U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20519
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the year ended December 31, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number 0-17594
USA BIOMASS CORPORATION
(Name of small business issuer in its charter)
DELAWARE 33-032959
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7314 Scout Avenue
Bell Gardens, California 90201
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (including area code): 562-928-9900
Securities registered under Section 12(g) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.002 par value per share
Title of Class
Check whether the issuer: (1) filed all reports required to be filed by 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that 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 is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statement to this Form 10-KSB. [_]
The registrant's revenues from continuing operations for its most recent fiscal
year were $7,644,907.
Based on the average of bid and asked prices on March 31, 2000, the
aggregate market value of common stock held by non-affiliates of the registrant
on March 31, 2000 was approximately $36,223,252.
The number of shares outstanding of the registrant's only class of Common
Stock, $0.002 par value per share, was 9,347,936 on March 31, 2000.
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Part I
ITEM 1. DESCRIPTION OF BUSINESS.
HISTORICAL SUMMARY
USA Biomass Corporation, formerly AMCOR Capital Corporation (the
"Company"), was incorporated in Delaware on March 10, 1988. The Company's
consolidated operations, as of December 31, 1999, include its wholly owned
subsidiaries, USA Waste Transport Inc., USA Biomass-Greenwaste, Inc.,
TransPacific Environmental, Inc. ("TPE") and AMCOR Biomass Farms, LLC (99%
owned), all of which are continuing operations. Discontinued Operations include
Sun Goddess Farms, Inc., AMCOR Properties, Inc., and Las Palomas Country Club
Estates LLC, (99% owned).
DESCRIPTION OF BUSINESS
The Company's operations at December 31, 1999 included: (i) "clean green"
waste processing and recycling ("biomass") and (ii) contract waste transport
services. During 1997, the Company's focus shifted from agribusiness and land
planning/development to biomass. Subsequently, in June 1998, the Company
broadened its new focus to include solid waste transportation and developed a
strategic alliance with Waste Management, Inc., formerly USA Waste Services
("Waste Management").
During the second half of 1998, in light of the Company's strategic
alliance with Waste Management and related existing and potential biomass and
solid waste transportation opportunities, the Company's Board of Directors
determined that the Company's shift in focus from agribusiness and land
planning/development to solid waste transportation and biomass should be
complete and permanent. Consequently, the Board of Directors approved the
Company's name change effective August 31, 1998 and subsequently, on December
22, 1998, adopted a Plan of Discontinued Operations (the "Plan") pursuant to
which the Company will discontinue its agribusiness and land
planning/development operations and will focus on its solid waste transportation
and biomass operations. In addition, on January 12, 1999, the Board of Directors
approved a change in the Company's fiscal year end to December 31.
Implementation of the Plan has had a material impact on the presentation of
the Company's financial statements. All business activity, cash flows and net
assets of these operations for the year ended August 31, 1998, the four month
period ended December 31, 1998, and the year ended December 31, 1999 have been
classified as discontinued operations, and the assets of these operations have
been reduced to the lower of cost or net realizable value.
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SOLID WASTE TRANSPORTATION
The Company entered into two transportation service contracts with Waste
Management in June 1998. Under the contracts, the Company has the exclusive
right to provide transportation services from two of Waste Management's Los
Angeles-area transfer stations to certain landfills. The Company began providing
transportation services in October 1998. The contracts have initial terms of
five years, with two automatic five-year extensions unless either party gives
180 days' prior written notice of its desire to terminate the contracts at the
end of the then current term. A third contract was agreed to with Waste
Management in December 1999, with terms similar to the other two contracts.
BIOMASS/RECYCLING
"Clean green" waste is organic material in the form of plants, leaves,
clippings, cuttings, trimmings of grass, weeds, shrubbery, bushes, trees, garden
wastes and wood products from both commercial and residential sources, including
sawdust, tree trunks, scrap lumber and untreated wooden pallets. The material
received as clean green waste cannot contain more than 0.5% non-organic matter
by total weight.
The Company's clean green waste operations have been and most likely will
continue to be influenced significantly by the implementation of the California
Integrated Waste Management Act of 1989 (Assembly Bill 939 ("AB 939"). The
provisions of AB 939 mandate, among other things, the diversion of recyclable
materials from over-crowded landfills. A key element of AB 939 relates to green
waste that could be processed and incorporated back into the soil or recycled in
other ways. AB 939 currently mandates that California's municipalities must have
a plan in place to divert 50% of all waste from landfills by the end of the year
2000.
The Company is engaged in private green waste recycling and holds leasehold
interests in a transfer station facility located in Santa Fe Springs, California
and a 3-acre site in Fontana, California that is fully permitted for green waste
processing. The Company receives green waste at its transfer stations from
various sources including Waste Management. The Company processes and markets
the green waste to various users, thereby assisting Waste Management and others
in fulfilling their recycling obligations under AB 939.
In November 1998, the Company commenced hauling green waste for the County
of Los Angeles Sanitation District in connection with the County's diversion of
processed material from its Puente Hills landfill. The initial contract is for a
term of three years plus an option for three additional years and specifies that
the Company will divert the first 100 tons per day (500 tons per week) of excess
ground or processed green
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waste from the landfill. Pursuant to this contract, the Company has been
informally presented with the opportunity to divert more than the minimum of 100
tons per day, which opportunity the Company intends to pursue as sufficient
outlet markets are identified.
The Company receives and processes green waste from numerous Southern
California municipalities and commercial parties. It also is a party to an
operating agreement with Apollo Wood Recovery, Inc., to process wood for boiler
fuel (electricity generation) and fiberboard at the Company's site in Fontana,
California. The Company is exploring the acquisition of a company engaged in the
composting of organic fertilizer.
In March 2000, the Company acquired American Waste Transport, (AWT), a
private San Diego County-based waste transport and green waste recycling firm.
AWT has operations that mirror the Company's in San Diego County, with some
overlap in Los Angeles and Orange counties. AWT's revenues for the year ended
December 31, 1999, approximate $14 million.
Presently, there appears to be an abundant supply of green waste available
due primarily to the large volume produced in Southern California and the
implementation of AB 939. The Company believes there is a good economic
incentive to take all of the green waste that is offered, particularly as
landfill "tipping fees" ranging from $16 to over $27 per ton tend to establish
the market. The challenge is to identify and secure end-markets for the incoming
green waste, which historically have included fertilizer production facilities,
boiler fuel (for electricity generation) and fiberboard production facilities.
The Company owns 710-acres of undeveloped land located in the Coachella
Valley, which we plan to use as a land-application/biomass depository for our
continuing green waste operations.
DISCONTINUED OPERATIONS - AGRIBUSINESS
Historically, we engaged primarily in agribusiness, principally growing,
processing and marketing fresh table grapes in Southern California's Coachella
Valley. We also received management and/or development fees and income from
packing and cold storage services that we provided for some of our affiliated
partnerships and third parties. We leased an 80,000-square foot packing and cold
storage plant, which we previously used as our headquarters in the Coachella
Valley.
Although we were one of the largest producers and shippers of "early
market" table grapes that are harvested from early May through June and
typically command premium prices, increased competition from Mexico, which has a
microclimate similar to the
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Coachella Valley, had created supply/price uncertainty in the early table grape
market. Consequently, the Plan provided for the complete divestiture of the
Company's agribusiness operations, which was completed by December 31, 1999
except for the Company's investment in an Oregon farmland joint venture.
The Company's investment in the Columbia River Basin of eastern Oregon
includes a 50% ownership interest in a joint venture that owns a 6,000-acre
irrigated potato and grain farming operation, together with certain Columbia
River water rights. We are currently negotiating to sell our 50% interest in the
potato and grain farm to our joint venture partner, who operates that property
under a lease that would have terminated September 30, 1999, but which has been
extended for an additional five years.
DISCONTINUED OPERATIONS - LAND PLANNING/DEVELOPMENT
The Company traditionally was engaged primarily in agribusiness, with
additional revenues derived from partnership management, including real estate
development partnerships. Some of these partnerships owned land that was once
used for farming and ultimately became suitable for development. Other
partnerships were formed solely to acquire, plan and develop land.
During fiscal 1996, the Company began a major subdivision/golf course
project located southeast of San Antonio, Texas. The Company, under contract
with a partnership managed by the Company in 1997, completed development of a
golf course at the project. On behalf of the Partnership, the Company developed
and manages the 1,300-lot subdivision and golf course. In February 2000, the
golf course was sold through foreclosure.
Due to disappointing sales activity, the Plan contemplated the sale of the
entire project in a "bulk sale" transaction and, in that regard, the Company, in
early 1999, wrote down its cost of the project to estimated net realizable value
plus any costs incurred to carry the project through liquidation. This resulted
in a charge of $5,306,244 to its fiscal 1998 financial statements to reflect
this write-down. In March 1999, the Company entered into an agreement to sell
the project for $11.5 million. However, the buyer did not close the transaction.
In the fourth quarter of 1999, the Company transferred (including related
liabilities) its interest in the project to AMCOR Financial Corporation ("AFC"),
a then wholly owned subsidiary of the Company.
In January 2000, the Company distributed to its common and Series A
Preferred shareholder, all of its shares in AFC. The Company has disputes with
AFC regarding the nature and amount of assets and liabilities transferred to
AFC. Further, all of the regulatory requirements related to the distribution of
the AFC shares to the Company's shareholders may not have been satisfied.
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During the four months ended December 31, 1998, the year ended December 31,
1999, and the first quarter of 2000, the Company disposed of certain assets of
the discontinued operations at amounts less than initially anticipated. Further,
the current appraised value of certain of the remaining assets has declined from
the values used in estimating the disposal loss at August 31, 1998.
In 1999, the Company managed approximately 15 limited partnerships, down
from over 120 in 1991. The partnerships own two Southern California parcels
owned by one partnership, as well as a 173-acre property located outside Houston
owned jointly by two other partnerships. These partnerships are in the process
of terminating.
COMPETITION
The foundation of the Company's continuing solid waste transportation
activities is exclusive transport contracts with Waste Management, the largest
waste hauler in the country. The contracts include two transfer stations. The
first is located in Carson, California, with a permitted capacity of over 5,000
tons per day, and is reported to be one of the largest in the country. The other
transfer station is in South Gate. In December 1999 an additional contract was
negotiated for the transport of biomass from Waste Management's Sunset
Environmental transfer station in Orange County. Due to the exclusive nature of
these contracts and the five-year term and two five-year options to extend, the
Company does not expect to be confronted with any significant competition for
these three transfer stations for as long as 15 years, provided that the Company
satisfactorily discharges its contractual responsibilities. The Company intends
to bid on future solid waste transportation contracts for Waste Management and
other waste companies as they become available, which could provide the Company
with significant growth opportunities in the future.
