (693,870) (9,473)
---------- ---------
Net cash used in investing
activities (1,573,870) (9,473)
Cash flows from financing activities:
Proceeds from sale of stock 5,500,000 400,000
Debt repayments - (25,676)
Other - 100
---------- ---------
Net cash provided by financing
activities 5,500,000 374,424
---------- ---------
Increase in cash 2,744,964 15,950
Cash at beginning of year 18,165 2,215
Cash at end of year $2,763,129 $ 18,165
========== =========
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30, 1996 and 1995
During fiscal year ending September 30, 1995, liabilities were settled and
land was purchased in exchange for stock as follows:
* $800,000 debt retired in exchange for 1,600,000 shares of common stock.
* $75,675 note payable retired for cash of $25,675 and 10,000 shares of
common stock.
* Land was acquired for 150,000 shares of common stock valued at
$750,000.
During fiscal year ending September 30, 1996, liabilities were settled and
land was purchased in exchange for stock as follows:
* Land was acquired by issuing 1,427,940 shares of common stock valued
at $5,591,821 and cash of 693,870, for a total purchase price of
$6,285,691.
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
Continental Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------------------------
Basis of Presentation and Principles of Consolidation
-----------------------------------------------------
The accompanying consolidated financial statements include the accounts of
Continental Investment Corporation (CICG or the Company) and its
subsidiaries. All significant intercompany transactions and balances have
been eliminated.
Nature of Operations
--------------------
The Company operates in two principal segments: property development,
primarily its potential landfill site in Atlanta, Georgia, and its Fiber-
Seal fabric care and service protection business.
Property
--------
Property is recorded at cost. Expenditures for major additions and
improvements are capitalized, while minor replacements, maintenance and
repairs are charged to expense as incurred. When property is retired or
otherwise disposed of, the cost and accumulated depreciation and depletion
are removed from the accounts and any resulting gain or loss is reflected
in current operations.
Landfill and certain treatment facility costs will be depleted using the
units of production method, which is calculated using the total units of
airspace filled during the year in relation to total estimated permitted
airspace capacity. Depreciation on the remaining assets will be provided
over the estimated useful lives of such assets using the straight-line
method.
Landfill improvements include direct costs incurred to obtain a landfill
permit and direct costs incurred to construct and improve the site. These
costs will also be depleted based on consumed airspace. No general and
administrative costs are capitalized as landfill and landfill improvements.
Income Taxes
------------
Deferred income taxes are provided under the liability method in which
deferred assets and liabilities are determined based on the differences
between the tax basis of assets and liabilities and the amounts reported in
the financial statements. Deferred tax assets and liabilities at the end of
each period are determined using the currently enacted tax rates.
F-8
<PAGE>
Continental Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996 and 1995
Reclassifications
-----------------
Certain 1995 balances have been reclassified to conform to the 1996
presentations.
Intangibles
-----------
Intangibles are amortized over fifteen years, on a straight-line basis.
Intangibles represent licensing and marketing rights to the intellectual
property of a system for fabric care treatment and protection. The Company
periodically reviews intangibles to assess recoverability, and impairment
is recognized in results of operations when recoverability is not probable.
Loss Per Share
--------------
Loss per common share is based on the weighted average number of
outstanding common shares during the period and, if their effect is
dilutive, common stock equivalents consisting of stock options.
Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE B - ACQUISITION
- --------------------
On September 30, 1996, the Company acquired all of the operating assets and
liabilities of Fiber-Seal of Dallas (FSD) and Fiber-Seal Services
International, Inc. (FSSI) from the majority stockholder of the Company in
exchange for a $1,150,000 note payable. Due to the common ownership of the
Company, FSD and FSSI, the transaction has been accounted for in a manner
similar to a pooling of interests and, accordingly, the consolidated
financial statements for all periods presented have been restated to
include the accounts of FSD and FSSI. The excess of the note payable over
the historical cost basis of the net assets acquired has been reflected as
a distribution to stockholders.
F-9
<PAGE>
Continental Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996 and 1995
Net sales and net earnings of the separate companies for the periods
preceding the acquisition were as follows:
Elimin-
CICG FSD FSSI ations Combined
----------- --------- -------- --------- ---------
Year ended
September 30, 1996
Revenues $ 60,000 $247,606 $539,381 $(28,009) $818,978
Net earnings
(loss) (1,040,199) (311) 137,187 (5,379) (908,702)
Year ended
September 30, 1995
Revenues $ 134,002 $326,683 $491,262 $(48,919) $903,028
Net earnings
(loss) (654,508) 23,112 97,746 - (533,650)
NOTE C - NOTE RECEIVABLE
- ------------------------
The note receivable bears interest at 10% and is due in two installments in
January and May 1997. The note receivable is collateralized by 150,000
shares of common stock of the Company.
