UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------------------
FORM 10-KSB
(Mark One)
[|X|] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
[ ] 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
(Name of small business issuer 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)
Issuer's telephone number: (214) 691-1100
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.50 par value
(Title of class)
Indicate whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes |X|
No ___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [|X| ]
Issuer's revenues for its most recent fiscal year $2,280,317.
The aggregate market value of the voting stock held by non-affiliates
as of April 14, 1998, is approximately $74,885,643, based upon the closing bid
price of $11.50 per share as reported for such date by Trading and Market
Services of The Nasdaq Stock Market, Inc.
As of April 14, 1998, the issuer had outstanding 12,442,938 shares of its
Common Stock, $0.50 par value.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Background
Continental Investment Corporation ("CICG" or 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 located approximately 10 miles southwest of downtown Atlanta, Georgia. From
1966 to 1993, 65 acres of the land along with mineral rights were leased to a
mining and quarrying company unrelated to CICG. The lease and rights to extract
minerals from the property expired in 1993. Subsequently, CICG participated in
reclamation activities in preparation for an alternative use of the land. During
fiscal 1996, the Company purchased an additional 96 acres adjacent to the
133-acre site. A study of the property has indicated its viability as a
potential multi-use waste disposal, waste transfer and recycling facility. A
study of the Property has indicated its viability as a potential multi-use waste
disposal, waste transfer, and recycling facility.
In a series of transactions in fiscal 1994, 1995 and 1996, the Company
acquired all of the operating assets of FIBER-SEAL Holdings, Inc., FIBER-SEAL
Services International, Inc. and FIBER-SEAL of Dallas, including all trademarks,
servicemarks, logos, and tradenames of or related to FIBER-SEAL.
During fiscal 1997, the Company acquired an operating construction and
demolition ("C&D") landfill in metropolitan Atlanta, Georgia in exchange for
consideration totaling $2.74 million.
During fiscal 1997, the Company also acquired 108 acres of land in
another area of metropolitan Atlanta, Georgia in exchange for consideration
totaling $1,999,990. The Company intends to develop such site into a C&D
landfill.
During fiscal 1997, the Company acquired two landfill sites from
WasteMasters, Inc. (in Kirksville, Missouri and Walker County, Georgia) along
with substantial securities holdings in WasteMasters, Inc.
The Atlanta Quarry Site Property (the "Property")
The Company owns 229 acres of land in Fulton County, Georgia. The land is
located within the Atlanta city limits approximately 10 miles southwest of
downtown Atlanta. Fulton County is one of the nine individual 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.
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. 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 activities are presently being evaluated as an income source from the
Property. The potential resumption of granite mining activities represents a
possible double benefit to the Company that may also increase potential landfill
capacity in the future.
A study of the Property has indicated its viability as a potential
multi-use waste disposal, waste transfer and recycling facility. The Company is
presently evaluating the various potential uses for the Property as a waste
disposal site consisting principally of the possibilities discussed below.
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Because of ongoing potential political, legal, bureaucratic and other factors,
there can be no assurance that the Company will be able to accomplish any of its
goals for the Property within a reasonable period of time.
Municipal Solid Waste Landfill: Municipal solid waste ("MSW") landfills
are the primary depository for solid waste in North America. These disposal
facilities are located on land with geological and hydrological properties that
limit the possibility of water pollution, and are operated under prescribed
procedures. A landfill must be maintained carefully to meet federal, state and
local regulations. Maintenance includes excavation, continuous spreading and
compacting of waste, and covering of waste with earth or other inert material at
least once a day. Customers are charged disposal charges or "tipping fees" based
on market factors and the type and volume or weight of solid waste deposited.
Long-term disposal contracts typically contain a formula, generally based on
published price indices, for automatic adjustment of fees to cover increases in
some, but not all, operating costs. A municipal solid waste landfill can accept
any waste derived from households, including garbage, trash and sanitary waste
in septic tanks. Household waste includes solid waste from single-family and
multi-family residences, hotels and motels, bunkhouses, campgrounds, picnic
grounds, and day-use recreation areas. The term also includes commercial solid
waste, but does not include solid waste from mining, agricultural or forestry
operations or industrial processes or operations.
Construction and Demolition Landfill: A construction and demolition
("C&D") landfill may accept building materials and rubble resulting from
construction, remodeling, repair, and demolition operations on pavements,
houses, commercial buildings, and other structures. Such wastes include, but are
not necessarily limited to, wood, bricks, metal, concrete, wallboard, paper,
cardboard, all inert waste landfill material, and other "non-putrescible"
wastes, as these wastes have a low potential for groundwater contamination upon
decomposition.