In the large Southern California market, there are three principal
providers of contract waste transport services -- STS Transportation, American
Waste Transport, and USA Biomass Corporation. In March 2000, American Waste
Transport ("AWT"), with annual revenues of $14 million, was acquired by USA
Biomass. AWT has major contracts with Waste Management, Republic Services and
Allied Waste, as well as extensive green waste operations. Combined, the two
companies have a contractual backlog exceeding $350 million. Revenues for 2000
are expected to be $25 million, and will provide the Company with the dominant
share of this market.
The Company's clean green waste operations provide alternatives to landfill
disposal and are part of the non-hazardous waste recycling industry. The Company
believes that successful entry into the green waste industry, on a volume basis,
requires that the Company identifies and contracts with multiple end-users for
the recycled
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product. The industry is dominated by several large national waste management
companies and numerous regional and local companies, all of which contribute to
the significant, somewhat fragmented, competition that characterizes the
industry, many having much greater financial and operational resources, and more
established market positions, than the Company. The Company believes that its
recent strategic alliance with Waste Management, and its expanded market share
gained with the AWT acquisition, will help insulate the Company from external
competition and provide a reliable supply of biomass to support the Company's
green waste operations.
There has been an increasing trend at the state and local levels to mandate
solid waste reduction at the source and to prohibit the disposal of certain
types of wastes at landfills, as evidenced by legislation such as AB 939. The
Company believes that as this trend continues, the Company will encounter
additional competition from new and existing waste industry participants. In
addition, the Company may compete with municipalities that maintain their own
waste collection and landfill operations and that have significant financial
advantages over the Company due to, among other things, the availability of tax
revenues and tax-exempt financing.
BUSINESS STRATEGY
The Company continues to manage and expand its solid waste transportation
and biomass businesses. The Company's present business strategy includes: (i)
expansion of its contractual relationships with Waste Management and other waste
haulers, and (ii) growth of its green waste processing and recycling business as
additional markets are generated, both internally and through acquisitions.
EMPLOYEES
As of December 31, 1999, the Company, together with its subsidiaries, had
108 full-time employees, including 10 in administration and 98 in biomass
operations. None of the Company's employees are represented by a labor union and
the Company has experienced no work stoppages. However, the Company is presently
in negotiations with a local of the Teamsters Union pursuant to an election to
organize held in April 1999. The Teamsters have a one-year contract with the
truck drivers of AWT, which was acquired in March 2000. The Company believes
that in spite of the historically low unemployment rate in Southern California,
there is an adequate supply of the type of labor needed to staff the Company's
expanding solid waste transportation and biomass operations.
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ITEM 2. DESCRIPTION OF PROPERTY
On December 31, 1998, the Company acquired a 4-acre industrial parcel
located in Bell Gardens, California, which includes a 40,000 square-foot
equipment maintenance facility and a separate 2,400 square-foot office building
used as the base for the Company's transportation operations. During 1999, the
Company officially relocated its headquarters to the Bell Gardens facility. Its
address is 7314 Scout Avenue, Bell Gardens, CA 90201.
The Company's biomass operations are based in two locations, the first
being a 1.75-acre site in Santa Fe Springs, California, which we lease for
$54,000 annually. This site also serves as a green waste transfer station
pursuant to a Conditional Use Permit from the City of Santa Fe Springs. The
second location is a fully permitted green waste transfer and processing
facility on a 3-acre site in Fontana, California, which we lease for $42,000
annually.
ITEM 3. LEGAL PROCEEDINGS
In December 1997, a judgment was entered against the Company and two of its
officers, who are also shareholders. The Company has filed an appeal of this
judgment.
On April 5, 2000, a bank filed a lawsuit against the Company related to a
deficiency pertaining to real property the bank foreclosed on in Texas. The
Company intends to vigorously defend against this lawsuit and believes that it
has recorded its liability related thereto on its financial statements. The
Company does not expect that this matter will have a material adverse effect on
the Company's financial condition or results of operations.
The Company is not involved in any other pending legal proceedings other
than legal proceedings occurring in the ordinary course of business. Such other
legal proceedings in the aggregate are believed by management to be immaterial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has traded in the over-the-counter market since
1989 and is currently trading on the NASDAQ SmallCap Market. Set forth below are
the high and low bid prices of the Common Stock during each quarter of calendar
1998 and 1999, as reported by a member firm of the National Association of
Securities Dealers, Inc. that affects transactions in NASDAQ SmallCap Market
stocks and acts as one of the market makers for the Company's Common Stock. The
quotations listed below reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not represent actual transactions.
Stock Prices
-------------------------------
High Low
------ -----
FISCAL 1998
First Quarter $ 5.375 $ 4.1875
Second Quarter 5.313 4.125
Third Quarter 5.187 4.125
Fourth Quarter 4.938 2.378
FISCAL 1999
First Quarter $ 2.875 $ 1.438
Second Quarter 2.375 1.375
Third Quarter 2.00 1.189
Fourth Quarter 4.50 1.125
- -------------------------------------------------------------------------------
At March 31, 2000, there were approximately 3,280 stockholders of record of
the Company's Common Stock. The Company has paid no dividends on its Common
Stock and does not expect to pay dividends in the foreseeable future.
In January 1998, the Company issued an aggregate of 31,250 shares of Common
Stock in exchange for $62,000 upon the exercise of options issued under the
Company's 1994 Non-Qualified Stock Option Plan.
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In January 1998, the Company issued 3,938 shares of Common Stock in
exchange for the cancellation of a 5% note payable to a non-affiliate in the
principal amount of $15,816.88.
In December 1998, the Company issued an aggregate of 11,507 shares of
Common Stock to two non-affiliated holders of 12% notes in lieu of an interest
payment of $55,376.71.
In January 1999, the Company issued 22,151 shares of Common Stock in
payment of interest to two holders of 12% notes.
In November 1999, the Company issued 149,407 shares of Common Stock in
exchange for the cancellation of a $410,869, 8% note payable to an employee.
In November 1999, the Company issued 290,799 shares of Common Stock in
exchange for the cancellation of 12% notes aggregating $954,234 to various
private parties.
In November 1999, the Company issued 89,170 shares of Common Stock in
exchange for the cancellation of two 5% notes aggregating $267,461 to two
private parties.
In November 1999, the Company issued 422,883 shares pursuant to Options
outstanding to two officers in exchange for the offset of $676,613 of notes owed
to the Officers by the Company.
In December 1999, the Company issued 12,000 shares to a creditor in
exchange for the cancellation of $41,297 owed by the Company.
In December 1999, the Company issued 100,000 shares pursuant to Options
held by an employee in the amount of $200,000.
In December 1999, the Company issued 50,000 shares pursuant to Options held
by a former employee in consideration for $65,000, in the form of a note
receivable.
In December 1999, the Company issued 12,500 shares to two consultants
pursuant to Options for a total consideration of $37,500 in the form of a note
receivable.
In December 1999, the Company exchanged 591,625 shares of Common Stock for
394,414 shares of its Series B Preferred Stock valued at $3,944,140.
The issuances of the Company's Common Stock in the above referenced transactions
were affected in reliance upon the exemption from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"), as
transactions not involving
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a public offering. Exemption from the registration provisions of the Securities
Act is claimed on the basis that such transactions did not involve any public
offering and the purchasers were sophisticated with access to the kind of
information registration would provide.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In 1997, the Company entered the biomass business, and in 1998 entered into
a strategic alliance with Waste Management resulting in a long-term contractual
relationship for the transport of solid waste. Prior to 1999, as described
above, the Company was engaged in agribusiness and real estate/land planning and
development. In December 1998, the Company's Board of Directors approved the
Plan authorizing the liquidation of all agribusiness and real estate operations.
Implementation of the Plan, particularly for years 1998 and 1999, has had a
material impact on the presentation of the Company's financial statements.
FISCAL YEAR CHANGE
Prior to the year-ended December 31, 1999, the Company's financial
statements were prepared on the basis of an August 31 fiscal year. In January
1998 the Company elected to convert to a December 31 calendar year for reporting
purposes and, in accordance therewith, filed a 10-QSB "Transition Report" for
the four months ended December 31, 1998. Accordingly, the amounts reflected in
the Company's current Consolidated Statements of Operations are for the years
ended December 31, 1999 and August 31, 1998 and for the four months ended
December 31, 1998. Therefore, for purposes of comparing the respective 12-month
periods for December 31 1998 and 1999, the 1998 numbers have been presented on a
pro-forma basis. As the Company's biomass operations were relatively
insignificant prior to December 31, 1998, the following pro-forma analysis, in
the opinion of management, presents a realistic comparison of the two twelve
month periods.
CONTINUING OPERATIONS
In October 1998, the Company officially commenced waste transport services
for Waste Management. Pro forma revenues for 1998, which included green waste
recycling and tree maintenance revenues for the entire year, were $3.6 million.
Revenues for 1999, which included just one calendar quarter of tree maintenance
revenues as this business was sold in March, 1999, were $7.6 million--up 112%,
but still below the Company's estimated $10 million break-even level. The
Company did have a positive 1999 gross margin of 12.3%, although a loss in the
amount of $1,735,000 was incurred (compared to a loss of
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$7,114,000 the prior year) due primarily to a $637,000 loss from TransPacific
Environmental's tree maintenance operations (which were sold in the first
quarter), and carry-over administrative and interest costs (aggregating
$2,319,000), partially to support of the phase-out of discontinued operations.
In addition, continuing operations incurred significant start-up costs to
develop the infrastructure for a fast growth biomass business. This included a
substantial investment in plant, personnel and equipment to support the future
anticipated revenue stream.
With additional contracts in place, the Company forecasts year 2000
revenues to increase substantially. This will be augmented by the March 2000,
acquisition of San Diego County-based American Waste Transport, with annual
revenues approximating $14 million. This acquisition, which also has contract
waste transport services, as well as extensive green waste recycling operations,
should result in combined revenues of $25 million for 2000. Management believes
that a minimum 12% gross margin level can be maintained, which would generate
adequate proceeds to carry administrative and interest costs. The present
contractual backlog, which includes contracts/renewals with terms in excess of
10 years, exceeds $350 million.