NOTE D - PROPERTY
- -----------------
The Company's property consists of the following at September 30, 1996:
229 acres in Atlanta, Georgia
Former Granite Quarry $ 564,222
Unimproved land 8,068,360
----------
8,632,582
253.5 acres, Ellis County, Texas
Unimproved land 750,000
30 acres, Ellis County, Texas
Unimproved land 115,000
----------
$9,497,582
==========
F-10
<PAGE>
Continental Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996 and 1995
NOTE E - AMOUNTS DUE TO RELATED PARTIES
- ---------------------------------------
Amounts due to related parties consist of $67,999 due the majority
stockholder.
NOTE F - INCOME TAXES
- ---------------------
The Company and its subsidiaries file a consolidated tax return. At
September 30, 1996 and 1995, the Company has, for Federal income tax
purposes, operating loss carryforwards of approximately $3,600,000 and
$2,900,000, respectively, expiring through 2011 and capital loss
carryforwards of approximately $310,000 expiring through 1999. Tax laws
limit the utilization of the net operating loss carryforwards and capital
loss carryforwards to approximately $250,000 per year. Therefore, CICG may
be required to pay income taxes in future years even though significant
loss carryforwards exist.
Reconciliation of income taxes computed at the Federal statutory rate and
income tax expense is as follows:
Year ended September 30,
----------------------------
1996 1995
---------- ----------
Tax benefit at statutory rate $(309,000) $(194,000)
Change in valuation allowance 307,000 194,000
Other 2,000 1,321
--------- ---------
$ - $ 1,321
========= =========
F-11
<PAGE>
Continental Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996 and 1995
NOTE F - CONTINUED
- ------------------
Consolidated deferred tax assets and liabilities consist of the following
at September 30, 1996:
Deferred tax assets
Net operating loss and capital
loss carryforwards $ 1,300,000
Valuation allowance (1,300,000)
-----------
-
Deferred tax liabilities
Property 747,000
-----------
Net deferred tax liability $ 747,000
===========
At September 30, 1996, the Company had capital and net operating loss
carryforwards for Federal tax purposes expiring as follows:
Year of
expiration Amount
---------- ----------
Capital losses 2006 $ 313,568
==========
Net operating loss carryforwards 2005 $ 245,018
2006 286,359
2007 682,391
2008 152,727
2009 710,373
2010 644,163
2011 902,484
----------
$3,623,515
==========
F-12
<PAGE>
Continental Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996 and 1995
NOTE G - NOTE PAYABLE
- ---------------------
The note payable bears interest at 8.5% and is due in annual installments
of $230,000 commencing on January 15, 1997, with interest due quarterly.
The future minimum payments under this long-term note at September 30, 1996
are as follows:
1998 $230,000
1999 230,000
2000 230,000
2001 230,000
--------
$920,000
========
NOTE H - LEASES
- ---------------
The Company leases office and warehouse space under an agreement expiring
in 1999. This lease, which has been classified for accounting purposes as
an operating lease, is subject to customary escalation clauses for
executory costs and operating expenses. The future minimum lease payments
under the noncancellable lease at September 30, 1996, are as follows:
Year ending
September 30,
-------------
1997 $ 36,044
1998 36,044
1999 36,044
--------
$108,132
========
F-13
<PAGE>
Continental Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996 and 1995
NOTE I - STOCKHOLDERS' EQUITY
- -----------------------------
Common stock is stated at the lower of par value or consideration received
as permitted by state law.
The following information relates to warrants outstanding:
Number
of shares Option price
---------- --------------
Warrants outstanding - October 1, 1994 144,000 $5.00 - $18.00
Issued during the year (1) 210,000 $4.25 - $ 5.00
Warrants outstanding - September 30, 1995 354,000 $4.25 - $18.00
Issued during the year (1) 3,622,500 $4.00 - $35.00
Exercised during the year (462,500) $4.00 - $10.00
Warrants outstanding - September 30, 1996 3,404,000 $4.00 - $35.00
Warrants exercisable - September 30, 1996 3,404,000 $4.00 - $35.00
(1) During 1996 and 1995, the Company received $5,500,000 and $400,000
respectively for the sale of its restricted common stock and
warrants to purchase restricted common stock which expire in varying
terms (one to five years).
