UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
________________________________
FORM 10-KSB/A
(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
__________________________________
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 May 28, 1998, is approximately $50,466,411, based upon the closing bid
price of $7.75 per share as reported for such date by Trading and Market
Services of The Nasdaq Stock Market, Inc.
As of May 28, 1998, the issuer had outstanding 12,442,938 shares of its
Common Stock, $0.50 par value.
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS.
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Background
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Continental Investment Corporation ("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")
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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
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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.
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
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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.). 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
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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.
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Operating Construction and Demolition Landfill
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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
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Revenue $3,610,793 $2,246,091
Net Loss ($850,712) ($1,064,080)
Net loss per
common share ($.07) ($.09)
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
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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.
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During the quarterly period ended September 30, 1997, the Company
purchased from WasteMasters, Inc. (a publicly-traded corporation whose
registered common stock is traded on the Nasdaq SmallCap Market under the
trading symbol WAST) 100% of the issued and outstanding shares of two
corporations which had been wholly-owned subsidiaries of WasteMasters, Inc.
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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. As per a management contract between the Company and
WasteMasters, Inc., the Company is paid a monthly fee of $50,000 to manage
the affairs and operations of WasteMasters, Inc.
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.
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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 1998,
U.S.A. Waste Services, Inc. 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.
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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.
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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 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.
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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 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")
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The SWDA and its implementing regulations establish a framework for
regulating the handling, transportation, treatment, and disposal of hazardous
and non-hazardous wastes. They also require states to develop programs to
ensure the safe disposal of solid wastes in landfills.
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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 including new financial responsibility requirements which took
effect on April 9, 1997 although many states have already implemented
financial assurance programs. These federal regulations must be implemented by
the states, although states may impose requirements for landfill sites that
are more stringent than the federal Subtitle D standards. Once a state has an
approved program, it will review all existing landfill permits to ensure that
they comply with the new regulations. Although the states were required to
submit proposed permitting programs designed to implement the Subtitle D
regulations to the EPA by April 1993, some states have not submitted their
programs to the EPA and others have not fully completed their implementation.
Because the new regulations did not take effect until late 1993 and have not
been fully implemented by the states, their full impact may not be apparent
for several years. The Company could incur significant costs in complying with
such regulations.
The Federal Water Pollution Control Act of 1972
("The Clean Water Act")
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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")
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CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities from which there has been, or
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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 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
-12-
<PAGE>
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.
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.
-13-
<PAGE>
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
-14-
<PAGE>
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.
(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, cash flow from
the operating construction and demolition landfill described on Page 5 of this
Report and cash flow generated from the operation of its FIBER-SEAL fabric
care and treatment 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.
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<PAGE>
(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. 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.
-16-
<PAGE>
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 May 28, 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.
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.
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<PAGE>
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.
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.
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<PAGE>
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 1,267 holders of record of the Common Stock as of May 28,
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 5 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. 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 $1,070,716 in fiscal 1997 (as compared with zero Company landfill
revenues in fiscal 1996) and $261,972 of management fee revenues related to
WasteMasters, Inc. and another entity. (The C&D acquisition was accounted for
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<PAGE>
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 5
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.) 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.
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<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 5 of this Report
and increased interest income.
Liquidity and Capital Resources
-------------------------------
Cash and Short-Term Investments
- -------------------------------
Cash and Note Receivable as of December 31, 1997 were $1,701,480, a
decrease of $1,520,106 as compared with the cash and Note Receivable 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 5 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 May 28, 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
original cost of $6,080,000. As per a management contract between the Company
and WasteMasters, Inc., the Company is paid a monthly fee of $50,000 to
manage the affairs and operations of WasteMasters, Inc.
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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.
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, cash flow from the operating construction and demolition
landfill described on Page 5 of this Report and cash flow generated from
the operation of its FIBER-SEAL fabric care and treatment 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.
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ITEM 7. FINANCIAL STATEMENTS.
- ------------------------------
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-4
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-5
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-6
Notes to Financial Statements ................................... F-8
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<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.