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Pro Forma Statement of Operations
For the Year Ended December 31, 1998
Amounts in Thousands
-----------------------------
Add Less For Year Ended December 31
Year Ended 4 Mos.End 4 Mos.End --------------------------
08/31/98 12/31/98 12/31/97 1998 1999
Audited (Unaudited)(Unaudited) (ProForma) Audited
------- ------- ------- --------- -------
Revenues $ 2,005 $ 2,025 $ 406 $ 3,624 $ 7,645
Cost of Revenues 2,665 1,694 634 3,725 6,705
------- ------- ------- ------- -------
Gross Profit (Loss) (660) 331 (228) (101) 940
------- ------- ------- ------- -------
Gen'l & Admin. Exp. 3,228 1,156 678 3,706 1,496
Loss from Asset
Impairment 1,971 -- -- 1,971 141
Loss on Sale of
Assets 366 4 -- 370 215
Interest Exp.
(Income), net 662 390 86 966 823
------- ------- ------- ------- -------
Loss, Continuing
Operations ($6,887) $(1,219) $ (992) $(7,114) $(1,735)
======= ======= ======= ======= =======
For both 1998 and 1999, the Company's continuing operations consist of
solid waste transport and biomass operations, which include green waste
recycling. The Company sold its unprofitable municipal tree maintenance
operations in March 1999. The Company's discontinued operations consist of
agribusiness and land planning/development. A discussion of the material factors
that affected the Company's results of continuing operations and, where
applicable, the results of its discontinued operations, are presented separately
below.
RESULTS OF CONTINUING OPERATIONS
REVENUES
The Company's revenues from continuing operations for 1999 include both
biomass recycling and waste transport revenues whereas revenues for 1998 reflect
mostly biomass recycling activities, as the initial waste transport contract did
not commence until October 1998. The Company generated revenues of $7,645,000
for 1999 compared to $3,624,000 for 1998, an increase of $4,021,000 or 111%. The
increase is principally due to a full year of waste transport revenues in 1999,
which totaled $5,561,000, compared to
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only three months in 1998, which totaled $894,000. Other revenues for 1999
totaled $2,084,000 of which $363,000 pertained to municipal tree maintenance
operations, which were sold during the first quarter of 1999.
COST OF REVENUES
Costs of Revenues for 1999 were $6,705,000 compared to $3,725,000 for 1998,
an increase of $2,980,000 or 80%. The increase is principally related to the
111% increase in revenues in 1999. This is partially offset by a 1998 cost of
$797,000 related to green waste soil enhancement activities that were terminated
that year and by operating costs associated with a full year's tree maintenance
operations in 1998. Overall, this resulted in a gross profit from operations in
1999 of $940,000, for an operating margin of 12.3%. This compares to an
operating loss of $101,000 for the prior year. The improved margin is the result
of significantly higher waste transport volume, reduced losses from tree
maintenance operations (which were sold in early, 1999) and the elimination of
soil enhancement activities.
Gross margin on waste transport activities was $853,000 (15.4% of waste
transport revenues) in 1999, and $236,000 (14% of gross greenwaste revenues,
exclusive of municipal tree trimming activities) in 1999. Tree trimming
contracts resulted in a negative gross margin of $146,000 (40% of tree trimming
revenue) in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1,496,000 for 1999 compared to
$3,706,000 for the prior year, a decrease of $2,210,000 or 60%. The significant
decrease is primarily due to the expected cost and related overhead reduction
pertaining to the phasing out of the Company's discontinued agricultural and
real estate operations. In addition, the prior year included $672,000 of
administrative costs related to TPE, which was sold early in 1999, $360,000 of
corporate restructuring consulting fees, and $188,000 related to the cost
associated with options granted to members of the Company's Board of Directors.
INTEREST EXPENSE, NET OF INTEREST INCOME
For 1999, interest expense, net of interest income, was $823,000, compared
to $966,000 for 1998, a decrease of $143,000 or 15%, due largely to the pay down
of debt from asset sales.
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LOSS FROM ASSET IMPAIRMENT
In 1998 the Company incurred a $1,971,000 loss from asset impairment
related to a green waste contract that did not materialize and soil enhancement
operations that were suspended. Such losses for 1999 were only $141,000 as the
substantial portion of the loss was incurred the prior year.
GAIN OR LOSS ON SALE OF ASSETS:
For 1999, the Company realized a net loss of $215,000 on the sale of assets
compared to a net loss of $370,000 in 1998. The higher prior year's loss related
primarily to the liquidation of assets, related to the Company's initial green
waste pilot program.
LOSS FROM CONTINUING OPERATIONS:
For 1999, the Company incurred a net loss of $1,735,000 from continuing
operations compared to a loss of $7,114,000 for the prior year. The material
disparity between the two years is principally that 1998 was a start-up year for
biomass operations and included a full year loss from tree maintenance
activities, which were disposed of in early 1999. Concerning the 1999 loss,
$637,000 was attributable to TPE's tree maintenance operations, which were sold
early in 1999. Additional administrative costs were incurred in relocating the
Company's headquarters. Interest costs will also decrease as the Company has
reduced its debt by 42%. As volume increases for 2000 and future years, based on
the Company's expanding contractual backlog, the Company is expected to operate
profitably.
RESULTS OF DISCONTINUED OPERATIONS
The Plan adopted by the Board of Directors specified a one-year time frame
for management to dispose of all non-biomass operations, which were reclassified
for financial statement purposes, as discontinued operations. As of December 31,
1999, over $12 million of assets were sold, with a $2.5 million agricultural
property scheduled for sale by mid-year 2000. Any remaining assets not sold by
December 31, 1999 (principally a San Antonio subdivision that was under contract
to sell in 1999 for $11.5 million, but the sale aborted) were revalued and
written down to fair market value, resulting in an additional 1999 loss from
discontinued operations. These assets (and related liabilities) were then
transferred to AMCOR Financial Corporation ("AFC") a then wholly owned
subsidiary. AFC has separate management from the Company, and the Company has no
management or control over AFC. In January 2000, the Company distributed to its
common and preferred shareholders all of its AFC common shares. The Company has
disputes with AFC regarding the nature and amount of assets and liabilities
transferred to AFC. Further, all of the regulatory requirements related to the
distribution of the AFC shares to the Company's shareholders may not have been
satisfied.
15
<PAGE>
For years 1998 and 1999, implementation of the Plan has had a material
impact on the presentation of the Company's financial statements. This is
because operations, cash flows and net assets of these operations for both years
have been reclassified as discontinued operations, and consequently the assets
for these operations were reduced to the lower of cost or net realizable value,
resulting in significant charges to earnings. Accordingly, the Company's
agribusiness and real estate operations have been accounted for as discontinued
operations and the results thereof have been excluded from continuing operations
in the Company's consolidated financial statements. For fiscal 1998, which had
limited biomass start-up revenues, this resulted in a loss of $15,786,000 of
which $9,947,000 pertained to discontinued operations, principally due to the
write-down of real estate and related assets. For 1999, which was the first full
year of biomass operations, the net loss was $9,186,746 of which $7,452,029
pertained to discontinued operations, principally related the write-down of the
San Antonio project.
LIQUIDITY AND CAPITAL RESOURCES
The Company's overall financial condition as of December 31, 1999, as
compared to the prior year has not changed significantly, principally due to the
Company's inability to liquidate all of its discontinued operations. However,
some assets were sold, which served to reduce total debt from $19.7 million at
December 31, 1998 to $11.4 million at the end of 1999. This $8.3 million debt
reduction (42%) is expected to yield significant annual interest savings for the
year 2000 and beyond. In addition, 1999 revenues from expanding biomass
operations increased 111% over the prior year but, at $7.6 million, are below
the projected $10 million threshold required to break even. Although the Company
reported a loss of $1,735,000 for the year from continuing operations, due
largely to the development of the new biomass business, it had a gross operating
margin of 12.3%, which included losses from TPE, which diluted the target 15%
margin from biomass operations. Revenue growth for the year 2000 was
significantly enhanced in March, when the Company completed the acquisition of
American Waste Transport which, when consolidated with the Company, should
generate $25 million of revenues for 2000--an increase of 227% over 1999, and
with a gross margin expected to exceed 12%, should generate adequate funds for
operations. Moreover, the Company now has a contractual backlog in place of more
than $350 million with terms generally exceeding 10 years or longer, ensuring
consistent revenue for future periods. Also, in March 2000 the Company
successfully completed a $3 million private placement of 6% convertible
preferred stock. This capital will be largely used for acquisitions and for
capital equipment needs to service the Company's expanding contractual base.
The Company's current ratio was .66 at December 31, 1999 compared to 1.11
the prior year, primarily due to the write off of assets of discontinued
operations, which were
16
<PAGE>
classified as current, pending the anticipated sale thereof. This ratio
significantly improved in the first quarter 2000 as a result of the private
placement of preferred stock, which provided $3 million of working capital.
Moreover, liquidity is expected to continue to improve during 2000 as a result
of (i) the intense management of cash flow; (ii) the Company has adequate lines
of credit in place and has plans to moderately expand both senior and
subordinated debt to fund working capital related to the Company's large
contract backlog; (iii) during 2000 the Company expects to liquidate its $2.5
million agricultural property investment, (iv) the Company has tax-loss
carry-forwards exceeding $22 million which can be applied to shelter future
earnings thereby enhancing cash flow, and (v) the Company intends to, where
appropriate, make acquisitions using its common stock for the generation of
earnings and cash flow. It is for the foregoing reasons that the Company
believes that its liquidity needs for the year 2000 will be sufficiently
satisfied. Moreover, with its discontinued operations now partially liquidated,
the Company has strategically positioned itself to profitably capitalize on the
numerous opportunities now available in the biomass industry.
YEAR 2000 COMPLIANCE
To date management of the Company believes that its software packages
currently in use are Year 2000 compliant. Management does not expect that the
financial impact of required modifications to such software, if any, will be
material to the Company's financial position, cash flows or results of
operations in any given year.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report, including those under
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and especially those contained under
"Liquidity and Capital Resources" and "Looking Ahead," are "forward-looking
statements" that involve risks and uncertainties. The actual future results of
the Company could differ materially from those statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this Annual Report on Form 10-KSB, risks associated with managing
the Company's growth and those factors discussed in "Risk Factors" described
below in this Item 6 of this Annual Report on Forma 10-KSB. While the Company
believes that these statements are accurate, the Company's business is dependent
upon general economic conditions and various conditions specific to the clean
green waste and solid waste transportation industries. Future trends and results
cannot be predicted with certainty. In particular:
- In 1998 the Company has elected to embark on a major departure from
its historic business into the biomass and solid waste transportation
businesses
17
<PAGE>
in which the Company has relatively little experience. Such a
transformation has many risks and uncertainties that could far
outweigh the benefits of its strategic alliance with Waste Management.
