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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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AMENDMENT NO. 1
TO
FORM 10-KSB
[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
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CONTINENTAL INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-0705228
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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
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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
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
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)
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.
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
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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
its 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
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 fiscal 1998, there can be no assurance that the Company will be able to
do so.
THE ATLANTA PROPERTY
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.
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
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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 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
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.
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, 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 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
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
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Conservation and Recovery Act of 1976 (the "RCRA"), rests with the
Environmental Protection Division of the State of Georgia Department of Natural
Resources (the "EPD"). The Company intends to prepare an application pursuant
to the requirements of the EPD in order to demonstrate 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.
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 through periodic and unannounced
inspections.
Operation of the proposed 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 profitability of the Company's
proposed waste management operations by increasing construction and operation
costs. 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.
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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 are able 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:
THE SOLID WASTE DISPOSAL ACT ("SWDA"), AS AMENDED BY THE
RESOURCE CONSERVATION AND RECOVERY ACT OF 1976, AS AMENDED ("RCRA")
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")
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
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in compliance with Clean Water Act requirements, particularly as they apply to
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 ("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, 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 passed 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.
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
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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 also may 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 also has 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.
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, (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 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,
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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
a 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
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 inform its shareholders and the
public about the Company's operations, may, from time-to-time, issue certain
oral or written statements 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 statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies possible future acquisitions and projected or anticipated
benefits from acquisitions made or proposed 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 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 management 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
stock (the "Common Stock") and the revenues
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generated from the operation of its fabric care business. Historically,
revenues from the fabric care operation have been inadequate 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 the 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 will 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 also will increase. The future availability of such
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.
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<PAGE> 11
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.
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, the
Company has not taken a position on the substantive allegations of the
Petition. 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.
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.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The 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 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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
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
</TABLE>
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 did not declare
any dividends on its Common Stock during fiscal 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.
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
non-recurring sale of mined rock from the Atlanta quarry site in fiscal 1995,
and a $54,048 decline in revenue from FIBER-SEAL. The decline in FIBER-SEAL
revenues was caused primarily 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 1997 and fiscal
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.
12
<PAGE> 13
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 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 EXPENSES
Selling, general and administrative expenses (SG&A) 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 a licensing-based to a
franchise-based 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 expenses for fiscal 1996 of $307,599 (a 29.26% increase) to
$1,358,719 from $1,051,120 in fiscal 1995. This was 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.
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. For fiscal 1995, the
Company had a deferred income tax expense of $1,321.
13
<PAGE> 14
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 SG&A expenses, which were 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 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 Common Stock in private placements and
pursuant to the exercise of outstanding options.
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 the sale of Common Stock in private placements and pursuant
to the exercise of outstanding options.
14
<PAGE> 15
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 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 issuances 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 (i)
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 (ii) 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.
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.
15
<PAGE> 16
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-3
Consolidated Statement of Stockholders' Equity
for the years ended September 30, 1996
and 1995 ............................................................... F-4