Recycling: Recycling involves the removal of reusable materials from the
waste stream for processing and sale or other disposition for use in various
applications. In response to increasing environmental concerns and expanding
federal and state regulations, recycling is rapidly becoming a viable business.
Indeed the U. S. recycling rate has grown from 13% in 1988 to over 25% today.
Recycling fees are generally service based wherein the customer pays for the
cost of removing, processing and disposing of potentially recyclable materials.
In many cases, mixed waste materials are received at a materials recovery
facility ("MRF") which is often integrated into our contiguous to a transfer
operations. Materials such as paper, cardboard, glass, plastic, and aluminum and
other metals are sorted, separated, accumulated, bound, or placed in a container
and readied for transportation to a third party which will reuse the separated
materials. The purchaser generally pays for the materials based on fluctuating
spot-market prices. Materials for which there is no market or for which the
market price is insufficient to warrant processing are disposed of at a landfill
or other disposal facility. The Company would seek to avoid exposure to
fluctuating commodity prices by passing through substantially all of the profit
or loss from the sale of recyclables to its customers.
Transfer Station: A transfer station is a waste management facility where
solid waste is received from collection vehicles and then transferred to and
compacted in large, specially designed and constructed trailers for
transportation to distant disposal facilities. Transportation can be by road or
rail. A transfer station operation can effectively reduce costs by positively
impacting the utilization of personnel and equipment and by reducing fuel costs.
The greatest benefit of transfer stations is the quick turnaround obtained for
route collection vehicles. The Property is potentially well suited to serve as a
waste transfer station for transfer of waste outside the nine county region
because a railroad line is located just outside of the Property's boundary. The
Company will seek to acquire a rail spur to the Property. Although the
Property's proximity to a major rail line provides for a viable transfer
station, complications exist with regard to interstate transport (e.g., states
trying to collect per ton confiscatory fees on incoming waste, etc.).
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There is also an effort by some state legislators to restrict the disposal
of out-of-state wastes in their state's landfills. Although most legislative
efforts to date have been rejected by the courts, there is a possibility that
these laws may eventually pass.
FIBER-SEAL Operations
FIBER-SEAL brand services and products provide customers with cleaning,
stain removal and lasting protection for carpets and other fine interior fabric
coverings and surfaces and cleaner, newer looking interiors. These products and
services have been provided since 1971 under the FIBER-SEAL brand trademark and
servicemark. The products and services are currently being provided in the
United States and other countries through licensing agreements with
approximately 60 service centers now in operation through FSSI. 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. Customers' premises include individual
residences, real estate developments, restaurants, offices, and commercial
aircraft.
The Company has made a strategic decision to convert its FIBER-SEAL
Fabric Care System(R) business from a licensing mode to a franchising operation
during fiscal years 1998. It is the Company's opinion that the conversion will
not result in the creation of any material risks that could have an adverse
impact upon the Company's financial position 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 years
1998 and 1999. It is the Company's opinion that the revenues derived from the
FIBER-SEAL business can be significantly enhanced. However, as the business
areas in which FIBER-SEAL competes are highly competitive, there can be no
assurance that the Company will be able to accomplish its goals regarding
FIBER-SEAL.
Operating Construction and Demolition Landfill
During the third quarter of 1997, the Company acquired an operating
construction and demolition ("C&D") landfill in metropolitan Atlanta, Georgia in
exchange for consideration totaling $2.74 million. The purchase price consisted
of immediate cash consideration of $2.5 million and an obligation to make future
cash payments totaling $240,000. A construction and demolition landfill may
accept building materials and rubble resulting from construction, remodeling,
repair, and demolition operations on commercial buildings, pavements, houses,
and other structures. Such wastes include, but are not necessarily limited to,
wood, bricks, metal, concrete, wallboard, paper, and cardboard. The acquisition
was accounted for as a purchase and the operating results of the acquired
landfill have been included in the financial statements of the Company since the
acquisition. The following pro forma information compares the results of
operations as if the acquisition had been consummated as of the beginning of
each of the 12 month periods ended December 31, 1997 and December 31, 1996.
Twelve months ended
December 31,
1997 1996
------------- ----------
Revenue $3,610,793 $2,246,091
Net Loss ($850,712) ($1,064,080)
Net loss per
common share ($.07) ($.09)
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The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of operating results that would
have occurred had the acquisition been consummated as of the beginning of the
above periods, nor is it necessarily indicative of future operating results.