And, notwithstanding the attractiveness of its long-term transport
contracts with Waste Management, the Company's success will ultimately
depend heavily on the ability of management to guide the Company in
executing and performing the contracts with Waste Management and
others. Despite the Company's apparent initial success under its
contracts, the future remains uncertain.
- The Company has also committed part of its future to expansion of its
green waste operations. The future of this industry will be partially
dictated by AB 939, which mandates the diversion from landfills of 50%
of the waste stream. At the present time, municipalities and waste
haulers seem eager to comply and willing to pay fees to those
processors willing to take the material. However, if the Company
expands its green waste operations without locating reliable, adequate
end-market users, major green waste disposal problems could result.
- The Company's future liquidity and viability is still somewhat
dependent upon a relatively rapid and orderly execution of the Plan.
This may include funding the periodic cash requirements of certain
liabilities related to discontinued operations. Therefore, should the
Company fail to discharge its liquidation plan in an expedient
fashion, this could severely impair the Company's liquidity.
The Company has not experienced a material adverse impact of such risks and
uncertainties and does not anticipate such an impact. However, no assurance can
be given that such risks and uncertainties will not affect the Company's future
results of operations or its financial position.
RISK FACTORS
OPERATING LOSS; ACCUMULATED DEFICIT
In connection with the implementation of the Plan, the Company's
agribusiness and land planning/development operations have been accounted for as
discontinued operations and the results thereof, for 1998 and 1999, have been
excluded from continuing operations. This resulted in classifying most revenues
for 1998 as discontinued operations, as most of the Company's revenues prior
then were derived from now discontinued operations. In 1999 the Company incurred
an after-tax loss of $9,186,746 from all operations as compared to an after-tax
loss of $15,786,00 for fiscal 1998. As
18
<PAGE>
of December 31, 1999, the Company had an accumulated deficit of $24,781,849.
Although the Company expects to generate working capital from its continuing
biomass and transportation operations and divestiture of the Company's remaining
agricultural investment, the Company has shifted its focus to biomass activities
with which it has relatively little experience, and there can be no assurance
the Company will have profitable operations in the future.
19
<PAGE>
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS; COMPETITION
The Company's quarterly results have varied significantly in the past,
although and it is likely that this variability will not be as severe in the
future due to the existence if long-term solid waste transport contracts, and
the state of California law ("AB 939") mandating recycling. Many factors remain
beyond the Company's control, including: the impact of potential increased
competition with respect to the Company's biomass activities by municipalities
that maintain their own waste collection and landfill operations and have
significant financial advantages over the Company due to, among other things,
the availability of tax revenues and tax-exempt financing; the implementation
and enforcement of and compliance with legislation such as AB 939; the price and
availability of fuel and other resources needed for the Company's solid waste
transportation and biomass activities; the financial health of the Company's
customers; and economic conditions generally. The ability of the Company to
successfully obtain new biomass and transportation contracts and the volume of
the stream of biomass available to the Company for transport or recycling under
existing contracts during a quarter are difficult to forecast. Such fluctuations
may also contribute to volatility in the market price for the Common Stock of
the Company.
CUSTOMER CONCENTRATION
The Company derives a significant portion of its revenues from a relatively
limited number of customers. The foundation of the Company's initial solid waste
transportation activities was an exclusive transport contract with Waste
Management. Initially, this one customer accounted for over 80% of revenues from
continuing operations. With the acquisition of American Waste Transport in March
2000, this customer concentration is expected to fall to less than 60%, and
decline further during the year as additional new accounts are obtained.
However, there can be no assurance that the Company will be successful in
obtaining additional transportation and biomass contracts. Further, the Company
anticipates that its contracts with Waste Management will continue to account
for a majority of its transportation revenues for the foreseeable future. The
loss of this customer or failure of Waste Management to continue to provide a
reliable stream of biomass for transport would likely have a material adverse
effect on the Company's business, operating results and financial condition.
NEED FOR SUBSTANTIAL ADDITIONAL CAPITAL
The Company's future capital requirements will depend upon many factors,
including the Company's ability to obtain new biomass and transportation
contracts and customers
20
<PAGE>
and rapid, orderly execution of the Plan. Capital will be necessary to fund the
periodic cash requirements. During the past year the sale of discontinued
operations have funded much of these cash requirements. There can be no
assurance that such future transactions will be sufficient or that financing
will be available on a timely basis, if at all, or on terms acceptable to the
Company. If adequate funds are not available, the Company's business strategy
could be impeded and the Company may be required to delay, scale back or
eliminate its efforts to expand its biomass and transportation activities.
Accordingly, the Company's business, financial condition and results of
operations could be materially and adversely affected. If additional funds are
raised by issuing equity or convertible debt securities, options or warrants,
dilution to the existing stockholders of the Company may result.
CHANGES IN WORK FORCE AND ACTIVITIES; DEPENDENCE UPON KEY PERSONEL
Late in 1998 the Company elected to embark on a major departure from its
historic business into the biomass and solid waste transportation businesses in
which the Company had relatively little experience. The Company's future success
depends to a large extent upon the continued service of certain key managerial
employees and the Company's ability to restructure its existing work force and
attract and retain highly qualified personnel in connection with the shift in
the Company's activities.
The Company believes that it has hired individuals with extensive
management and operational experience in the biomass and solid waste
transportation industries. The Company's ability to succeed in its continuing
operations will require it to continue to restructure its existing workforce,
hire and integrate new talent experienced in solid waste transportation and
biomass activities, and motivate and effectively manage all of its employees.
There can be no assurance that the Company will be able to attract, assimilate
or retain such personnel. If the Company is unable to successfully restructure
its existing work force and attract, manage and retain qualified personnel
experienced in the Company's continuing operations, the Company's business,
operating results and financial condition could be adversely affected.
ENVIRONMENTAL REGULATION
It may be necessary to expend considerable time, effort and money to keep
the Company's existing or acquired facilities and vehicles in compliance with
applicable federal, state and local requirements regulating health, safety,
environment, zoning and land use, and as to which there may not be adequate
insurance coverages or reserves. If environmental laws become more stringent,
the Company's environmental capital expenditures and costs for environmental
compliance may increase in the future. In addition, due to the possibility of
unanticipated factual or regulatory development, the
21
<PAGE>
amounts and timing of future environmental expenditures could vary substantially
from those currently anticipated.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its subsidiaries
are submitted as a separate section of this Annual Report on Form 10-KSB on
pages F-1 through F-38.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
22
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Fred H. Behrens 58 Chairman of the Board, Chief Executive
Officer and Director
Robert A. Wright 63 President, Chief Operating Officer and
Director
Eugene W. Tidgewell 50 Chief Financial Officer, Treasurer, Vice
President and Director
Michael J. Silva 37 Chief Development Officer and Director
Hilly G. Jones 50 Secretary
Marlene Tapie 44 Director
H. Glen Leason 75 Director
FRED H. BEHRENS has served as the Chairman, Chief Executive Officer, and a
director of the Company since 1988 and previously served as Treasurer and Chief
Financial Officer of the Company from 1990 to January 1998. Mr. Behrens also
served as the Chairman and director of Sun Goddess Farms, Inc., a wholly owned
subsidiary of the Company ("SGF"). Mr. Behrens has been actively involved with
the Company and its affiliates since August 1979. From 1966 to 1971, Mr. Behrens
was on the audit staff of Arthur Andersen & Company; between 1971 and 1973, he
was a principal in a real estate development company; and from 1973 to August
1979, he was employed as a Vice President of an agricultural management company.
Mr. Behrens holds a Bachelor of Science degree from the University of Minnesota
School of Business Administration. Mr. Behrens is a general partner of Rancho
California Partners II, a California limited partnership (the "Partnership"),
which filed a voluntary Chapter 11 Reorganization Petition under the federal
Bankruptcy Act to resolve certain issues with the Riverside County Tax
Assessor's Office on or about March 20, 1996. The decision to file for
reorganization was made to protect certain real property owned by the
Partnership from foreclosure while the property was being reappraised. The
issues raised in the Petition have been favorably resolved and the Partnership
has dismissed the Petition.
23
<PAGE>
ROBERT A. WRIGHT has served as the President, Chief Operating Officer, and
a director of the Company since 1988. Mr. Wright also serves as the President
and director of SGF. In April 2000, Mr. Wright agreed to vacate the office of
President to assist with the management/liquidation of certain discontinued
operations. He remains a Company director. During the past 25 years Mr. Wright
has been, and continues to be, a principal in and the President of a farm
equipment manufacturing company located in central Illinois. Mr. Wright also
served as general partner or co-general partner for several agricultural real
estate partnerships, which were not organized by the Company or its affiliates.
Mr. Wright holds a Bachelor of Science degree in Business (Management and
Finance) from the University of Colorado. Mr. Wright is a general partner of the
Partnership, which filed a voluntary Chapter 11 Reorganization Petition under
the federal Bankruptcy Act to resolve certain issues with the Riverside County
Tax Assessor's Office on or about March 20, 1996. The decision to file for
reorganization was made to protect certain real property owned by the
Partnership from foreclosure while the property was being reappraised. The
issues raised in the Petition have been favorably resolved and the Partnership
has dismissed the Petition.
EUGENE W. TIDGEWELL has served as the Chief Financial Officer and Treasurer
and as a Vice President of the Company since January 1998 and has served as a
Director of the Company since February 1999. Mr. Tidgewell was an audit manager
at Kelly & Company, the Company's independent auditors, from 1989 to 1998. Mr.
Tidgewell holds a Bachelor of Science Degree in Business Administration
Accounting) from the University of Notre Dame and is a Certified Public
Accountant in the State of California.
MICHAEL J. SILVA has served as Chief Development Officer since January 2000
and a Director since February 2000. Mr. Silva is an engineering graduate from
the University of the Pacific and has MS in civil engineering from Stanford
University. Since graduation, he has been exclusively employed in the waste
service industry, serving as Division President/Chief Operating Officer for CR&R
from 1986 to 1997. From 1997 to 1999 he served as Chief Executive Officer of
Athens Services. Both companies are ranked in the top 10 nationally.