GRANT THORNTON LLP
Dallas, Texas
April 6, 1998
F-1
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
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
Accrued interest receivable 82,628
Inventories 59,423
Prepaid expenses and other assets 156,595
-----------
Total current assets 2,702,653
PROPERTY AND EQUIPMENT - AT COST
Landfill sites under development 13,817,572
Active landfill sites, net of
accumulated amortization of $307,203 2,572,500
Land held for development 865,000
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
===========
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATD BALANCE SHEET - Continued
December 31, 1997
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
===========
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months
Year ended ended Year ended
December 31, December 31, September 30,
1997 1996 1996
------------- ------------- -------------
Revenues $ 2,280,317 $ 221,884 $ 818,978
Costs and expenses
Cost of revenues 1,108,675 88,900 369,435
Selling, general and
administrative expenses 2,319,328 453,686 1,358,719
----------- ----------- ----------
3,428,003 542,586 1,728,154
----------- ----------- ----------
Operating loss (1,147,686) (320,702) (909,176)
Other income (expense)
Interest income 207,279 74,824 8,946
Interest expense (71,932) (24,991) (8,472)
----------- ----------- ----------
135,347 49,833 474
----------- ----------- ----------
NET LOSS $(1,012,339) $ (270,869) $ (908,702)
=========== =========== ==========
Per share data
Loss per common
share - basic $(.09) $(.02) $(.09)
===== ===== =====
Weighted average number
of common shares
outstanding 11,743,326 11,311,288 9,746,092
=========== =========== ==========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Common stock Additional Treasury stock
---------------------- contributed ---------------- Accumulated
Shares Par value capital Shares Amount Deficit Total
---------- ---------- ----------- ------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at October 1, 1995 8,883,527 $1,567,764 $ 2,546,929 7,209 $(26,771) $(2,260,208) $ 1,827,714
Retirement of treasury stock (7,209) (3,604) (23,167) (7,209) 26,771 - -
Sale of stock in private placement 955,000 477,500 5,022,500 - - - 5,500,000
Issuance of stock for services 50,800 25,400 228,680 - - - 254,080
Issuance of stock for land 1,427,940 713,969 4,877,852 - - - 5,591,821
Distribution to shareholder - - (1,150,000) - - - (1,150,000)
Net loss - - - - - (908,702) (908,702)
---------- ---------- ----------- ------ -------- ----------- -----------
Balances at September 30, 1996 11,310,058 2,781,029 11,502,794 - - (3,168,910) 11,114,913
Issuance of stock 2,950 1,475 37,650 - - - 39,125
Net loss - - - - - (270,869) (270,869)
---------- ---------- ----------- ------ -------- ----------- -----------
Balances at December 31, 1996 11,313,008 2,782,504 11,540,444 - - (3,439,779) 10,883,169
Purchase and cancellation
of stock (36,000) (18,000) (173,880) - - - (191,880)
Exercise of stock warrants 571,000 285,500 2,434,500 - - - 2,720,000
Issuance of stock for
landfill sites 219,047 109,524 3,850,466 - - - 3,959,990
Issuance of 100,000
warrants for landfill sites - - 1,500,000 - - - 1,500,000
Issuance of stock for investment
in WasteMasters, Inc. 300,000 150,000 5,730,000 - - - 5,880,000
Net loss - - - - - (1,012,339) (1,012,339)
---------- ---------- ----------- ------ -------- ----------- -----------
Balances at December 31, 1997 12,367,055 $3,309,528 $24,881,530 - $ - $(4,452,118) $23,738,940
========== ========== =========== ====== ======== =========== ===========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three months
Year ended ended Year ended
December 31, December 31, September 30,
1997 1996 1996
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,012,339) $(270,869) $ (908,702)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization and depreciation expense 388,317 12,265 2,333
Provision for doubtful accounts receivable 17,011 - -
Common stock issued as consideration for services - - 254,080
Change in operating assets and liabilities:
Accounts receivable - trade (262,125) (10,847) (12,832)
Accrued interest receivable (21,486) (61,142) -
Other current assets (567,172) (34,988) (67,711)
Accounts payable - trade 441,594 (7,564) (39,264)
Accrued expenses 62,720 31,356 (67,091)
Accrued expenses to related parties - (67,999) (274,106)
Other - - (67,873)
----------- ----------- -----------
Net cash used in operating activities (953,480) (409,788) (1,181,166)
Cash flows from investing activities:
Issuance of note receivable - (1,500,000) (880,000)
Purchases of property and equipment (2,731,778) (16,755) (693,870)
Investment in WasteMasters, Inc. (200,000) - -
----------- ----------- -----------
Net cash used in investing activities (2,931,778) (1,516,755) (1,573,870)
Cash flows from financing activities:
Proceeds from sale of stock 2,720,000 5,000 5,500,000
Payments of debt (488,555) - -
Proceeds from note receivable 895,903 - -
Proceeds from debt 133,707 - -
----------- ----------- -----------
Net cash provided by financing activities 3,261,055 5,000 5,500,000
----------- ----------- -----------
Increase (decrease) in cash (624,203) (1,921,543) 2,744,964
Cash at beginning of period 841,586 2,763,129 18,165
----------- -----------
Cash at end of period $ 217,383 $ 841,586 $ 2,763,129
=========== =========== ===========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
F-6
<PAGE>
Continental Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31, 1997, three months ended
December 31, 1996 and the year ended September 30, 1996
Non-cash investing and financing activities:
Fiscal year ending September 30, 1996:
. 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
$5,352,691.