Proposed Construction and Demolition Landfill
During fiscal 1997, the company also acquired 108 acres of land in
another area of metropolitan Atlanta, Georgia in exchange for consideration
totaling $1,999,990. The purchase price consisted of 119,047 restricted shares
of Common Stock of the Company. The Company intends to develop such site into a
C&D landfill. A maximum of 119,047 additional restricted shares of Common Stock
of the Company may be paid as additional consideration upon the issuance of a
final and non-appealable construction and demolition landfill permit.
Transactions With WasteMasters, Inc.
During the quarterly period ended September 30, 1997, the Company
purchased from WasteMasters, Inc. 100% of the issued and outstanding shares of
two corporations which had been wholly-owned subsidiaries of WasteMasters, Inc.
Such corporations, Trantex, Inc. (which owns a landfill site in Kirksville,
Missouri) and WasteMasters of Georgia, Inc. (which owns a landfill site in
Walker County, Georgia,) are now wholly-owned subsidiaries of Continental
Technologies Corporation of Georgia, which is itself a wholly-owned subsidiary
of Continental Investment Corporation. As per another provision of its agreement
with WasteMasters, Inc., the Company acquired 4,500,000 restricted shares of
newly-issued Common Stock and 5,000,000 shares of newly-issued Series A
Preferred Stock of WasteMasters, Inc. directly from WasteMasters, Inc., a
publicly traded corporation engaged in the waste disposal business. Such shares
comprise 3.93% of the total number of shares of WasteMasters' Common Stock that
are currently outstanding and 100% of the total number of shares of WasteMasters
Series A Preferred Stock that are currently outstanding. Each share of Preferred
Stock is entitled to one vote on any matter on which shareholders will vote, and
is convertible into 5.1 shares of WasteMasters Common Stock (i.e. a total of
25,500,000 shares of restricted WasteMasters Common Stock). If Continental were
to fully convert the Series A Preferred into Common Stock, Continental would
then own, ceteris paribus, approximately 21.43% of the total number of shares of
WasteMasters Common Stock that would then be outstanding. In addition, a Warrant
for the Purchase of Shares of WasteMasters Common Stock was issued by
WasteMasters, Inc. to Continental Investment Corporation giving Continental the
option, exercisable until August 29, 1999, to acquire up to 100,000,000
restricted shares of WasteMasters Common Stock in exchange for up to 1,000,000
restricted shares of Continental Common Stock based upon an exchange ratio of 1
share of Continental Common Stock for 100 shares of WasteMasters, Inc. Common
Stock. In the event that Continental exercises in full its Warrant and fully
converts its WasteMasters Preferred Stock into WasteMasters Common Stock,
Continental would own, ceteris paribus, approximately 54.17% of the then issued
and outstanding shares of Common Stock of WasteMasters. All of the above
calculations of potential percentage ownership positions of the Company in
WasteMasters, Inc. assume that no additional shares of WasteMasters common stock
will be issued other than those shares issued in the various Company
transactions described above. The total consideration for all of the
transactions with WasteMasters, Inc. described above was $9,540,000, of which
$6,080,000 was applicable to the acquisition of the WasteMasters securities and
$3,460,000 was applicable to the acquisition of the two landfill subsidiaries.
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Waste Industry Background
According to the National Solid Waste Management Association ("NSWMA"),
the North American solid waste industry was projected to have revenues of more
than $37 billion in 1997. The industry is highly fragmented, with the four
largest companies accounting, in 1995, for approximately 30% of revenues, seven
mid-sized public companies, accounting for approximately 4% of revenues, and
several thousand municipalities and independent collection firms accounting for
approximately 66% of revenues. The industry has been consolidating in recent
years as a result of increased capital requirements arising primarily from
stringent environmental and other governmental regulations. The Company expects
the trend toward consolidation to continue as many independent landfill and
collection operators, including municipalities, lack the capital resources,
management skills and technical expertise necessary to operate in compliance
with such regulations.
The Company believes that approximately 70% of solid waste landfills are
owned by municipalities, 25% by private companies and 5% by the federal and
state governments. These landfills vary greatly in size and capacity. The
Company believes that the estimated 800 privately-owned landfills represent
approximately 50% of the remaining disposal capacity in the United States.
Subtitle D regulations ("Subtitle D") of the Resource Conservation and Recovery
Act ("RCRA") require landfill operators to upgrade existing disposal facilities
by imposing requirements in the areas of facility design and operating criteria,
closure and post-closure requirements, financial assurance standards and
groundwater monitoring as well as corrective action standards. Trade group data
indicate that the number of municipal solid waste landfills decreased by 62%
from 1988 to 1995 and that the remaining number of such landfills is under
2,,900.