Consolidated Statements of Cash Flows
for the years ended September 30, 1996
and 1995 ............................................................... F-5
<PAGE> 17
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.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Dallas, Texas
November 27, 1996
F-1
<PAGE> 18
CONTINENTAL INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1996
<TABLE>
<S> <C>
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 8,564,582
OTHER ASSETS
Intangibles, net of accumulated amortization of $8,361 26,639
Other 33,424
----------
Total assets $12,323,097
==========
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 10,569,794
Accumulated deficit (3,168,910)
----------
Total stockholders' equity 10,181,913
----------
Total liabilities and stockholders' equity $12,323,097
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-2
<PAGE> 19
CONTINENTAL INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
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 (98,564) (95,102)
----------- ----------
(89,618) (95,102)
----------- ----------
Loss before income taxes (998,794) (654,609)
Deferred income tax expense - 1,321
----------- ----------
Loss before extraordinary credit (998,794) (655,930)
Extraordinary credit - gain on debt forgiveness - 39,246
----------- ----------
NET LOSS $(998,794) $ (616,684)
=========== ==========
Per share data
Loss before extraordinary credit per common share $(.10) $(.08)
==== ====
Loss per common share $(.10) $ (.08)
==== =====
Weighted average number of common and common
equivalent shares outstanding 9,746,092 8,181,482
=========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 20
CONTINENTAL INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Common stock Additional
------------------------- contributed
Shares Par value capital
---------- ----------- ------------
<S> <C> <C> <C>
Balances at October 1, 1994 - as previously reported 7,027,327 $ 639,664 $ 238,930
Accumulated deficit of acquired businesses - - -
Distribution to stockholder - - -
--------- --------- ---------
Balances at October 1, 1994 - as restated 7,027,327 639,664 238,930
Conversion of debt to stock 1,600,000 800,000 100
Sale of stock in private placement 80,000 40,000 360,000
Purchase of land for stock 150,000 75,000 675,000
Issuance of stock for services 16,200 8,100 77,899
Stock issued for debt forgiveness 10,000 5,000 45,000
Net loss - - -
--------- --------- ---------
Balances at September 30, 1995 8,883,527 1,567,764 1,396,929
Retirement of treasury stock (7,209) (3,604) (23,167)
Sale of stock in private placement 955,000 477,500 5,022,500
Issuance of stock for services 50,800 25,400 228,680
Issuance of stock for land 1,427,940 713,969 3,944,852
Net loss - - -
---------- --------- ---------
Balances at September 30, 1996 11,310,058 $2,781,029 $10,569,794
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Treasury stock
---------------------- Accumulated
Shares Amount deficit Total
------ ------ ------------ ----------
<S> <C> <C> <C> <C>
Balances at October 1, 1994 - as previously reported 7,209 $(26,771) $ (387,827) $ 463,996
Accumulated deficit of acquired businesses - - (188,731) (188,731)
Distribution to stockholder - - (976,874) (976,874)
------ ------- ---------- ----------
Balances at October 1, 1994 - as restated 7,209 (26,771) (1,553,432) (701,609)
Conversion of debt to stock - - - 800,100
Sale of stock in private placement - - - 400,000
Purchase of land for stock - - - 750,000
Issuance of stock for services - - - 85,999
Stock issued for debt forgiveness - - - 50,000
Net loss - - (616,684) (616,684)
------ ------- ---------- ----------
Balances at September 30, 1995 7,209 (26,771) (2,170,116) 767,806
Retirement of treasury stock (7,209) 26,771 - -
Sale of stock in private placement - - - 5,500,000
Issuance of stock for services - - - 254,080
Issuance of stock for land - - - 4,658,821
Net loss - - (998,794) (998,794)
------ ------- ---------- ----------
Balances at September 30, 1996 - $ - $(3,168,910) $10,181,913
====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 21
CONTINENTAL INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (998,794) $(616,864)
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
Imputed interest on note payable 90,092 83,034
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) 58,760
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
========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 22
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 $4,658,821 and cash of $693,870, for a total purchase
price of approximately $5,352,691.
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 23
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 surface 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.
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.
F-7
<PAGE> 24
CONTINENTAL INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996 and 1995
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 note payable exchanged in the acquisition
has been discounted and interest imputed at the stated rate of 8-1/2% per
annum as if the transaction had occurred on October 1, 1994. The excess of
the carrying value of the note payable over the historical cost basis of the
net assets acquired has been reflected as a distribution to stockholders.
Net sales and net earnings of the separate companies for the periods
preceding the acquisition were as follows:
<TABLE>
<CAPTION>
Imputed
CICG FSD FSSI Eliminations interest Combined
------------- ----------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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) (90,092) (998,794)
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 - (83,034) (616,684)
</TABLE>
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:
<TABLE>
<S> <C>
229 acres in Atlanta, Georgia
Former Granite Quarry $ 564,222
Unimproved land 7,135,360
---------
7,699,582
253.5 acres, Ellis County, Texas
Unimproved land 750,000
30 acres, Ellis County, Texas
Unimproved land 115,000
---------
$8,564,582
=========
</TABLE>
F-8
<PAGE> 25
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:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------
1996 1995
---------- ------------
<S> <C> <C>
Tax benefit at statutory rate $(340,000) $(223,000)
Change in valuation allowance 307,000 223,000
Other 33,000 1,321
-------- --------
$ - $ 1,321
======== ========
</TABLE>
Consolidated deferred tax assets and liabilities consist of the following at
September 30, 1996:
<TABLE>
<S> <C>
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
===========
</TABLE>
At September 30, 1996, the Company had capital and net operating loss
carryforwards for Federal tax purposes expiring as follows:
<TABLE>
<CAPTION>
Year of
expiration Amount
----------- ----------
<S> <C> <C>
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
=========
</TABLE>
F-9
<PAGE> 26
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:
<TABLE>
<S> <C>
1998 $230,000
1999 230,000
2000 230,000
2001 230,000
-------
$920,000
=======
</TABLE>
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:
<TABLE>
<CAPTION>
Year ending
September 30,
-------------
<S> <C>
1997 $ 36,044
1998 36,044
1999 36,044
--------
$ 108,132
========
</TABLE>
NOTE I - COMMON STOCK AND STOCK OPTIONS
Common stock is stated at the lower of par value or consideration received,
as permitted by state law. In 1996, the Company granted options to purchase
3,622,500 shares of its common stock primarily in conjunction with sales
of its common stock. The options vest immediately and are exercisable over
periods ranging from one to five years at prices equal to or in excess of
the fair value of the common stock at the date of grant.