MARLENE A. TAPIE has served as a director of the Company since 1988.
Between 1979 and 1994, she served in various capacities including Vice
President, Executive Secretary to the Chairman and Office Administrator. From
1992 through 1995, Ms. Tapie owned and operated a clothing company, Marlene &
Company. In October 1994 she and her husband, Alan Tapie, a PGA golf
professional, purchased a controlling interest in Buena Park Golf Center, a golf
course and driving range located in Buena Park, California. She currently
manages her husband, who is a touring professional in the European PGA Senior
Tour.
24
<PAGE>
H. GLEN LEASON has served as a director of the Company since February 1999.
From 1984 to the present, Mr. Leason has served as a Senior Vice President with
Torrey Pines Securities. Prior to that, Mr. Leason served in the United States
Navy Submarine Service From 1943 to 1946. He was a securities broker with Leason
& Company in Chicago, Illinois from 1946 through 1960, eventually becoming Vice
President for its initial public offering department in Newport Beach,
California, was a Vice President in the initial public offering department at
R.J. Henderson & Co., in Newport Beach, California from 1960 to 1966, was an
Emerging Growth Stock Vice President with Jefferies & Co. in Newport Beach,
California from 1966 until Jefferies & Co., was purchased in 1969, and rejoined
Leason & Company as President until 1973. From 1973 to 1984, Mr. Leason worked
with Wedbush Securities and then with McDonald, Krieger & Bowyer in Beverly
Hills, California. Mr. Leason completed various courses at Northwestern
University and Loyola Marymount University, is a registered representative with
the NASD and holds a principal's license.
HILLY G. JONES has served as Corporate Secretary since January 2000 and has
been the Company's Office Administrator since May 1999. She has been employed
part time by the Company in various administrative capacities since 1989, except
for the period from June 1995 to December 1998, when she left the Company to own
and operate a small business. Prior to 1989, she was employed in various
administrative capacities in the securities, environmental, and other
industries.
All directors hold office until the next annual stockholders' meeting or
until their respective successors are elected or until their earlier death,
resignation or removal. Officers are appointed by, and serve at the discretion
of, the Board of Directors.
COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), requires the Company's executive officers and directors and persons who
beneficially own more than 10% of a registered class of a Company's Common Stock
("reporting persons") to file initial reports of ownership and reports of
changes in ownership with the SEC. Such reporting persons are required by SEC
regulations to furnish the Company with copies of all such reports that they
file.
Based solely upon a review of copies of such reports furnished to the
Company during the year ended December 31, 1999 and thereafter, or any written
representations received by the Company from reporting persons that no other
reports were required, the Company believes that, during the Company's 1999
year, all section 16(a) filing requirements applicable to the Company's
reporting persons were complied with.
25
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
There is shown below information concerning the annual and long-term
compensation for services in all capacities to the Company of the Company's
Chief Executive Officer and the only other executive officer of the Company
whose aggregate cash compensation exceeded $100,000 (collectively, the "Named
Executives") during the fiscal years ended August 31, 1997 and 1998 and December
31, 1999.
SUMMARY COMPENSATION TABLE
Annual Compensation
------------------------------------------------
Other Annual
Name and Salary Compensation
Principal Position Year ($) ($)
------------------ ---- ------- ----------
Fred H. Behrens 1999 136,200 15,650
Chairman and Chief 1998 152,000 15,864
Executive Officer 1997 120,000 5,724
Robert A. Wright 1999 109,375 15,180
President(1) and Chief 1998 133,081 15,080
Operating Officer 1997 120,000 11,519
Eugene W. Tidgewell 1999 112,000 --
Vice President and 1998 102,666 --
Chief Financial Officer
- ---------------------------
(1) In April 2000, Mr. Wright agreed to vacate the office of as President, to
assume responsibility for the management and liquidation of assets included
in discontinued operations. He will remain as a Company director.
STOCK OPTION GRANTS IN 1999
The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1997 Stock Option Plan during 1999
to each of the named executives. The Company has never granted any stock
appreciation rights.
26
<PAGE>
OPTIONS GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------------------------------------------
Number of Percent of
Securities Total
Underlying Options Exercise
Options Granted to or Base
Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Sh) Date
---------- --------- ----------- ------- ----------
Eugene W. Tidgewell 19,500 66.43% $1.50 10/15/10
OPTION EXERCISES AND VALUE FOR 1999
The table below sets forth the following information with respect to option
exercises during 1999 by each of the named executive officers and the status of
their options at December 31, 1999:
o The number of shares of common stock acquired upon exercise of options
in fiscal 1999;
o The aggregate dollar value realized upon the exercise of such options,
o The total number of exercisable and non-exercisable stock options held
at December 31, 1999, and
o The aggregate dollar value of in-the-money exercisable options at
December 31, 1999.
AGGREGATED OPTION EXERCISES DURING 1999
AND
OPTION VALUES ON DECEMBER 31, 1999
<TABLE>
<CAPTION>
Number of
Shares
Acquired Upon Number of Unexercised Value of Unexercised In-the-
Exercise of Value Realized Options 12/31/99 Money Options 12/31/99(1)
-------------------------- ----------------------------
Name Option Upon Exercise Exercisable Unexercisable Exerciserable Unexercisable
---- ------ ------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fred H. Behrens 246,955 $343,514 -- -- -- --
Robert A. Wright 175,928 244,715 -- -- -- --
</TABLE>
27
<PAGE>
- ----------------------
(1) In accordance with SEC rules, values are calculated by subtracting the
exercised price from the fair market value of the underlying common stock.
For purposes of this table, fair market value is deemed to be closing price
on the date the options were executed for the Company's common reported for
Nasdaq SmallCap transactions on December 31, 1999.
DIRECTORS' COMPENSATION
The Company's directors do not receive cash compensation for attending
Board of Director meetings. In 1998, each director received options to purchase
up to 15,000 shares of the Company's Common Stock at $3.00 per share, the then
closing price of the Company's Common Stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 1, 2000, certain information
with respect to (i) each director of the Company, (ii) the named executives and
(iii) all directors and executive officers of the Company as a group. Other than
as described below, no other person is known to the Company to be the beneficial
owner of more than 5% of the Company's Common Stock. The information with
respect to each person specified as a supplier or confirmed by such person or
based upon statements filed with the Commission. Each person set forth below is
a director of the Company.
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
OF BENEFICIAL OWNER OF COMMON STOCK(1) OF COMMON STOCK
- -------------------- ------------------------ ----------------
Fred H. Behrens(2) 1,003,153 9.98%
7314 Scout Avenue
Bell Gardens, CA 90201
Robert A. Wright(3) 815,018 8.11 %
86025 Avenue 52
Coachella, CA 92236
H. Glen Leason(4) 16,370 *
77-955 Calle Arroba
La Quinta, CA 92253
Eugene W. Tidgewell (5) 39,500 *
28
<PAGE>
7314 Scout Avenue
Bell Gardens, CA 90201
Marlene Tapie (6) 89,167 *
76 Los Cabos
Dana Point, CA 92629
All Directors and Executives
Officers as a group (5 persons)(7) 1,963,208 19.54%
- ---------------------
* Represents less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally included voting or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Shares of Common Stock subject to
options currently exercisable, or exercisable within 60 days after March 1,
2000 are deemed to be outstanding in calculating the percentage ownership
of a person or group but are not deemed to be outstanding as to any other
person or group.
(2) Includes 782,498 shares of Common Stock held by Behrens Partners, Ltd., a
family limited partnership controlled by Mr. Behrens. Also includes (i)
207,355 shares held in escrow on behalf of Mr. Behrens and ii) 13,300
shares held in an IRA account.
(3) Includes (i) 237,093 shares of Common Stock held by Wright Family Partners,
Ltd., a family limited partnership controlled by Mr. Wright, (ii) 447,533
shares of Common Stock held in escrow on behalf of Mr. Wright and iii)
130,392 shares held in an IRA account.
(4) Includes 16,200 shares of Common Stock underlying 9,000 shares of Series A
9% Convertible Preferred Stock that are convertible and 170 shares of
Common Stock held in an IRA account.
(5) Represent 39,500 shares of Common Stock underlying options.
(6) Includes 31,250 shares of Common Stock underlying options.
(7) Includes 476,633 shares of Common Stock underlying options and 33,120
shares of Common Stock underlying 18,400 shared of Series A 9% Convertible
Preferred Stock that are convertible.
29
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Between 1981 and 1986, the Company, in its capacity as general partner
and/or placement agent, raised approximately $200 million in private placement
syndications. This syndication activity resulted in the formation of
approximately 137 limited partnerships, which acquired real estate for
agribusiness or development and resale purposes. Partnership liquidation have
reduced this total to 14 limited partnerships as of December 31, 1999. It is
planned that all partnerships will file final tax returns during the next 12
months and virtually all on-going business activities have ceased.
On November 30, 1995, the Company acquired a 50% interest in PS III Farms,
LLC, which leases 6,490 acres to one of the limited liability company members,
which is not affiliated with the Company. The lease expired September 30, 1999
and has been renewed for an additional five years pending negotiations to sell
the Company's 50% interest to its partner during 2000. The primary crop grown on
the farm is potatoes.
The Company holds a 99% ownership interest in Las Palomas Country Club
Estates LLC, a California limited liability company, which previously acted as
the development entity for the golf course owned by an affiliated partnership,
all operations has been transferred to AFC in December 1999.
Fred H. Behrens, Chairman, Chief Executive Officer, director, and principal
shareholder of the Company holds a 1% ownership interest in Las Palomas Country
Club Estates LLC. The Company also holds a 99% ownership interest in AMCOR
Builders LLC, which previously managed the construction operations of the
Company in Texas prior to being transferred to AFC. Robert A. Wright, President,
Chief Operating Officer, director and principal shareholder of the Company holds
a 1% ownership interest in AMCOR Builders LLC. The Company holds a 99% ownership
interest in AMCOR Biomass Farms LLC. Enterprise packing Company ("EPC") owns 442
limited partnership interests issued by Lake Valley. Mr. Behrens and Mr. Wright
are the only general partners of Lake Valley and EPC. There are 2,600 limited
partnership interests of Lake Valley presently issued and outstanding.