As a result of these regulatory changes, a number of independent landfill
operators and municipalities are discontinuing or privatizing landfill and
collection operations. In some instances, industrial companies that had
previously operated landfills have decided to close such landfills rather than
bring them into compliance with the new, more demanding regulations. The
increasing requirements for capital, skilled management and technical expertise
are, for small operators who cannot achieve economics of scale and integration,
reducing margins and causing them to sell or close existing landfills. As a
result, the Company expects continued availability of opportunities to acquire
solid waste collection and disposal businesses. However, there can be no
assurance of such continued availability or of the Company's ability to
consummate any such potential acquisitions.
Pricing in the waste management industry has become increasingly complex
as wastes have been sub-divided/categorized by regulation changes, and charges
or "tipping fees" are being calculated as to specific transport and disposal
requirements. Revenues are generated through charges or tipping fees to the
collection and hauling companies and are calculated by volume or weight.
Transfer stations consolidate and compact the waste for transport to distant
sites where tipping fees may be lower, while collecting a fee per ton for
consolidation, compaction, transportation, and disposal. The prices that are
charged for disposal or transfer of waste are determined by the volume or
weight, the type of waste disposed of and prices charged for similar disposal
services by competitors. Long term disposal and collection contracts typically
contain a formula, generally based on published price indices, for automatic
adjustment of fees to cover increases in some, but not all, operating costs.
Competition
The solid waste industry is highly competitive and requires substantial
amounts of capital. The waste industry is currently dominated by several large,
national waste management companies -- Waste Management, Inc., Browning-Ferris
Industries, Inc. ("BFI"), U.S.A. Waste Services, Inc., Allied Waste Industries,
Inc. and Republic Industries, Inc. (In early 1997, U.S.A. Waste Services, Inc.
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and Waste Management, Inc. announced their intention to merge.) Additionally,
there are a number of regional companies and numerous local companies. All of
these companies have significantly larger operations and greater financial
resources than CICG. The Company also competes with those counties and
municipalities that maintain their own waste collection and/or disposal
operations.
The Company competes for landfill business on the basis of tipping fees,
geographical location and quality of operations. The Company's ability to obtain
landfill business is limited by the fact that some major collection companies
also own or operate landfills to which they send waste that they collect.
Solid Waste Disposal Business Risks
There are potential, often unforeseen, business risks and certain cost
exposures associated with the establishment, ownership and operation of solid
waste landfill sites. Such risk factors include, but are not limited to: a
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; 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; 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.
The Company purchases and maintains environmental impairment liability
insurance policies on its landfills that provide coverage against clean-up costs
and bodily injury to non-employees and property damage caused by off-site
pollution emanating from the landfills. However, if the Company should be unable
to obtain adequate insurance, or decides to operate without insurance, 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. Difficulty in obtaining
insurance could also impair the Company's ability to secure future contracts,
which may be conditioned upon the availability of adequate coverage.
Municipal and governmental waste management contracts typically require
performance bonds or bank letters of credit to secure performance. In addition,
the Company may 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 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 intends to
prepare an application for the Property that meets the requirements of the EPD
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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.
Landfills are 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 landfills on an unannounced
basis to investigate for regulatory and permit compliance. Once a landfill is
full, post-closure care operations and maintenance are required for 30 years.
The Company is 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.
Operation of landfills requires that costs be incurred, some significant,
related 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 landfill operations by
increasing the costs of construction and operation of landfills over the short
and long term. The Company will require substantial additional financing to
develop the Property. 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 is required to obtain
insurance and performance bonds at potentially high cost to meet this
requirement.
Governmental agencies have the power to enforce compliance with landfill
regulations and permit conditions and to obtain injunctions or impose fines in
the event violations are evidenced. During the ordinary course of its operation,
the Company may from time to time receive citations or notices from such
governmental agencies that its facility is not in full compliance with
applicable environmental or health and safety regulations. Upon receipt of such
citations or notices, the Company will work with agency representatives to
attempt resolution of the matters cited. Failure to correct the problems to the
satisfaction of the agencies could lead to monetary penalties, curtailed
operations, criminal prosecution, facility closure, or the inability to obtain
further permits.
The Company is subject to liability for any nuisance or trespass
resulting from the operation of its landfills. A person bringing a nuisance or
trespass action against the Company may seek an injunction to curtail or limit
the Company's operations. Further, any person pursuing a nuisance or trespass
cause of action may petition for actual and punitive damages. The awarding of
such damages could negatively impact the Company's financial condition and
business operations.
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 the packaging
that they use. Recycling regulations and procurement requirements for recycled
goods will continue to create business opportunities in the recycling field
while simultaneously serving to diminish 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
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Agency 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
light of these developments, the Company will attempt to anticipate future
regulatory requirements that might be imposed and plan accordingly to remain in
compliance with the regulatory framework.