Fiscal year ending December 31, 1997:
. Landfill sites under development and active landfill sites were
acquired by issuing 219,047 shares of common stock valued at
$3,959,900, 100,000 warrants to purchase common stock valued at
$1,500,000, debt of $240,000, and cash of $2,500,000 for a total
purchase price of $8,199,990.
. The Company purchased equipment costing $437,129 for debt.
. The Company acquired its investment in WasteMasters, Inc. by issuing
300,000 shares of common stock valued at $5,880,000 and cash of
$200,000 for a total purchase price of $6,080,000.
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
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 and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Nature of Operations
--------------------
The Company operates in two principal segments: waste disposal, primarily
its active and potential landfill sites in Georgia and Missouri 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.
Capitalized landfill costs include land and related air space, permitting
and preparation costs. Landfill permitting and preparation costs represent
only direct costs related to these activities, including legal, engineering,
construction of landfill improvements, cell development costs. No general
and administrative costs have been capitalized through December 31, 1997
related to these purposes.
Landfill and certain treatment facility costs are 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.
Income Taxes
------------
Deferred income taxes are provided under the liability method in which
deferred assets and liabilities are determined based on the differences
between the tax basis of assets and liabilities and the amounts reported in
the financial statements. Deferred tax assets and liabilities at the end of
each period are determined using the currently enacted tax rates.
F-8
<PAGE>
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Loss Per Share
--------------
In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
(SFAS 128). In accordance with SFAS 128, the Company computes basic earnings
per share based on the weighted-average number of common shares outstanding
during each period presented. Diluted earnings per share is computed based
on the weighted average number of common shares plus the dilutive effect of
all potential dilutive securities, principally stock options and warrants,
outstanding during each period presented. In all periods presented, all
potential common shares were anti-dilutive. Accordingly, the adoption of
SFAS 128 had no effect on loss per share amounts.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. In reviewing recoverability, the Company estimates the
future cash flows expected to result from using the assets and eventually
disposing of them. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, an impairment loss is recognized based on the asset's fair
value.
Stock Options
-------------
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Change in Fiscal Year
---------------------
Effective January 1, 1997, the Company changed its fiscal year end from
September 30 to December 31.
F-9
<PAGE>
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Accrued Closure and Post-Closure Costs
--------------------------------------
Accrued closure and post-closure costs represent an estimate of the current
value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. Site specific closure and post-closure engineering
cost estimates are prepared annually for landfills owned and/or operated by
the Company for which it is responsible for closure and post-closure. The
present value of estimated future costs are accrued based on accepted
tonnage as landfill airspace is consumed. Discounting of future costs is
applied where the Company believes that both the amounts and timing of
related payments are reliably determinable. The Company periodically
updates its estimates of future closure and post-closure costs. The impact
of changes which are determined to be changes in estimates are accounted
for on a prospective basis. These costs are included in accrued liabilities
and are net of cash deposits to third party trustees.
Environmental Costs
-------------------
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals
for estimated losses from environmental remediation obligations generally
are recognized no later than completion of the remedial feasibility study.
Such accruals are adjusted as further information develops or circumstances
change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value. Recoveries of
environmental remediation costs from other parties are recorded as assets
when their receipts are deemed probable.
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-10
<PAGE>
NOTE B - ACQUISITIONS
On September 30, 1996, the Company acquired all of the operating assets and
liabilities of FIBER-SEAL Dallas, Inc. (FSD) and FIBER-SEAL Services
International, Inc. (FSSI) from the majority stockholder of the Company in
exchange for a $1,150,000 note payable. Due to the common ownership of the
Company, FSD and FSSI, the transaction has been accounted for in a manner
similar to a pooling of interests and, accordingly, the consolidated
financial statements for all periods presented have been restated to include
the accounts of FSD and FSSI. The excess of the 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>
CICG FSD FSSI Eliminations Combined
----------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 996
Revenues $ 60,000 $247,606 $539,381 $(28,009) $ 818,978
Net earnings
(loss) (1,040,199) (311) 137,187 (5,379) (908,702)
</TABLE>
In August 1997, the Company acquired an active landfill (Scales Road) in
Georgia for cash of $2,500,000 and a note payable of $240,000. On
September 6, 1997, the Company acquired one active landfill (Rye Creek) in
Missouri and one landfill development site (Walker County) in Georgia from
WasteMasters, Inc. (WasteMasters) for 100,000 shares of restricted common
stock valued at $1,960,000 and a five-year warrant to acquire 100,000 shares
of stock at $23 per share valued at $1,500,000. Based upon the net available
airspace in each landfill, cost of $275,000 and $3,185,000 was allocated to
Rye Creek and Walker County, respectively. Subsequent to the transaction
with WasteMasters, it was determined that the Company did not receive proper
title to the Rye Creek landfill. As a result, in February 1998, the Company
acquired proper title to the Rye Creek landfill for additional consideration
of approximately $946,547, consisting of restricted common stock of the
Company valued at $32,000 and assumption of liabilities. Operations of Rye
Creek will be included in the operations of the Company beginning in February
1998. On October 20, 1997, the Company acquired a landfill development site
(Fairburn Road) for 119,047 restricted shares of common stock valued at
$1,999,990. In addition, the Company agreed to pay the seller an additional
119,047 restricted shares if the site became permitted within a specified
period.