NOTE J - SEGMENTS
- -----------------
The Company operates in two principal segments: property development,
primarily its potential landfill site in Atlanta, Georgia, its Fiber-Seal
fabric care and surface protection business.
Property Fabric
September 30, 1996 Development Care Corporate Consolidated
------------------ ------------ -------- --------- ------------
Revenues $ - $818,978 $ - $ 818,978
Operating profit (loss) (1,014,144) 105,852 (410) (908,702)
Identifiable assets 13,162,202 93,895 - 13,256,097
Depreciation and
amortization - 13,284 - 13,284
Capital expenditures 693,870 - - 693,870
F-14
<PAGE>
Continental Investment Corporation and Subsidiaries
NOTES TO CONOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996 and 1995
NOTE J - SEGMENTS - CONTINUED
Property Fabric
Development Care Corporate Consolidated
------------ -------- --------- ------------
September 30, 1995
------------------
Revenues $ 30,002 $873,026 $ - $ 903,028
Operating profit (loss) (379,255) 186,134 (378,454) (571,575)
Identifiable assets 3,282,321 25,814 - 3,308,135
Depreciation and
amortization - 2,334 - 2,334
Capital expenditures 9,473 - - 9,473
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
The Company's financial instruments include cash and debt. The fair value
of all instruments approximates the carrying value.
NOTE L - CONTINGENCIES
- ----------------------
The Company is defendant in various matters in litigation which have arisen
in the normal course of business. In the opinion of management, such
litigation will not have a material effect on the Company's financial
position or results of operations.
F-15
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
- --------------------------------------------------------------------
NONE
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
- ---------------------------------------------------------------------
Executive Officers of the Registrant
- ------------------------------------
Set forth below is certain information concerning the Directors and
Executive Officers of the Company as of December 27, 1996.
Name Age Current Position with Company
--------------------- ---- ---------------------------------
R. Dale Sterritt, Jr. 40 Director, Chairman and CEO
Thomas F. Snodgrass 66 Director, President and Treasurer
Robert D. Luna 43 Director, Secretary
Martin G. Blahitka 59 Director
J. B. Morris 57 Director
Mr. R. Dale Sterritt, Jr. has served as Chairman, CEO and as a Director
of the Company since July 1, 1991. From 1980 to the present he has served as
Chairman of the Board of Sterritt Energy, Inc., a company involved in oil and
gas production and as President of Sterritt Investments, Inc., an investment
company. During the past five years, he has also been actively involved in
mergers and acquisitions. From 1980 to 1986, he was Chairman of the Board of
Auburn-Sterritt Partners, a real-estate company involved in the acquisition,
development and management of shopping centers, apartments, and office
buildings within the sunbelt area. From 1978 to 1980, he was vice president
of acquisitions for the Robert A. McNeil Corporation, a real estate
investment and management group. In addition, Mr. Sterritt has served on the
boards of various manufacturing, service and distribution companies.
Mr. Thomas F. Snodgrass has served as a Director, President and Treasurer
of the Company since July 1991. From March 1990 to July 1992 he also served
as President of Thermal Corporation; from June 1, 1987 to December 31, 1989
as Chief Financial Officer of Republic Gypsum; and as Executive Vice
President of M-X Oil and Gas Corporation from January 1, 1982 to May 31,
1987. Mr. Snodgrass has a background in accounting and finance.
-19-
<PAGE>
Mr. Martin G. Blahitka has served as a director of the Company since
September 7, 1993. From 1989 to the present, he served as Vice President of
Rescue Capital Corporation, which specializes in providing transitional
management supervision and/or financial restructuring to troubled companies.
From 1989 to 1991 he was Vice President of Operations for Legal Econometrics,
Inc., a crisis management firm.
Mr. Robert D. Luna has served as a Director since September 7, 1993 and
currently serves as Secretary of the Company. From 1982 to the present, he
has served as President and CEO of Luna Investments, Inc., a privately-held
real estate development, investment and brokerage company. In 1990, Luna
Investments expanded into direct investments involving oil and gas producing
properties and venture capital.
Mr. J. B. Morris has served as a Director since April 1990. He has been a
private investor for more than the past five years.