Therefore, by attribution of their ownership interests in EPC, Messrs. Behrens
and Wright jointly own 17% of the issued and outstanding limited partnership
interests of Lake Valley.
In December 1997, Messrs. Behrens and Wright agreed, at the lenders'
request, to personally guarantee $4,250,000 of debt financing obtained by the
Company from GMAC Credit Corporation and TexStar Bank in connection with the Las
Palomas golf course/subdivision project. In consideration for the guarantee, the
Company agreed to pay to Messrs. Behrens and Wright assigned to the Company
their rights to this guarantee fee effective August 31, 1998 as described below
in this Item 12.
30
<PAGE>
On December 20, 1999, the Company agreed to reduce the conversion price of
its Series B Convertible Preferred Stock to $6.67 per share from $10 per share
(on December 20, the market price for the Company's Common Stock were $4.188).
At that time, all of the Series B Convertible Preferred Stock that was issued to
three affiliated limited partnerships was converted into 591,621 shares of the
Company's common stock.
31
<PAGE>
USA Biomass Corporation
Consolidated Financial Statements
As of December 31, 1999 and 1998 and for the
Year Ended December 31, 1999, the Four Month Period Ended
December 31, 1998 and for
The Year Ended August 31, 1998
<PAGE>
USA Biomass Corporation
Index to the Consolidated Financial Statements
As of December 31, 1999 and 1998 and for the
Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and for
The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
Independent Auditors' Report .............................................. 1
Consolidated Financial Statements for USA Biomass Corporation:
Consolidated Balance Sheets as of December 31, 1999 and 1998 ......... 2
Consolidated Statements of Operations for the Year Ended
December 31, 1999, the Four Month Period Ended December
31, 1998 and the Year Ended August 31, 1998 ....................... 5
Consolidated Statements of Shareholders' Equity for the Year
Ended December 31, 1999, the Four Month Period Ended
December 31, 1998 and the Year Ended August 31, 1998 .............. 6
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1999, the Four Month Period Ended December 31,
1998 and the Year Ended August 31, 1998 ........................... 8
Notes to the Consolidated Financial Statements ........................... 13
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders of
USA Biomass Corporation
We have audited the accompanying consolidated balance sheets of USA Biomass
Corporation and its subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 1999, the four month period ended December
31, 1998, and the year ended August 31, 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of USA
Biomass Corporation and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1999, the four month period ended December 31, 1998, and the year
ended August 31, 1998, in conformity with generally accepted accounting
principles.
Kelly & Company
Newport Beach, California
April 12, 2000
<PAGE>
USA Biomass Corporation
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 540,651 $ 767,293
Cash held in escrow 617,176 --
Cash held in trust 203,891 --
Accounts receivable, net of allowance for doubtful receivables of
$90,580 and $54,985 as of December 31, 1999 and December 31, 1998,
respectively 862,619 526,170
Receivable from affiliates 25,869 --
Income taxes recoverable -- 292,639
Other current assets 129,589 423,295
Net current assets of discontinued operations 1,248,670 8,337,976
----------- -----------
Total current assets 3,628,465 10,347,373
Property and equipment, net of accumulated depreciation 7,584,040 9,104,446
Note receivable, noncurrent -- 6,462,347
Other assets 31,963 127,645
Intangible assets, net of accumulated amortization 391,667 441,666
----------- -----------
Total assets $11,636,135 $26,483,477
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
USA Biomass Corporation
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,747,537 $ 1,944,450
Payroll and payroll taxes payable 632,013 890,698
Accrued remediation costs 180,808 507,000
Lines of credit 640,000 874,610
Payable to affiliates -- 520,618
Notes payable:
Affiliates 190,714 2,268,053
Other 727,717 979,954
Capitalized lease obligations 809,690 681,922
Income taxes payable 347,942 334,832
Accrued interest 194,620 284,272
----------- -----------
Total current liabilities 5,471,041 9,286,409
Notes payable, net of current portion:
Affiliates 1,020,967 597,420
Other 2,333,288 6,261,799
Capitalized lease obligations, net of current portion 2,551,898 3,515,768
----------- -----------
Total liabilities 11,377,194 19,661,396
=========== ===========
</TABLE>
Commitments and contingencies
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
USA Biomass Corporation
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Shareholders' equity:
Preferred Stock (2,000,000 shares authorized):
Series A, 9% Convertible Preferred Stock, $0.01 par value;
cumulative nonvoting; $7,422,000 and $7,475,000 aggregate
liquidation preference at December 31, 1999 and 1998,
respectively; 812,500 shares authorized, 742,200 and 747,500
shares issued and outstanding at December 31, 1999 and 1998,
respectively $ 7,422 $ 7,475
Series B, 6% Convertible Preferred Stock, $0.01 par value; cumulative
nonvoting; 750,000 shares authorized, 394,414 shares issued and
outstanding at December 31, 1998 -- 3,944
Common stock, $0.002 par value; 25,000,000 shares authorized, 9,509,856
and 7,761,385 issued, 9,485,606 and 7,737,135 shares
outstanding at December 31, 1999 and 1998, respectively. 19,018 15,522
Additional paid-in capital 25,235,189 21,970,123
Accumulated deficit (24,781,849) (15,056,644)
Receivable on common stock (102,500) --
Treasury stock, at cost (24,250 common shares at
December 31, 1999 and 1998) (118,339) (118,339)
------------ ------------
Total shareholders' equity 258,941 6,822,081
------------ ------------
Total liabilities and shareholders' equity $ 11,636,135 $ 26,483,477
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
USA Biomass Corporation
Consolidated Statements of Operations
For the Year Ended December 31, 1999, the Four Month Period Ended
December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ -------------------- -------------------
<S> <C> <C> <C>
Revenues $ 7,644,907 $ 2,024,830 $ 2,005,611
Cost of revenues 6,704,505 1,694,250 2,665,206
------------ ------------ ------------
Gross margin 940,402 330,580 (659,595)
General and administrative expenses 1,492,820 1,152,697 3,228,682
Loss from asset impairment 141,050 -- 1,971,123
Loss on sale of assets 215,258 3,768 365,990
------------ ------------ ------------
Operating loss from continuing operations 908,726 825,885 6,225,390
Interest expense,net 822,791 389,429 661,889
------------ ------------ ------------
Loss from continuing operations before income
taxes 1,731,517 1,215,314 6,887,279
Benefit from income taxes 3,200 3,200 (1,048,475)
------------ ------------ ------------
Loss from continuing operations 1,734,717 1,218,514 5,838,804
------------ ------------ ------------
Discontinued operations (Note 4):
Estimated loss on disposal 5,346,328 814,550 7,068,069
Loss from discontinued operations (Note 12) 2,105,701 -- 2,878,813
------------ ------------ ------------
Total 7,452,029 814,550 9,946,882
------------ ------------ ------------
Net loss $ 9,186,746 $ 2,033,064 $ 15,785,686
============ ============ ============
Loss from continuing operations per common share,
basic and diluted $ 0.41 $ 0.20 $ 0.88
============ ============ ============
Net loss per common share, basic and diluted $ 1.35 $ 0.31 $ 2.19
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
USA Biomass Corporation
Consolidated Statements of Shareholders' Equity
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A Series B Common Series A
Preferred Preferred Common Treasury Preferred
Shares Shares Shares Shares Stock
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1997 -- 404,414 7,172,974 -- --
Issuance of Series A 9% Convertible Preferred
Stock 747,500 -- -- -- $ 7,475
Shares issued upon exercise of options -- -- 31,250 -- --
Shares issued in payment of debt -- -- 14,927 -- --
Shares issued for the acquisition of TransPacific
Environmental, Inc. -- -- 406,109 -- --
Shares issued in settlement of litigation -- -- 144,000 -- --
Options on common stock granted to
nonemployees for consulting and other services -- -- -- -- --
Treasury shares acquired -- -- -- (24,250) --
Shares reacquired and retired -- -- (7,875) -- --
Series A Preferred Stock dividends -- -- -- -- --
Net loss -- -- -- -- --
---------- ------------ ------------ ------------ ------------
Balance, August 31, 1998 747,500 404,414 7,761,385 (24,250) $ 7,475
========== ============ ============ ============ ============
<CAPTION>
Series B Treasury Additional
Preferred Common Common Paid-in Accumulated
Stock Stock Stock Capital Earnings (Deficit)
------------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1997 $ 4,044 $ 14,345 -- $ 14,242,065 $ 3,259,382
Issuance of Series A 9% Convertible Preferred
Stock -- -- -- 6,161,869 --
Shares issued upon exercise of options -- 63 -- 62,437 --
Shares issued in payment of debt -- 30 -- 70,869 --
Shares issued for the acquisition of TransPacific
Environmental, Inc. -- 812 -- 1,195,030 --
Shares issued in settlement of litigation -- 288 -- 83,093 --
Options on common stock granted to
nonemployees for consulting and other services -- -- -- 187,500 --
Treasury shares acquired -- -- $ (118,339) -- --
Shares reacquired and retired -- (16) -- (32,840) --
Series A Preferred Stock dividends -- -- -- -- (497,276)
Net loss -- -- -- -- (15,785,686)
------------ ------------ ------------ ------------ ------------
Balance, August 31, 1998 $ 4,044 $ 15,522 $ (118,339) $ 21,970,023 $(13,023,580)
============ ============ ============ ============ ============
<CAPTION>
Notes
Receivable
Common
Stock Total
------------ ------------
<S> <C>
Balance, August 31, 1997 -- $ 17,519,836
Issuance of Series A 9% Convertible Preferred
Stock -- 6,169,344
Shares issued upon exercise of options -- 62,500
Shares issued in payment of debt -- 70,899
Shares issued for the acquisition of TransPacific
Environmental, Inc. -- 1,195,842
Shares issued in settlement of litigation -- 83,381
Options on common stock granted to
nonemployees for consulting and other services -- 187,500
Treasury shares acquired -- (118,339)
Shares reacquired and retired -- (32,856)
Series A Preferred Stock dividends -- (497,276)
Net loss -- (15,785,686)
------- ------------
Balance, August 31, 1998 -- $ 8,855,145
======= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
USA Biomass Corporation
Consolidated Statements of Shareholders' Equity
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A Series B Common Series A
Preferred Preferred Common Treasury Preferred
Shares Shares Shares Shares Stock
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1998 747,500 404,414 7,761,385 (24,250) $ 7,475
Share cancellation -- (10,000) -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 747,500 394,414 7,761,385 (24,250) 7,475
Common stock issued in settlement of debt -- -- 563,527 -- --