All of the 1997 acquisitions have been accounted for as purchases, and
accordingly, the operating results of the acquired landfills have been
included in the operating results of the Company since their acquisition
or upon assumption of control of the facilities by the Company.
F-11
<PAGE>
NOTE B - ACQUISITIONS - Continued
The following table presents unaudited pro forma consolidated results of
operations as if the acquisitions had been consummated as of October 1,
1995. The pro forma results are not necessarily indicative of the results of
operations that would have occurred had the acquisitions been made on
October 1, 1995 or of future results of the combined companies.
Three months
Year ended ended Year ended
December 31, December 31, September 30,
1997 1996 1996
------------ ------------ -------------
Revenue $3,610,793 $ 628,586 $2,445,909
Net loss $ (850,712) $(252,487) $ (835,168)
Loss per share $(.07) $(.02) $(.09)
NOTE C - INVESTMENT IN WASTEMASTERS, INC.
In September 1997, the Company acquired 4.5 million restricted shares of
common stock and 5 million shares of Series A Preferred Stock of
WasteMasters, Inc. for 300,000 restricted shares of its common stock
valued at $5,880,000. The Series A Preferred Stock has voting rights
identical to common stock and may be converted into 25.5 million shares of
common stock. In addition, the Company received a warrant to acquire 100
million shares of WasteMasters in exchange for the issuance of 1 million of
the Company's restricted common stock. The warrant is exercisable only by the
Company over a two-year period from the date of grant. At December 31, 1997,
the Company held an approximate 23.8% voting interest in WasteMasters and
held approximately 12.9% of all outstanding common stock. The Chairman,
President and Chief Executive Officer and General Counsel of the Company
hold the same offices at WasteMasters and the Company has a management
agreement which pays it $50,000 monthly from WasteMasters. Based upon the
above, the Company has the ability to exercise significant influence over
the operating and financial policies of WasteMasters; therefore, the
Company's investment is accounted for by the equity method. The portion of
the fiscal 1997 net loss of WasteMasters, Inc. allocable to the Company was
immaterial.
NOTE D - NOTE RECEIVABLE
Note receivable consists of amounts due under a revolving loan agreement.
Amounts outstanding under the agreement are collateralized by 100,000
shares of the Company's common stock, bear interest at 10% per annum,
payable quarterly, with principal due in two equal installments on July
30, 1998 and December 31, 1998.
F-12
<PAGE>
NOTE E - PROPERTY AND EQUIPMENT
The Company's property and equipment consists of the following at
December 31, 1997:
LANDFILL SITES UNDER DEVELOPMENT
229 acres in Atlanta, Georgia
Former granite quarry $ 564,222
Unimproved land 8,068,360
-----------
8,632,582
Fairburn Road, metropolitan, Atlanta, Georgia 1,999,990
Walker County, Georgia 3,185,000
-----------
$13,817,572
===========
ACTIVE LANDFILL SITES
Scales Road $ 2,604,702
Less accumulated amortization 307,202
-----------
2,297,500
Rye Creek 275,000
-----------
$ 2,572,500
===========
LAND HELD FOR DEVELOPMENT
253.5 acres, Ellis County, Texas
Unimproved land $ 750,000
30 acres, Ferris, Texas
Unimproved land 115,000
-----------
$ 865,000
===========
FIXTURES AND EQUIPMENT
Fixtures and equipment $ 846,017
Accumulated depreciation (81,114)
-----------
$ 764,903
===========
NOTE F - INCOME TAXES
The Company and its subsidiaries file a consolidated tax return. At
December 31, 1997, the Company has, for Federal income tax purposes,
operating loss carryforwards of approximately $4,900,000, expiring through
2013 and capital loss carryforwards of approximately $310,000 expiring
through 1999. Tax laws limit the utilization of certain of the net
operating loss carryforwards and capital loss carryforwards to approximately
$250,000 per year. Therefore, the Company may be required to pay income
taxes in future years even though significant loss carryforwards exist.