Key Subsidiary Executive
- ------------------------
Steven A. Lytle, in October 1996, was named Executive Vice President and
Chief Operating Officer of a wholly-owned subsidiary, Continental
Technologies Corporation, a Georgia corporation based in Atlanta. He will
direct the development of the Company's proposed solid waste disposal and
hauling operations. Mr. Lytle, 43, has had 11 years experience in the solid
waste industry, including extensive involvement in developing and managing
solid waste facilities. Among other accomplishments, he designed and obtained
the permit for a 300-acre, 50 million cubic yard disposal facility in Georgia
and continued on to manage this facility as the District Manager for his
former employer. Prior to joining the Company in October, 1996, Mr. Lytle
was a regional executive with Sanifill, Inc. for Arkansas, Florida, Georgia,
Kentucky, Ohio, Pennsylvania, and Puerto Rico, with responsibilities ranging
from landfill design, engineering, permitting operations, and compliance to
economic evaluation of potential acquisitions. He was with Browning-Ferris
Industries ("BFI") from 1985 to 1994 in positions of ever-increasing
responsibility. Mr. Lytle holds a degree in civil engineering from the
University of Cincinnati.
-20-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
- ---------------------------------
The following table sets forth the compensation earned by the Company's
Chief Executive Officer during the last three fiscal years. No other
executive officer received compensation in excess of $100,000 during any of
the three fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
|-----------------------|-----------|
Annual Compensation | Awards | Payouts |
-----------------------------|-----------------------|-----------|
<S> <C> <C> <C> <C> | <C> <C> | <C> | <C>
(a) (b) (c) (d) (e) | (f) (g) | (h) | (i)
Other | | |
Name Annual | Restricted | | All Other
and Compen- | Stock | LTIP | Compen-
Principal sation | Award(s) Options/ | Payouts | sation
Position Year Salary($) Bonus($) ($) | ($) SARs(#) | ($) | ($)
- -------------------------------------------------|-----------------------|-----------|---------------
R. Dale 1996 $234,750 | | |
Sterritt, 1995 $161,575 | | |
Jr., 1994 $142,125 | | |
Chairman | | |
and CEO | | |
</TABLE>
The Company does not have any employment agreements with any of its
executive officers. During fiscal 1996, all compensation paid to executive
officers and directors of the Company was based upon services rendered to the
Company on a per diem basis at rates prescribed by the Board of Director as
follows: $750 per day for the Chairman, Chief Executive Officer and
President; and $400 per day for all other executive officers. By resolution
of the Board of Directors, directors are entitled to a fee of $200 per
meeting. All such fees were waived during fiscal 1996.
-21-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
- -------------------------------------------------------------
The following table sets forth, to the best knowledge of the Company as
of December 27, 1996, certain information with respect to (i) beneficial
owners of more than five percent (5%) of the outstanding Common Stock, (ii)
beneficial ownership of shares of the Company's Common Stock by each
director, and (iii) beneficial ownership of shares of the Company's Common
Stock by all officers and directors as a group.
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Class
----------------------- ----------------------- ----------
Martin G. Blahitka 10,000 (3)
Route 1, Box 918
Big Sandy, TX 75755
Robert D. Luna - -
10254 Miller Road
Dallas, TX 75238
J. B. Morris 170,699 1.5%
10254 Miller Road
Dallas, TX 75238
Stewart Rahr 870,700 7.7%
152-35 10th Avenue
Whitestone, NY 11357
Thomas F. Snodgrass 15,000 (3)
10254 Miller Road
Dallas, TX 75238
R. Dale Sterritt, Jr. - -
10254 Miller Road
Dallas, TX 75238
Sterritt Properties, Inc. (1) 5,750,444 50.8%
10254 Miller Road
Dallas, TX 75238
-22-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT - CONTINUED.
- ------------------------------------------------------------
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Class
------------------- ----------------------- ----------
Business Ventures, Inc. (2) 1,600,000 14.1%
50 Lincolns Inn Fields
3rd Floor
London, WC 2A 3PF
England
________________
All Officers and Directors 195,699 1.7%
as a Group (5 persons)
(1) Sterritt Properties, Inc. is owned 100% by a family limited
partnership. Richard D. Sterritt, Sr., the President of
Sterritt Properties, Inc., is the father of R. Dale
Sterritt, Jr., the Chairman and CEO of the Company.
(2) The record and beneficial ownership of these shares is
contested and the subject of litigation brought by Sterritt
Properties, Inc., the Company's majority shareholder. See Item
3. Legal Proceedings. If Sterritt Properties, Inc. prevails in
this litigation, it would be the beneficial owner of 7,350,444
shares (64.97%) of the Common Stock including 1,600,000 shares
subject to acquisition upon conversion of a promissory note
from the Company which is the subject of the pending.
litigation.