In order to operate a landfill or transfer station, the Company typically
will have to go through 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 and time consuming to
obtain and are usually opposed by various local elected officials and citizens'
groups. Once obtained, in some states (but not in Georgia), operating permits
generally must be periodically renewed and are subject to modification and
revocation by the issuing agency.
The Company's landfill business subjects 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 the Company's
possible acquisition of existing landfills, it will often 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 have the power to enforce compliance with
these laws and regulations and to obtain injunctions or impose civil or criminal
penalties in case of violations. The Company's operations are 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. They also require 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.
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The Federal Water Pollution Control Act of 1972 ("The Clean Water Act")
This 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
potential landfill or transfer station is discharged into surface waters, the
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 works with the appropriate regulatory agencies to ensure
that its facilities are 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 Act provides for civil, criminal and administrative penalties for
violations of specified sections of the 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 enforcing agency could hold the
Company completely responsible for all investigative and remedial costs even if
others may also be 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
landfills 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 waste
disposal 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
10
<PAGE>
demolition work, and the handling of asbestos, apply to the Company's
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 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.
Proposed Federal Legislation
In the future, the Company's landfill operations (along with any
potential collection and/or transfer operations) may also be affected by
legislation currently pending before Congress that would authorize the states to
enact discriminatory legislation governing waste shipments. The Company believes
that if any such federal legislation is enacted, it may have a material adverse
effect on the Company's potential operations.
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 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 facilities
at their 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.
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<PAGE>
The permits or other land use approvals with respect to a landfill, as
well as state or local regulations, may (i) limit 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. Although there are presently no known
insurmountable impediments to the approval of these permit applications,
significant opposition may arise from city of Atlanta and surrounding county
residents regarding environmental and quality of life issues. Indeed, some local
residents and community activists have already indicated their opposition to the
potential use of the property as a waste disposal site. 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 would be at liberty to
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. A variance would significantly reduce costs associated
with the construction of the landfill.
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 help keep its shareholders and the public
informed about the Company's operations, may from time to time issue certain
statements, either in writing or orally, that contain or may contain Forward
Looking Statements. Although the Company believes that the expectations
reflected in such Forward Looking Statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies (past and
possible future), acquisitions and projected or anticipated benefits from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings, level of capital expenditures or other aspects
of operating results. All phases of the Company's 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. Such important factors ("Important Factors") and other factors could
cause actual results to differ materially from the Company's expectations. All
prior and 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.
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<PAGE>
(1) Competition: The waste collection/disposal business and the fabric
are business are both highly competitive and require substantial amounts of
capital. The Company's existing and potential facilities do, may or would
compete with numerous enterprises, many of which have significantly larger
operations and greater resources than the Company. The Company does, may or
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.
(2) Availability of Acquisition Targets: The Company's planned
acquisition program is a key element of its expansion strategy. In addition,
obtaining landfill permits has become increasingly difficult, time consuming and
expensive. There can be no assurance, however, that the Company will succeed in
obtaining landfill permits or locating appropriate acquisition candidates that
can be acquired at price levels that the Company considers appropriate.
(3) 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 stock, revenues from the
operating construction and demolition landfill described on Page 4 of this
report and revenues generated from the operation of its fabric care business. If
the Company is unable to obtain adequate funds from the sale of its stock in
public offerings, private placements, the exercise of warrants, or alternative
financing arrangements, it may be necessary to delay the potential permitting
and development of its landfill properties and potential landfill properties.
Because of potential political, legal, bureaucratic, and other factors, there
can be no assurance that the Company will be able to accomplish any of its goals
within a reasonable period of time.
(4) Economic Conditions: The Company's existing and potential waste
disposal businesses may or would be affected by general economic conditions.
There can be no assurance that an economic downturn would not result in a
reduction in the potential volume of waste that might be disposed of at the
Company's facilities and/or the price that the Company would charge for its
services. Additionally, the demand for FIBER-SEAL's services may be adversely
affected by an economic downturn.
(5) Weather Conditions: Protracted periods of inclement weather may
adversely affect the Company's existing and potential operations by interfering
with collection and landfill operations, delaying the development of landfill
capacity and/or reducing the volume of waste generated by the Company's existing
and potential customers. In addition, particularly harsh weather conditions may
result in the temporary suspension of certain of the Company's existing and
potential operations. The Forward Looking Statements do not assume that such
weather conditions will occur.