F-13
<PAGE>
NOTE F - INCOME TAXES - Continued
Reconciliation of income taxes computed at the Federal statutory rate and
income tax expense is as follows:
Three months
Year ended ended Year ended
December 31, December 31, September 30,
1997 1996 1995
------------ ------------ -------------
Tax benefit at statutory rate $(419,000) $(92,000) $(340,000)
Change in valuation allowance 419,000 89,000 307,000
Other - 3,000 33,000
--------- -------- ---------
$ - $ - $ -
========= ======== =========
Consolidated deferred tax assets and liabilities consist of the following at
December 31, 1997:
Deferred tax assets
Net operating loss and capital loss carryforwards $1,772,000
Valuation allowance (1,772,000)
----------
-
Deferred tax liabilities
Property 747,000
---------
Net deferred tax liability $ 747,000
==========
At December 31, 1997, the Company had capital and net operating loss carry-
forwards for Federal tax purposes expiring as follows:
Year of
expiration Amount
---------- -----------
Capital losses 1999 $ 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
2012 262,408
2013 1,012,043
----------
$4,897,966
==========
F-14
<PAGE>
NOTE G - LONG TERM DEBT
Long-term debt consists of the following:
December 31,
1997
------------
Note payable to stockholder, interest at 8.5% per annum,
due in annual installments of $25,000 in 1998 and
$230,000 in 1999 through 2001, uncollateralized $ 715,000
Note payable to a finance company, interest at 10% per
annum, monthly principal and interest payments of $11,090
through maturity in 2002, collateralized by equipment 437,129
Note payable to an individual, interest at 8% per annum,
monthly principal and interest payments of $10,000 through
maturity in 1999 186,659
Other 34,786
----------
1,373,574
Less current maturities 219,032
----------
$1,154,542
==========
The future minimum payments under long-term debt at December 31, 1997 are
as follows:
1998 $ 219,032
1999 445,049
2000 343,011
2001 355,126
2002 11,356
----------
$1,373,574
==========
NOTE H - LEASES
The Company is obligated under various noncancellable operating leases for
land, and office and warehouse premises through 2004. The head office lease,
which has been classified for accounting purposes as an operating lease, is
F-15
<PAGE>
NOTE H - LEASES - Continued
subject to customary escalation clauses for executory costs and operating
expenses. The future minimum lease payments under noncancellable leases at
December 31, 1997, are as follows:
Year ending
December 31,
------------
1998 $ 114,468
1999 105,457
2000 43,424
2001 7,616
2002 6,000
----------
$ 276,965
==========
NOTE I - STOCKHOLDERS' EQUITY
Common stock is stated at the lower of par value or consideration received,
as permitted by state law. The Company grants both stock warrants and
employee stock options. At December 31, 1997, the total number of warrants
outstanding was 3,912,000 and employee stock options was 1,070,000. All of
the employee stock options were granted during 1997.
The Company has adopted only the disclosure provisions of SFAS 123 for
employee stock options and continues to apply APB 25 for stock options
granted to employees. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire
the stock. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for options consistent with the
methodology prescribed by SFAS 123, the Company's net loss and loss per
share for the year ended December 31, 1997 would be as follows:
Year ended
December 31, 1997
-----------------
Net loss
As reported $ (1,012,339)
Pro forma $(11,393,214)
Loss per share
As reported $(.09)
Pro forma $(.97)
The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility of 100 percent; risk-free interest rates
of 5.9 percent; no dividend yield; and expected lives of one to ten years.
F-16
<PAGE>
NOTE I - STOCKHOLDERS' EQUITY - Continued
The following information relates to warrants:
Number of Shares Warrant Price
---------------- -------------
Outstanding - October 1, 1995 354,000 $4.25-$18.00
Issued during the year (1) 3,512,500 $4.00-$35.00
Exercised during the year (462,500) $4.00-$10.00
---------
Outstanding - September 30, 1996 3,404,000 $4.00-$35.00
Expired during the period (100,000) $4.25
Exercised during the period (1,000) $5.00
---------
Outstanding - December 31, 1996 3,303,000 $4.00-$35.00
Issued during the year (1) 1,080,000 $6.00-$50.00
Exercised during the year (571,000) $4.00-$ 5.00
---------
Outstanding - December 31, 1997 3,812,000 $4.00-$50.00
(1) During 1997 and 1996, the Company received $2,720,000 and $5,500,000
respectively for the sale of its restricted common stock and warrants
to purchase restricted stock which expire in varying terms (one to
five years).