Series B convertible preferred stock issued
for cumulative dividends in arrears -- 53,846 -- -- --
Conversion of Series B Convertible Preferred
Stock to common stock -- (448,260) 591,621 -- --
Common stock issued on exercise of stock options -- -- 585,383 -- --
Conversion of Series A Convertible Preferred
Stock to common stock (5,300) -- 7,940 -- (53)
Common stock options issued for services -- -- -- -- --
Notes receivable arising from exercise of
common stock options -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 742,200 -- 9,509,856 (24,250) $ 7,422
============ ============ ============ ============ ============
<CAPTION>
Series B Treasury Additional
Preferred Common Common Paid-in Accumulated
Stock Stock Stock Capital Earnings (Deficit)
------------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1998 $ 4,044 $ 15,522 $ (118,339) $ 21,970,023 $(13,023,580)
Share cancellation (100) -- -- 100 --
Net loss -- -- -- -- (2,033,064)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 3,944 15,522 (118,339) 21,970,123 (15,056,644)
Common stock issued in settlement of debt -- 1,127 -- 1,728,693 --
Series B convertible preferred stock issued
for cumulative dividends in arrears 538 -- -- 537,921 (538,459)
Conversion of Series B Convertible Preferred
Stock to common stock (4,482) 1,183 -- 3,299 --
Common stock issued on exercise of stock options -- 1,170 -- 977,941 --
Conversion of Series A Convertible Preferred
Stock to common stock -- 16 -- 37 --
Common stock options issued for services -- -- -- 17,175 --
Notes receivable arising from exercise of
common stock options -- -- -- -- --
Net loss -- -- -- -- (9,186,746)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 -- $ 19,018 $ (118,339) $ 25,235,189 $(24,781,849)
============ ============ ============ ============ ============
<CAPTION>
Notes
Receivable
Common
Stock Total
---------- ------------
<S> <C> <C>
Balance, August 31, 1998 $ -- $ 8,855,145
Share cancellation -- --
Net loss -- (2,033,064)
--------- ------------
Balance, December 31, 1998 -- 6,822,081
Common stock issued in settlement of debt -- 1,729,820
Series B convertible preferred stock issued
for cumulative dividends in arrears -- --
Conversion of Series B Convertible Preferred
Stock to common stock -- --
Common stock issued on exercise of stock options -- 979,111
Conversion of Series A Convertible Preferred
Stock to common stock -- --
Common stock options issued for services -- 17,175
Notes receivable arising from exercise of
common stock options (102,500) (102,500)
Net loss -- (9,186,746)
--------- ------------
Balance, December 31, 1999 $(102,500) $ 258,941
========= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
USA Biomass Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ 9,186,746 $ 2,033,064 $ 15,785,686
Add loss (deduct income) from discontinued
operations 7,452,029 -- 9,946,882
------------ ------------ ------------
Net loss from continuing operations 1,734,717 2,033,064 5,838,804
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 958,929 268,658 316,229
Amortization 49,999 16,666 41,668
Uncollectible receivables 50,580 14,985 --
Loss on impairment of assets 141,050 -- 1,971,123
Loss on sale of assets 177,322 -- 365,990
Gain on sale of assets 13,914 -- --
Provision for settlement expense -- -- 112,129
Stock options granted to nonemployees
for consulting and other services -- -- 187,500
Stock Compensation 17,175 -- --
Issuance of common stock for interest 55,376 -- --
Issuance of common stock for services 41,297 -- --
Decrease (increase) in assets, net of effect of
acquisition of TransPacific Environmental,
Inc.:
Accounts receivable (387,029) (205,621) (97,855)
Income taxes recoverable 292,639 -- (292,639)
Other current assets 293,706 (178,827) 710,093
Due from related parties -- -- 239,887
Other assets 95,682 (97,464) 2,782
Increase (decrease) in liabilities, net of effect of
acquisition of TransPacific Environmental,
Inc.:
Accounts payable (186,056) 678,193 (400,579)
Remediation (326,192) -- --
Payroll taxes payable (258,685) (174,307) 87,557
Income taxes payable 13,110 331,632 (1,033,200)
Accrued interest payable 243,921 121,427 (181,583)
Deferred taxes -- -- (55,894)
------------ ------------ ------------
Payable to affiliates (412,694) (11,093) --
------------ ------------ ------------
Net cash used in operating activities of
continuing operations (1,092,492) (454,265) (3,865,596)
Net cash used in operating activities of
discontinued operations (1,609,977) (1,220,231) (6,105,493)
------------ ------------ ------------
Cash used in operating activities $ (2,702,469) $ (1,674,496) $ (9,971,089)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
USA Biomass Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ --------------------- -------------------
<S> <C> <C> <C>
Cash flows provided by (used in) investing activities:
Purchases of property and equipment $ (158,163) $ (166,801) $ (142,777)
Proceeds on sale of note receivable 2,462,347 -- --
Sales of property and equipment 81,500 -- 101,393
Acquisition of TransPacific Environmental, Inc., net of
cash acquired -- -- (398,154)
----------- ----------- -----------
Net cash used in investing activities of
continuing operations 2,385,684 (166,801) (439,538)
Net cash provided by investing activities
of discontinued operations 963,676 -- 4,199,029
----------- ----------- -----------
Cash provided by investing operations 8,349,360 (166,801) 3,759,491
----------- ----------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from line of credit 15,000 625,000 249,610
Proceeds from notes and loans -- 1,530,646 2,229,065
Repayment of notes and loans (652,035) (374,827) (3,541,141)
Proceeds from exercise of options 200,000 -- --
Repayment of notes and notes - affiliates (102,900) -- --
Dividends paid on Series A Preferred Stock -- -- (497,276)
Acquisition of treasury shares -- -- (118,339)
Net proceeds from issuance of Series A
Preferred Stock -- -- 6,169,344
Purchase and retirement of common stock -- -- (32,856)
Exercise of stock options -- -- 62,500
----------- ----------- -----------
Net cash provided by financing activities of
continuing operations (539,935) 1,780,819 4,520,907
Net cash provided by financing activities of
discontinued operations (333,598) -- 2,338,596
----------- ----------- -----------
Cash provided by financing activities (873,583) 1,780,819 6,859,503
----------- ----------- -----------
Net increase (decrease) in cash (226,642) (60,478) 647,905
Cash and equivalents at beginning of year 767,293 827,771 179,866
----------- ----------- -----------
Cash and equivalents at end of year $ 540,651 $ 767,293 $ 827,771
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
USA Biomass Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1999, the Four Month
Period Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ -------------------- -------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest:
Continuing operations $1,196,703 $ 189,382 $ 838,066
Discontinued operations 582,927 383,999 521,191
---------- ---------- ----------
$1,779,630 $ 573,381 $1,359,257
========== ========== ==========
Income taxes $ -- $ -- $ 332,589
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Supplemental Schedule of
Non-Cash Investing and Financing Activities of Continuing Operations
<S> <C> <C> <C>
Assets acquired (disposed of) in non-cash transactions:
Assets acquired -- 5,486,636 $ 1,141,225
Receivables from related parties -- -- 815,184
Capital lease obligations incurred -- (2,905,733) (727,610)
Liabilities incurred -- (2,580,903) (413,615)
Liability to officer incurred -- -- (815,184)
Satisfaction of debt through issuance of stock:
Liabilities satisfied $ 1,633,145 -- $ 70,899
Common stock issued (1,633,145) -- (70,899)
Dividends on Preferred Stock:
Additional paid in capital 538,459 -- --
Reduction in retained earnings (538,459) -- --
Satisfaction of debt through offset of options exercise:
Liabilities satisfied 676,586 -- --
Common shares issued (676,586) -- --
Conversaion of preferred stock to common stock:
Preferred shares converted 3,997 -- --
Common shares issued (3,997) -- --
Issuance of note receivable on common stock:
Receivable on common stock 102,500 -- --
Common shares issued (102,500) -- --
Satisfaction of debt through offset of related receivables:
Receivables satisfied (1,401,723) -- --
Liabilities satisfied 283,388 -- --
Liabilities to officers satisfied 1,118,335 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE>
USA Biomass Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
Supplemental Schedule of
Non-Cash Investing and Financing Activities of Continuing Operations, Continued
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
----------------- -------------------- ------------------
<S> <C> <C> <C>
Settlement liability and related party receivable:
Liability to estate of former officer -- -- $ (283,388)
Receivable from related party -- -- 283,388
Purchase of all the capital stock of TransPacific Environmental, Inc.:
Fair value of assets acquired -- -- $ 2,260,933
Less:
Cash paid -- -- (411,207)
Common stock issued -- -- (1,195,842)
-----------
Liabilities assumed -- -- $ (653,884)
===========
Included in the net liabilities assumed were the following operating
assets and liabilities:
Cash -- -- $ 13,053
Accounts receivable -- -- 116,235
Other current assets -- -- 48,531
Other assets -- -- 2,230
Accounts payable -- -- (679,283)
Notes payable -- -- (154,650)
Assets disposed of in non-cash transaction:
Assets disposed $ (200,295) -- --
Liabilities satisfied 377,517 -- --
Loss on disposal (177,222) -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
1. Description of the Company's Business
The operations of USA Biomass Corporation (the "Company"), a Delaware
corporation, consist of clean green waste processing ("biomass"), and waste
transportation, which commenced in October 1998. These activities take
place exclusively in Southern California. In January 1999, the Company
changed its year end to December 31.
During the year ended August 31, 1998, the Company commenced its biomass
operations, and in December 1998, the Company's Board of Directors adopted
a plan to discontinue its agribusiness and real estate activities (Note 4).
In a two year period, the Company has completed it transition from its
historical activities to its current segments. Although this has resulted
in the recognition of significant losses in the periods, the Company
believes that the combination of its long term waste transportation
contracts, its growing biomass operations, and the preferred stock offering
and acquistion of American Waste Transport in the first quarter of 2000
will enable it to successfully compete in its current lines of business.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of USA Biomass
Corporation and its subsidiaries. USA Waste Transport, USA
Biomass-Greenwaste, Inc., TransPacific Environmental Inc., and AMCOR
Biomass Farms, LLC (99% owned), are the Company's continuing operating
subsidiaries. Sun Goddess Farms, Inc., AMCOR Properties, Inc., Las Palomas
Country Club Estates, LLC (99% owned) and AMCOR Builders, LLC (99% owned)
are discontinued operations. All significant intercompany transactions have
been eliminated.