(6) Dependence on Senior Management: The Company is highly dependent upon
its senior management team. In addition, as the Company continues to grow, its
requirements for management personnel with franchising and waste industry
experience will also increase. The future availability of such experienced
management personnel cannot be predicted. The Forward Looking Statements assume
that experienced management personnel 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 additional
management personnel could have a material adverse effect on the Company.
(7) Influence of Government Regulation: The Company's existing and
potential operations are and would be subject to and substantially affected by
extensive federal, state and local laws, regulations, orders and permits, which
govern environmental protection, health and safety, zoning and other matters.
13
<PAGE>
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.
(8) Potential Environmental Liability: The Company may incur liabilities
for the deterioration of the environment as a result of its existing and
potential operations. Any substantial liability for environmental damage could
materially adversely affect the operating results and financial condition of the
Company. Due to the limited nature of insurance coverage of 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. Consistent with industry practice, most of the Company's contracts
will provide for a pass through of certain costs, including increases in
landfill tipping fees and, in some cases, fuel costs. The Company therefore
believes it should be able to implement price increases sufficient to offset
most cost increases resulting from inflation. However, competitive factors may
require the Company to absorb cost increases, resulting from inflation. The
Company is unable to determine the future impact of a sustained economic
slowdown.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company is currently in the process of evaluating its information technology
infrastructure for Year 2000 compliance. The Company does not expect that the
cost to modify its information technology infrastructure to be Year 2000
compliant will be material to its financial condition or results of operations.
The Company does not anticipate any material disruption in its operations as a
result of any failure by the Company to be in compliance. The Company's Year
2000 issues relate not only to its own systems but also to those of its
customers and suppliers. The Company does not currently have any information
concerning Year 2000 compliance status of its customers and suppliers. In the
event that any of the Company's significant customers or suppliers does not
successfully and timely achieve Year 2000 compliance, the Company's business or
operations could be adversely affected.
Employees
As of April 14, 1998, the Company employed a total of 36 persons, none of
whom are subject to a collective bargaining agreement. The Company considers its
relations with its employees to be satisfactory.
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<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The principal fixed asset of the Company is the Atlanta Property
described in Item 1. that the Company proposes to develop into a landfill. The
Company also owns 283.5 acres of real estate located approximately 50 miles from
Dallas in Ellis County, Texas. This property is held for future development or
resale. The Company has no timetable for such development or resale.
The Company also owns 89 acres of land at its operating C&D landfill in
metropolitan Atlanta, Georgia and 108 acres of land at another site in
metropolitan Atlanta, Georgia on which it intends to construct another C&D
landfill.
The Company also owns 65 acres of land at its landfill site in
Kirksville, Missouri and 225 acres of land at its landfill site in Walker
County, Georgia.
The Company leases approximately 9,612 square feet of office and
warehouse space in Dallas, Texas and approximately 2,766 square feet of office
space in Atlanta, Georgia.
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.
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 fiscal year 1997.
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<PAGE>
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
December 31, 1997 December 31, 1996
----------------- -----------------
Quarters High Low High Low
OCT-DEC $22.00 $15.125 $27.13 $20.50
JUL-SEP $25.00 $21.375 $30.50 $16.50
APR-JUN $23.00 $20.50 $26.00 $ 3.50
JAN-MAR $23.50 $20.50 $ 5.00 $ 4.13
Due in part to the high level of public awareness of the business in
which the Company is engaged, regulatory enforcement proceedings or other
potentially unfavorable developments involving the Company's operations or
facilities including those in the ordinary course of business, may be expected
to engender publicity which could from time to time have an adverse impact upon
the market price for the Company's Common Stock.
There were 1,264 holders of record of the Common Stock as of April 13,
1998. 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
cash dividends on its Common Stock during fiscal 1997, 1996 or 1995. 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
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended
September 30, 1996
Revenues
During the fiscal year ended December 31, 1997, revenues of the Company
were derived primarily from the operating construction and demolition ("C&D")
landfill described on Page 4 of this report, that was acquired during the
quarterly period ended September 30, 1997 and from the FIBER-SEAL fabric care
and treatment business. Revenues for the fiscal year ended December 31, 1997
increased $1,461,339 (178.43%) to $2,280,317 from $818,978 for the fiscal year
ended September 30, 1996.