The following information relates to options:
Weighted Average
Number of Shares Exercise Price
---------------- ---------------
Outstanding at January 1, 1997 - -
Granted 1,070,000 $37.14
--------- ------
Outstanding and exercisable at
December 31, 1997 1,070,000 $37.14
========= ======
Weighted average fair value per
share of options granted during 1997 $ 9.70
======
F-17
<PAGE>
NOTE I - STOCKHOLDERS' EQUITY - Continued
Information about warrants and employee stock options outstanding at
December 31, 1997 is summarized as follows:
Year ended
December 31, 1997
--------------------------
Weighted
average
exercise
Shares price
--------- --------
Outstanding at beginning of year 3,303,000 $10.13
Granted 2,150,000 31.09
Exercised (571,000) 4.76
---------
Outstanding at end of year 4,882,000 $19.98
========= ======
Warrants and options exercisable at
December 31, 1997 4,804,500 $19.96
========= ======
Warrants and employee stock options outstanding
-----------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
------------------------ ----------- ---------------- ----------------
$ 4.00 to $ 5.00 1,812,000 3.9 years $ 4.90
$ 5.01 to $ 10.00 222,000 2.4 years $ 7.45
$10.01 to $100.00 2,848,000 0.9 years $30.37
---------
4,882,000
=========
NOTE J - SEGMENTS
The Company operates in two principal segments: waste disposal, primarily
its active landfills and landfill development sites in Georgia and Missouri
and its FIBER-SEAL Fabric care and surface protection business.
F-18
<PAGE>
NOTE J - SEGMENTS - Continued
Year ended Waste Fabric
December 31, 1997 Disposal Care Corporate Consolidated
----------------- ------------ --------- --------- ------------
Revenues $ 1,332,687 $947,630 $ - $ 2,280,317
Operating profit (loss) (1,020,915) 9,036 (460) (1,012,339)
Identifiable assets 26,485,955 316,673 - 26,802,628
Depreciation and
amortization 374,752 13,565 - 388,317
Capital expenditures 15,001,930 4,662 - 15,006,592
Three months ended
December 31, 1996
------------------
Revenues $ - $221,884 $ - $ 221,884
Operating profit (loss) (356,436) 35,734 - (320,702)
Identifiable assets 11,717,308 305,272 - 12,022,580
Depreciation and
amortization - 12,265 - 12,265
Capital expenditures 16,755 - - 16,755
Year ended
September 30, 1996
------------------
Revenues $ - $818,978 $ - $ 818,978
Operating profit (loss) (924,526) 15,760 (410) (909,176)
Identifiable assets 12,229,202 93,895 - 12,323,097
Depreciation and
amortization - 2,333 - 2,333
Capital expenditures 693,870 - - 693,870
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash, accounts receivable, note receivable, receivables - WasteMasters,
accounts payable - trade and note payable - related party. The carrying
amounts approximate fair value because of the short maturity of these
instruments.
The fair value of long-term debt is estimated based on current market
rates for the same or similar issues.
These fair value estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore, cannot
be determined with precision. Changes in assumptions could significantly
affect these estimates.
F-19
<PAGE>
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The estimated fair value of the Company's financial instruments is as
follows:
Carrying
amount Fair value
------------ -----------
Financial assets
Cash $ 217,383 $ 217,383
Note receivable 1,484,097 1,484,097
Receivables - WasteMasters 433,734 433,734
Accounts receivable 268,793 268,793
Financial liabilities
Note payable - related party (98,707) (98,707)
Accounts payable - trade (561,090) (561,090)
Long-term debt (1,373,574) 1,355,574)
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.
NOTE M - RELATED PARTY TRANSACTIONS
The Company received $61,972 in management fee revenue from a company owned
partially by the Chairman of the Board of the Company.
F-20
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
- -------------------------------------------------------------------
None
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH 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 May 28, 1998.
Name Age Current Position with Company
---------------------- --- -----------------------------
R. Dale Sterritt, Jr. 42 Chairman, President and CEO
Robert D. Luna 44 Director, Secretary
Martin G. Blahitka 60 Director
J. B. Morris 58 Director
Mr. R. Dale Sterritt, Jr. has served as Chairman of the Board of
Directors and Chief Executive Officer since July 1991, and as President since
July 1997. Mr. Sterritt also serves as Chairman, President and Chief Executive
Officer of WasteMasters, Inc. (see "Transactions With WasteMasters, Inc." on
Page 5 of this Report).
Mr. Martin G. Blahitka has served as a director of the Company since
September 1993. He has been a private investor for more than the past five
years.
Mr. Robert D. Luna has served as a Director since September 1993 and
currently serves as Secretary of the Company. Mr. Luna has been a private
investor (in securities, real estate and oil and gas) for more than the past
five years.
Mr. J. B. Morris has served as a Director since April 1990. He has been
a private investor for more than the past five years.
Other Key Executives
- --------------------
Mr. Barry G. Roberts, in May 1997, was named General Counsel of
Continental Investment Corporation. Immediately prior to joining the Company,
Mr. Roberts, 34, was a partner with the law firm of Holland & Knight. Prior to
his joining Holland & Knight in 1996, Mr. Roberts was with the law firms of
Branch, Pike & Ganz from 1991 to 1996 and Alston & Bird from 1988 to 1991. He
also serves as General Counsel of WasteMasters, Inc. (see "Transactions With
WasteMasters, Inc." on Page 5 of this Report). Mr. Roberts holds undergraduate
and law degrees from the University of North Carolina.