The following information relates to stock options.
<TABLE>
<CAPTION>
Number of
shares Option price
---------- --------------
<S> <C> <C>
Options outstanding - October 1, 1994 144,000 $5.00 - $18.00
Granted during the year 210,000 $4.25 - $5.00
---------
Options outstanding - September 30, 1995 354,000 $4.25 - $18.00
Granted during the period 3,622,500 $4.00 - $35.00
Exercised during the year (462,500) $4.00 - $10.00
---------
Options outstanding - September 30, 1996 3,404,000 $4.00 - $35.00
=========
Options exercisable - September 30, 1996 3,404,000 $4.00 - $35.00
=========
</TABLE>
F-10
<PAGE> 27
CONTINENTAL INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996 and 1995
NOTE J - SEGMENTS
The Company operates in two principal segments: property development,
primarily its potential landfill site in Atlanta, Georgia, and its
Fiber-Seal fabric care and surface protection business.
<TABLE>
<CAPTION>
Property Fabric
September 30, 1996 Development Care Corporate Consolidated
------------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ - $ 818,978 $ - $ 818,978
Operating profit (loss) (1,014,144) 15,760 (410) (998,794)
Identifiable assets 12,229,202 93,895 - 12,323,097
Depreciation and amortization - 13,284 - 13,284
Capital expenditures 693,870 - - 693,870
September 30, 1995
------------------
Revenues $ 30,002 $873,026 $ - $ 903,028
Operating profit (loss) (379,255) 103,100 (378,454) (654,609)
Identifiable assets 3,282,321 25,814 - 3,308,135
Depreciation and amortization - 2,334 - 2,334
Capital expenditures 9,473 - - 9,473
</TABLE>
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-11
<PAGE> 28
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.
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION WITH COMPANY
<S> <C> <C>
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
</TABLE>
R. DALE STERRITT, JR. has served as Chairman, CEO and 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 also has 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.
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.
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
28
<PAGE> 29
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.
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.
J. B. MORRIS has served as a Director since April 1990. Mr. Morris 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 11 years experience in the solid
waste industry, including extensive involvement in developing and managing
solid waste facilities. Among other accomplishments, 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
from 1985 to 1994 in various positions. Mr. Lytle holds a degree in civil
engineering from the University of Cincinnati.
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 $100,000 during any of the three
fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
OTHER
NAME ANNUAL RESTRICTED ALL OTHER
AND COMPEN- STOCK LTIP COMPEN-
PRINCIPAL SATION AWARD(S) OPTIONS/ PAYOUTS SATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($) SARS (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
R. Dale Sterritt, Jr., 1996 $234,750
Chairman and 1995 $161,575
CEO 1994 $142,125
</TABLE>
29
<PAGE> 30
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 Directors 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
director's fees were waived during fiscal 1996.
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.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS
------------------- ----------------------- ----------
<S> <C> <C>
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
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)
</TABLE>
(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%.
30
<PAGE> 31
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. 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.
31
<PAGE> 32
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.
32
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit Number Exhibit Index
- -------------- -------------
<S> <C>
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.
</TABLE>
- ------------------------------
* 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.
33
<PAGE> 34
(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."
34
<PAGE> 35
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 and Chief Executive Officer
Dated: May 30, 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.
<TABLE>
<CAPTION>
NAME DATE
<S> <C>
/s/ R. DALE STERRITT, JR.
- --------------------------------------- May 30, 1997
R. Dale Sterritt, Jr., Director
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ THOMAS F. SNODGRASS
- ---------------------------------------- May 30, 1997
Thomas F. Snodgrass, Director
President and Treasurer
(Principal Financial and Accounting Officer)
/s/ ROBERT D. LUNA
- --------------------------------------- May 30, 1997
Robert D. Luna, Director
and Secretary
/s/ MARTIN G. BLAHITKA
- --------------------------------------- May 30, 1997
Martin G. Blahitka, Director
/s/ J. B. MORRIS
- --------------------------------------- May 30, 1997
J. B. Morris, Director
</TABLE>
<PAGE> 1
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