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<PAGE>
While FIBER-SEAL revenues increased $128,652 (15.71%) from $818,978 to
$947,630, the increase in revenues was primarily a result of the acquisition of
the aforementioned C&D landfill which generated revenues of $1,332,687 in fiscal
1997 as compared with zero Company landfill revenues in fiscal 1996. (The
acquisition was accounted for as a purchase. Therefore, the operating results of
the acquired landfill have been included in the financial statements of the
Company beginning with, and not prior to, the date of acquisition.) A
construction and demolition landfill may accept building materials and rubble
resulting from construction, remodeling, repair, and demolition operations on
commercial buildings, pavements, houses, and other structures. Such wastes
include, but are not necessarily limited to, wood, bricks, metal, concrete,
wallboard, paper, and cardboard. FIBER-SEAL revenues consist of: (1) licensee
fees based upon monthly sales, (2) product sales to licensees, and (3) direct
product and service sales from the Dallas, Texas territory (which is owned by
the Company). The Company has made a strategic decision to convert its
FIBER-SEAL business from a licensing mode to a franchising operation during
fiscal year 1998. 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 years 1998 and 1999. It is the Company's opinion that the
revenues derived from the FIBER-SEAL business can be significantly enhanced.
However, as the business areas in which FIBER-SEAL competes are highly
competitive, there can be no assurance that the Company will be able to
accomplish its goals regarding FIBER-SEAL.
Cost of Revenues
Cost of revenues for the fiscal year ended December 31, 1997 increased
$739,240 (200.10%) to $1,108,675 (representing 48.62% of revenues) from $369,435
(representing 45.11% of revenues) for the fiscal year ended September 30, 1996.
The increase in the cost of revenues was primarily a result of the acquisition
of the operating C&D landfill described on Page 4 of this report.
Selling, General and Administrative (SG&A) Expenses
Selling, general and administrative (SG&A) expenses for the fiscal year
ended December 31, 1997 increased $960,609 (70.70%) to $2,319,328 from
$1,358,719 for the fiscal year ended September 30, 1996. The increase was due to
a variety of factors including those related to the development and potential
use of the Company's primary Atlanta, Georgia property as a solid waste disposal
site (e.g., consulting fees, increased legal fees, increased personnel costs,
the rental of office space in Atlanta, increased travel expenses, etc.), the
expenses incurred as a result of the acquisitions described on Pages 4 and 5 of
this report, and additional expenses for FIBER-SEAL related to the development
of a plan to convert from the current licensing method to a franchise operation.
Operating Loss
Operating loss for the fiscal year ended December 31, 1997 increased
$238,510 (26.23%) to $1,147,686 from $909,176 for the fiscal year ended
September 30, 1996. This was due to an increase in revenues for the fiscal year
ended December 31, 1997 of $1,461,339 (a 178.43% increase) to $2,280,317 from
$818,978 for the fiscal year ended September 30, 1996, an increase in cost of
revenues for the fiscal year ended December 31, 1997 of $739,240 (a 200.10%
increase) to $1,108,675 from $369,435 for the fiscal year ended September 30,
1996, and an increase in selling, general and administrative (SG&A) expenses for
the fiscal year ended December 31, 1997 of $960,609 (a 70.70% increase) to
$2,319,328 from $1,358,719 for the fiscal year ended September 30, 1996.
17
<PAGE>
Interest Income
Interest income of $207,279 for the fiscal year ended December 31, 1997
increased by $198,333, as compared with the fiscal year ended September 30, 1996
during which period the Company had $8,946 of interest income. Such increase was
due to the Company's significantly increased holdings of cash and short term
investments during the fiscal 1997 period as compared with the fiscal 1996
period.
Interest Expense
Interest expense for the fiscal year ended December 31, 1997 increased by
$63,460 to $71,932 from $8,472 for the fiscal year ended September 30, 1996. The
increase was primarily due to the note payable issued in connection with the
September 1996 acquisition of additional FIBER-SEAL assets.
Net Loss
The net loss for the fiscal year ended December 31, 1997 increased
$103,637 (11.4%) to $1,012,339 from $908,702 for the fiscal year ended September
30, 1996. Such increase was primarily due to significantly higher selling,
general and administrative expenses offset to a great extent by earnings from
the operating C&D landfill described on Page 4 of this report and increased
interest income.
Liquidity and Capital Resources
Cash and Short-Term Investments
Cash and short-term investments as of December 31, 1997 were $1,701,480,
a decrease of $1,520,106 as compared with the cash and short-term investments
position of $3,221,586 at December 31, 1996. Such decrease was primarily due to
the expenditure of $2,500,000 of cash in the acquisition of the operating C&D
landfill described on Page 4 of this report, and the $1,012,339 net loss
experienced by the Company during the fiscal year ended December 31, 1997 offset
primarily by proceeds from the exercise of warrants and increased amortization
and depreciation.
Investment in WasteMasters, Inc.