-24-
<PAGE>
Mr. John R. Appel, in October 1997, was named President and Chief
Operating Officer of a wholly owned subsidiary, FIBER-SEAL Holdings, Inc., a
Texas corporation based in Dallas. He is directing the development and
transition of FIBER-SEAL from a licensing firm to a franchising firm. Mr.
Appel, 57, has had 29 years of experience in the franchise industry. Before
joining FIBER-SEAL, Mr. Appel served from January 1995 to September 1997 as
Vice President of The Dwyer Group, a franchise organization consisting of nine
nationwide service franchise companies with a total of 2,000 franchisees.
Concurrently, he served as President of two of the Dwyer franchise firms,
General Business Services and E. K. Williams, which specialized in small
business financial counseling and had a combined total of 500 franchisees.
From 1992 to 1995, Mr. Appel served as President of another Dwyer subsidiary,
Rainbow International, a carpet cleaning and dyeing company with 500
franchisees.
Mr. Oliver Lee, in May 1997, was named President of a wholly owned
subsidiary, Continental Technologies Corporation of Georgia, a Georgia
corporation based in Atlanta. Mr. Lee, 47, is an attorney whose areas of
expertise include environmental law, securities law, public finance and
municipal contracts. He is a graduate of Dartmouth College and Vanderbilt
Law School.
Mr. Steven A. Lytle, in October 1996, was named Executive Vice President
and Chief Operating Officer of a wholly-owned subsidiary, Continental
Technologies Corporation of Georgia, a Georgia corporation based in Atlanta.
He is directing the development of Continental's proposed solid waste
operations. Mr. Lytle, 43, has had 11 years experience in the solid waste
industry, including extensive involvement in developing and managing solid
waste facilities. Among other accomplishments, he designed and obtained the
permit for a 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 Continental in October, 1996, Mr. Lytle was a regional
executive with Sanifill, Inc. for Arkansas, Florida, Georgia, Kentucky, Ohio,
Pennsylvania, and Puerto Rico, with responsibilities ranging from landfill
design, engineering, permitting operations, and compliance to economic
evaluation of potential acquisitions. He was with Browning-Ferris Industries
("BFI") from 1985 to 1994 in positions of ever-increasing responsibility. Mr.
Lytle holds a degree in Civil Engineering from the University of Cincinnati.
Mr. Kenneth L. Kelly, in February 1998, was named Director of Business
Development and Acquisitions of the Company. Mr. Kelly, 45, came to
Continental from Eastern Environmental Services, Inc. where he served as
Corporation Acquisitions Director. Prior to joining Eastern, he was Business
Development Manager-Atlantic Region for Sanifill, Inc. (1995- 1996),
Corporation Acquisition Director and Market Development Manager for Republic
Waste Industries (1991-1995) and Business Development Manager-East South
Central Region for Waste Management, Inc. (1983-1991).
ITEM 10. EXECUTIVE COMPENSATION.
- ---------------------------------
The following table sets forth the compensation earned by the Company's
Chief Executive Officer during fiscal years ended September 30, 1995 and 1996,
during the short-year ended December 31, 1996, and during the fiscal year
-25-
<PAGE>
ended December 31, 1997. No other executive officer received compensation in
excess of $100,000 during any of those periods.
<TABLE>
<CAPTION>
Summary Compensation Table
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Annual Compensation Long-Term Compensation
---------------------------- -----------------------------
Awards Payouts
Other -------------------- -------
Annual Restricted Options/ All Other
Name and Compen- Stock SARs LTIP Compen-
Principal Position Year Salary Bonus sation Awards (Shares) Payouts sation
- -------------------- ------ ------ ----- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Dale Sterritt, Jr. 1997 - - $240,000 - - - -
Chairman of the Board 1996 (1) - - $ 54,750 - - - -
and Chief Executive 1996 (2) - - $234,750 - - - -
Officer 1995 - - $161,575 - - - -
<FN>
(1) Short year October 1 through December 31, 1996
(2) Fiscal year October 1, 1995 through September 30, 1996.
</FN>
</TABLE>
The Company does not have any employment agreements with any of the
executive officers of the parent company. Beginning January 1, 1997, Mr. R.
Dale Sterritt, Jr., Chairman and CEO, began employment with the Company at
an annual salary of $240,000.
Prior to 1997, the compensation paid to executive officers and directors
of the parent company was for services rendered to the Company on a per-diem
basis at rates prescribed by the Board: $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; however, all such fees were waived during fiscal
years 1997 and 1996 and the short year ended December 31, 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 May 28, 1998, certain information with respect to (i) beneficial owners of
more than five percent (5%) of the outstanding Common Stock, (ii) beneficial
-26-
<PAGE>
ownership of shares of the Company's Common Stock by each director, and (iii)
beneficial ownership of shares of the Company's Common Stock by all officers
and directors as a group.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
- ---------------------------------- ----------------------- ----------
Martin G. Blahitka 10,000 (4)
c/o Continental Investment Corp.