(3) Less than 1%.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
During fiscal 1996, Richard D. Sterritt, Sr. and affiliated entities
made loans to the Company in the aggregate amount of $373,501.14 for working
capital purposes, which were repaid in whole or in part at various times
during the year. As of the end of fiscal 1996, the amount of outstanding
loans payable from the Company to Mr. Sterritt and such affiliated entities
was $67,999.
On September 20, 1996, the Company entered into an agreement with the
20th Century Group, an entity comprised of SPI, FSSI, 20th Century Partners,
Inc. and 20th Century Holdings, Inc. This agreement called for the transfer
of certain rights and assets owned by 20th Century Group. The consideration
for the transfer was a promissory note from the Company in the principal
amount of $1,150,000. The property transferred consisted of assets related to
the FIBER-SEAL business, including all operations formerly carried out by
FSSI, all operations of the Dallas, Texas licensee of FIBER-SEAL and all
trademarks, servicemarks, logos, and tradenames of or related to FIBER-SEAL.
-23-
<PAGE>
Based upon its knowledge of the FIBER-SEAL assets acquired, and an
independent fairness opinion which was obtained by the Company's Board of
Directors in connection with the transaction, the Company believes that the
$1,150,000 paid for those assets constitutes fair market value and that the
transaction was accomplished at arm's length. As a result of this
transaction, the Sterritt family has transferred all of its FIBER-SEAL-
related holdings to the Company, effective September 30, 1996.
PART IV
-------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
- ------------------------------------------
(a) Following are documents filed as part of this report:
1. Consolidated Financial Statements of Continental Investment
Corporation and Subsidiaries.
See Item 8 of this report - Financial Statements and Supplementary
Data.
2. Financial statement schedules.
There are no financial statement schedules required to be filed.
3. Exhibits.
Exhibit Number Exhibit Index
-------------- -------------------------------------------------------
3.1 - Certified copy of the Company's Articles of
Incorporation and amendments thereto. 1/
-
3.2 - Amended and Restated Bylaws of the Company, as of
August 8, 1989. 1/
-
3.3 - Amendment to the Company's Articles of Incorporation
dated March 24, 1994. 2/
-
21 * - List of the Company's Subsidiaries.
______________________________
* Filed herewith.
1/ - Incorporated by reference to the exhibit with the
same description to the Company's Current Report on
Form 8-K filed on August 11, 1989.
2/ - Incorporated by reference to the exhibit with the
same description to the Company's Current Report on
Form 8-K dated as of January 5, 1994.
-24-
<PAGE>
(b) Reports on Form 8-K.
Reports filed on Form 8-K during the last quarter are as follows:
1. Report dated September 25, 1996. This Report contained an Item 5
event - "Changes in Accounting Period."
2. Report dated September 30, 1996. This report contained an Item 5
event - "Purchase of assets from FIBER-SEAL Services International,
Inc. and FIBER-SEAL of Dallas."
Exhibit 21
As of December 27, 1996, the Company had the following subsidiaries:
(a) Continental Technologies, Inc., a Delaware Corporation
(b) Continental Technologies Corporation of Georgia, a Georgia Corporation
(c) FIBER-SEAL Franchise Corporation, a Delaware Corporation
(d) FIBER-SEAL Holdings, Inc., a Texas Corporation
-25-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL INVESTMENT CORPORATION
By: /S/ R. Dale Sterritt, Jr.
-----------------------------
R. Dale Sterritt, Jr.
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Dated: December 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Date
/S/ R. Dale Sterritt, Jr. December 29 , 1997
-------------------------------
R. Dale Sterritt, Jr., Director
Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
/S/ Robert D. Luna December 29 , 1997
-------------------------------
Robert D. Luna, Director
and Secretary
/S/ Martin G. Blahitka December 29, 1997
-------------------------------
Martin G. Blahitka, Director
/S/ J. B. Morris December 29 , 1997
-------------------------------
J. B. Morris, Director
-26-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,763,129
<SECURITIES> 0
<RECEIVABLES> 880,000
<ALLOWANCES> 0
<INVENTORY> 42,491
<CURRENT-ASSETS> 3,698,452
<PP&E> 9,497,582
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,256,097
<CURRENT-LIABILITIES> 474,184
<BONDS> 0
0
0
<COMMON> 2,781,029
<OTHER-SE> 8,333,884
<TOTAL-LIABILITY-AND-EQUITY> 13,256,097
<SALES> 818,978
<TOTAL-REVENUES> 827,924
<CGS> 369,435
<TOTAL-COSTS> 1,728,154
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,472)
<INCOME-PRETAX> (908,702)
<INCOME-TAX> 0
<INCOME-CONTINUING> (908,702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (908,702)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