As of April 14, 1998, the Company owned various restricted, unregistered
securities of WasteMasters, Inc., a publicly-traded corporation whose registered
common stock is traded on the Nasdaq SmallCap Market under the trading symbol
WAST (see Page 5, "Transactions With WasteMasters, Inc."). Such securities
consist of 4,500,000 shares of restricted WasteMasters Common Stock, 5,000,000
shares of WasteMasters Series A Preferred Stock (which are convertible at the
Company's option into 25,500,000 shares of restricted WasteMasters Common Stock)
and an option to exchange up to 1,000,000 shares of restricted Continental
Investment Corporation Common Stock for up to 100,000,000 shares of restricted
WasteMasters Common Stock (as per a fixed exchange ratio of 1 share of
Continental for 100 shares of WasteMasters). Such securities are currently
valued on the Company's balance sheet at their cost basis of $6,080,000.
Capital Expenditures
The Company currently has no material commitments for capital expenditures.
The Company expects to continue to explore opportunities to acquire landfills
and related waste disposal industry assets in the future.
18
<PAGE>
Capital Resources
Heretofore, the primary source of capital has been provided by the sale
of shares of common stock of the Company in private sales. 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 stock,
revenues from the operating construction and demolition landfill described on
Page 4 of this report and revenues generated from the operation of its
FIBER-SEAL fabric care business. If the Company is unable to obtain adequate
funds from the sale of its stock in public offerings, private placements, the
exercise of warrants, or alternative financing arrangements, it may be necessary
to delay the potential permitting and development of its landfill properties and
potential landfill properties. Because of potential political, legal,
bureaucratic, and other factors, there can be no assurance that the Company will
be able to accomplish any of its goals within a reasonable period of time. The
Company has issued shares of its Common Stock from time to time in the past to
satisfy certain obligations, and expects in the future to also acquire certain
services, satisfy indebtedness and/or make acquisitions utilizing authorized
shares of stock of the Company. $2,720,000 of common stock purchase warrants
were exercised during the fiscal year ended December 31, 1997.
As of December 31, 1997, the Company had working capital of $1,540,507 and
a current ratio of 2.33 to 1.
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
<S> <C> <C>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants--------------------------------------------------------- F-1
Consolidated Balance Sheet as of December 31, 1997-----------------------------------------------------------F-2
Consolidated Statements of Operations
for the fiscal year ended December 31, 1997, the three months
ended December 31, 1996, and the fiscal year ended September 30, 1996------------------------------------F-3
Consolidated Statement of Stockholders' Equity for the fiscal year ended
December 31, 1997, the three months
ended December 31, 1996, and the fiscal year ended September 30, 1996------------------------------------ F-4
Consolidated Statements of Cash Flows
for the fiscal year ended December 31, 1997, the three months
ended December 31, 1996, and the fiscal year ended September 30, 1996 ----------------------------------- F-5
Notes to Financial Statements------------------------------------------------------------------------------- F-7
</TABLE>
19
<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 December
31, 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1997, the three months
ended December 31, 1996, and the year ended September 30, 1996. 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 December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the year ended December 31, 1997, the three months ended December 31, 1996, and
the year ended September 30, 1996, in conformity with generally accepted
accounting principles.
Dallas, Texas
April 6, 1998
F-1
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS
Cash $ 217,383
Note receivable 1,484,097
Receivables - Wastemasters, Inc. 433,734
Accounts receivable, net of allowance for doubtful accounts of $17,011 268,793
Inventories 59,423
Accrued interest receivable 82,628
Prepaid expenses and other assets 156,595
--------
Total current assets 2,702,653
PROPERTY AND EQUIPMENT - AT COST
Landfill sites under development 14,682,572
Active landfill sites, net of accumulated amortization of $307,203 2,572,500
Fixtures and equipment, net of accumulated depreciation of $81,114 764,903
--------
18,019,975
INVESTMENT IN WASTEMASTERS, INC. 6,080,000
Total assets $26,802,628
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - related party $ 98,707
Accounts payable - trade 561,090
Accrued expenses 283,317
Current maturities of long-term debt 219,032
--------
Total current liabilities 1,162,146
LONG-TERM LIABILITIES
Long-term debt 1,154,542
Deferred income taxes 747,000
1,901,542
Total liabilities 3,063,688
COMMITMENTS -
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 10,000,000 shares authorized;
no shares issued or outstanding -
Common stock, $.50 par value; 90,000,000 shares authorized;
12,367,055 issued and outstanding 3,309,528
Additional contributed capital 24,881,530
Accumulated deficit (4,452,118)
-----------
Total stockholders' equity 23,738,940
Total liabilities and stockholders' equity $26,802,628
</TABLE>
The accompanying notes are an integral part of this statement.
F-2