10254 Miller Road
Dallas, TX 75238
Robert D. Luna - -
c/o Continental Investment Corp.
10254 Miller Road
Dallas, TX 75238
J. B. Morris 170,699 1.4%
c/o Continental Investment Corp.
10254 Miller Road
Dallas, TX 75238
Stewart Rahr 1,765,553 (3) 14.2%
152-35 10th Avenue
Whitestone, NY 11357
R. Dale Sterritt, Jr. - -
c/o Continental Investment Corp.
10254 Miller Road
Dallas, TX 75238
Sterritt Properties, Inc. (1) 5,750,444 46.2%
P. O. Box 452648
Garland, TX 75045
Business Ventures, Inc. (2) 1,600,000 12.8%
50 Lincolns Inn Fields, 3rd Floor
London, WC 2A 3PF England
- --------------------------
All Officers and Directors 180,699 1.4%
as a Group (5 persons)
- --------------------------
(1) Sterritt Properties, Inc. is owned 100% by a Family Limited Partnership.
Richard D. Sterritt, Sr., the President of Sterritt Properties, Inc., is
the father of the Chairman, President and CEO, R. Dale Sterritt, Jr.
(2) The beneficial ownership of these shares is contested. The Company does
not take a position as to the true beneficial ownership of such shares,
but has indicated the name at the time of issue for the purpose of this
disclosure item.
(3) Does not include options to acquire 600,000 shares of CICG common stock.
Also does not include 200,000 shares owned by members of his immediate
family, to which Mr. Rahr disclaims beneficial ownership.
(4) Less than 1%.
-27-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The Company received $61,972 in management fee revenue from a company
owned partially by the Chairman of the Board of the Company.
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 7 of this report - Financial Statements.
2. Financial statement schedules.
There are no financial statement schedules required to be filed.
3. Exhibits.
Exhibit
Number Exhibit Index
------- ---------------------------------------------------------
3.1 - Certified copy of the Company's Articles of
Incorporation and amendments thereto. 1/
3.2 - Amended and Restated Bylaws of the Company, as of
August 8, 1989. 1/
3.3 - Amendment to the Company's Articles of Incorporation
dated March 24, 1994. 2/
21 * - List of the Company's Subsidiaries.
______________________________
* Filed herewith.
1/ - Incorporated by reference to the exhibit with the same
description to the Company's Current Report on Form 8-K
filed on August 11, 1989.
2/ - Incorporated by reference to the exhibit with the same
description to the Company's Current Report on Form 8-K
dated as of January 5, 1994.
(b) Reports on Form 8-K.
1. Report dated October 1, 1997. This Report contained an Item 5 event
(certain changes in the September 30, 1996 Balance Sheet and
Statement of Operations).
-28-
<PAGE>
Exhibit 21
- ----------
As of May 28, 1998, 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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL INVESTMENT CORPORATION
By: /S/ R. Dale Sterritt, Jr.
----------------------------------
R. Dale Sterritt, Jr., Chairman,
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ G. Michael Lawshe
---------------------------------
G. Michael Lawshe
Principal Financial and Accounting Officer
Dated: June 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME DATE
/S/ R. Dale Sterritt, Jr. June 24, 1998
- ----------------------------------
R. Dale Sterritt, Jr., Chairman,
President and Chief Executive
Officer (Principal Executive
Officer)
/S/Robert D. Luna June 24, 1998
- ----------------------------------
Robert D. Luna, Director and
Secretary
/S/Martin G. Blahitka June 24, 1998
- ----------------------------------
Martin G. Blahitka, Director
/S/ J. B. Morris June 24, 1998
- ----------------------------------
J. B. Morris, Director
-29-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 217,383
<SECURITIES> 1,484,097
<RECEIVABLES> 785,155
<ALLOWANCES> 17,011
<INVENTORY> 59,423
<CURRENT-ASSETS> 2,702,653
<PP&E> 18,019,975
<DEPRECIATION> 388,317
<TOTAL-ASSETS> 26,802,628
<CURRENT-LIABILITIES> 1,162,146
<BONDS> 0
0
0
<COMMON> 3,309,528
<OTHER-SE> 20,429,412
<TOTAL-LIABILITY-AND-EQUITY> 26,802,628
<SALES> 2,280,317
<TOTAL-REVENUES> 2,280,317
<CGS> 1,108,675
<TOTAL-COSTS> 3,428,003
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (135,347)
<INCOME-PRETAX> (1,012,339)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,012,339)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,012,339)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