Assets of discontinued operations are recorded at their estimated net
realizable value (Note 4).
Revenue Recognition
Revenues are recognized on the accrual method at the time the related
services are performed.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Equivalents
Cash and equivalents include short-term, highly liquid instruments with
original maturities of three months or less.
Accounts Receivable
The Company grants credit to customers substantially all of whom are in the
waste industry. The Company performs credit evaluations of its customers
and, generally, requires no collateral. The Company's ability to generate
revenues and collect amounts due from customers is affected by economic
fluctuations in the waste industry.
F-13
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Accounts Receivable, Continued
The Company uses the allowance method to account for uncollectible accounts
receivable. The Company's estimate is based on historical collection
experience and a review of the current status of trade accounts receivable.
It is reasonably possible that the Company's estimate of the allowance for
doubtful accounts will change.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below.
Estimated Useful
Life
----------------
Vehicles and equipment 3-10 years
Office furniture and equipment 3-10 years
Buildings 30 years
Leasehold improvements are amortized over the shorter of the life of the
assets or the life of the related lease.
Intangible Assets
Intangible assets include licenses and agreements and contracts. Intangible
assets are amortized using the straight-line method over a period of 10
years. Regularly, the Company assesses the intangible assets for impairment
based on recoverability of the balances from expected future operating cash
flows on an undiscounted basis (Note 8).
Long Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The estimated undiscounted cash
flows associated with the assets are compared to the carrying amounts to
determine if a writedown to fair value is required.
As a result of the Company's review and assessment, and based upon the best
information available in the circumstances, including independent
appraisals, at December 31, 1999 and August 31, 1998 the Company determined
that the carrying amounts of certain assets exceeded the fair value of such
assets.
F-14
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Stock Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee and nonemployee compensation plans.
The Company continues to account for stock-based employee compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees as permitted by
SFAS 123. Compensation cost for stock options, if any, is measured as the
excess 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.
Compensation cost is recorded over the requisite vesting periods based on
the market value on the date of grant.
New Accounting Pronouncement
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for
derivative instruments. This Statement requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No.
133, which postponed the adoption date of SFAS 133. As such, the Company is
not required to adopt the new Statement until the year 2001. The Company is
currently evaluating the effect that implementation of the new standard
will have on its results of operations and financial position.
3. Cash Held in Escrow and in Trust
At December 31, 1999, the Company had funds held in an escrow account
resulting from the sale of farmland from its discontinued agribusiness
operations. The funds were held pending the Company's ability to secure a
certain loan release. In February 2000, the loan release was obtained and
the cash was released from escrow.
At December 31, 1999, the Company had cash held in trust with an attorney
to be used in the resolution of certain liabilities.
F-15
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
4. Discontinued Operations
On December 22, 1998 , the Company adopted a plan to dispose of its
agribusiness and real estate operations. In October 1999, the Company
transferred substantially all of its remaining real estate assets and
related liabilities to AMCOR Financial Corp. ("AFC"), a then wholly owned
subsidiary. In January 2000, the Company distributed to its common and
preferred shareholders all of its AFC common shares. The Company has
disputes with AFC regarding the nature and amount of assets and liabilities
transferred to AFC. Further, all the regulatory requirements related to the
distribution of the AFC shares to the Company's shareholders may not have
been satisfied. As a result, the Company continues to record its investment
related to these real estate assets as net assets of discontinued
operations in the consolidated balance sheets.
At August 31, 1998 estimated losses of approximately $1,543,000 anticipated
on sales of discontinued operations and estimated operating losses of
approximately $1,336,000 for the period from August 31, 1998 through the
estimated dates of disposition of discontinued operations, currently
expected to be December 31, 2000, were included in the estimated loss on
disposal of discontinued operations. Additional losses on the dispositions
of discontinued operations of $ - and $814,550 were recorded in the year
ended December 31, 1999 and the four months ended December 31, 1998 due to
asset sales at less than expected amounts and diminished appraised values
resulting from slower than expected sales.
Selected information for the discontinued agribusiness and real estate
operations is presented below.
For the Year Ended December 31, 1999
---------------------------------------------------
Agribusiness Real Estate Total
--------------- --------------- ---------------
Revenues $ -- $ -- $ --
Operating income (loss) -- -- --
--------------- --------------- ---------------
Loss on disposal $ -- $ -- $ --
=============== =============== ===============
F-16
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
4. Discontinued Operations, Continued
For the Four Months Ended December 31, 1998
---------------------------------------------------
Agribusiness Real Estate Total
--------------- --------------- ---------------
Revenues $ -- $ -- $ --
=============== =============== ===============
Operating income (loss) -- -- --
=============== =============== ===============
Loss on disposal $ -- $ 814,550 $ 814,550
=============== =============== ===============
For the Year Ended August 31, 1998
---------------------------------------------------
Agribusiness Real Estate Total
--------------- --------------- ---------------
Revenues $ 6,057,166 $ 12,304,686 $ 18,361,852
============ ============ ============
Operating loss $ (1,989,554) $ (1,554,930) $ (2,878,882)
============ ============ ============
Loss on disposal $ (1,323,883) $ (1,554,930) $ (2,878,813)
============ ============ ============
At December 31, 1999, the remaining assets of the discontinued operations
are the Company's receivable from a partnership that owned in a golf course
sold in foreclosure in February 2000, certain housing development land in
Texas, and a 50% interest in PS III Farms, LLC, which owns 6,490 acres that
it leases to a limited liability company owned by the other 50% venture
partner. The lease has a remaining term of twelve months and contains a
renewal option on terms subject to mutual agreement at that time. The
primary crop grown on the Oregon farm is potatoes. The real estate assets
have been pledged as collateral on notes payable on which the Company is
primarily liable totaling $4,887,402 at December 31, 1999, which is
included in the net assets of discontinued operations. Of this amount,
$3,048,070 was collateralized by a golf course upon which the lender
foreclosed in February 2000. The lender has notified the Company that a
deficiency of $1.6 million exists after the foreclosure.
5. Receivables Due to/Due from Affiliates
Receivables due to/due from affiliates relate to the activities of a
partnership, Enterprise Packing Company ("EPC"), the partners of which are
two officers who are also shareholders and directors of the Company. The
amount due from the partnership represents the net of advances to and other
transactions with the partnership and bears interest at 8% per annum.
Offset of Guarantee Fees
The partners of EPC have from time to time provided their personal
guarantees to lenders who required the guarantees as necessary conditions
to lending the Company various amounts, which aggregate approximately
$11,750,000. During the year ended August 31, 1998, as partial satisfaction
of amounts that EPC owes the Company, the partners of EPC assigned and
offset their rights to receive loan guarantee fees totaling $548,500, which
is included in discontinued operations.
F-17
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
5. Due from Officers and Directors, Continued
Assignment of Priority Receivable
During the year ended August 31, 1998, EPC assigned its right to its
priority receivable from a partnership to the Company in the amount of
$428,841 as partial satisfaction of its amount owed to the Company. This
receivable is included in discontinued operations.
Exercise of Options
During the year ended December 31, 1999, the two officers exercised options
to purchase 422,883 shares of the Company's common stock through the
cancellation of $676,612.80 of amounts due by the Company.
6. Note Receivable
The note receivable at December 31, 1998 resulted from sale of a portion of
the assets of the Company's discontinued operations. In August 1999, the
Company sold this note. The terms of this sale provide for the Company to
receive up to an additional $500,000 if the note is paid by August 2000.
This amount decreases monthly until July 2002. If the note is paid after
July 2002, the Company will not realize any additional amounts. Any
additional amounts received will be recorded as income when received.
7. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Vehicles and equipment $ 6,548,131 $ 7,139,065
Office furniture and equipment 32,971 21,859
Leasehold improvements 13,686 68,244
Buildings 433,043 654,288
Land 1,804,082 1,814,082
----------- -----------
8,831,913 9,697,538
Less: accumulated amortization and depreciation (1,247,873) (593,092)
----------- -----------
Total property and equipment, net $ 7,584,040 $ 9,104,446
=========== ===========
</TABLE>
F-18
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
7. Property and Equipment, Continued
The following is an analysis of property held under capital leases
(included in the preceding summaries) with related accumulated
depreciation, depreciation expense, and total depreciation expense of
continuing operations:
December 31,
-----------------------------
1999 1998
----------- -----------
Vehicles and equipment $ 3,096,035 $ 3,142,256
Accumulated depreciation (518,685) (133,836)
----------- -----------
Total $ 2,577,350 $ 3,008,420
=========== ===========
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------ -------------------- -------------------
<S> <C> <C> <C>
Capitalized lease depreciation expense $436,913 $ 78,240 $119,934
======== ======== ========
Total property, equipment and capital lease
depreciation expense $958,929 $268,658 $319,229
======== ======== ========
</TABLE>
During the year ended December 31, 1999, the Company sold biomass equipment
with a net book amount of $1,055,126 and recognized a loss of $215,258 on
the sale of these assets.
Asset Impairment
At December 31, 1999, certain equipment previously utilized by the Company
was determined to no longer be necessary, or the Company significantly
changed the manner and extent to which it was used in its biomass
operations. When the Company determined that the assets would no longer be
utilized, it decided to hold these assets for disposition and ceased
recording depreciation expense. In this connection, the Company obtained an
appraisal of the value less estimated costs of disposal of the equipment
and, accordingly, recognized an impairment loss of $96,557.
F-19
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
8. Intangible Assets
Intangible assets associated with the Company are all involved with the
green waste segment of the business. The intangible assets are noted below:
December 31,
-----------------------
1999 1998
--------- ---------
Recycling license $ 250,000 $ 250,000
Customer lists 50,000 50,000
Facilities lease 200,000 200,000
--------- ---------
500,000 500,000
Less: accumulated amortization (108,333) (58,334)
--------- ---------
Intangible assets, net of amortization $ 391,667 $ 441,666
========= =========
Amortization expense for the year ended December 31, 1999, the four month
period ended December 31, 1998, and the year ended August 31, 1998 was
$49,999, $16,666, and $41,668, respectively.
9. Lines of Credit
Lines of credit consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Borrowing under a $650,000 line of credit with a bank, interest at
prime plus 1.50% (the bank prime rate was 8.50% at December 31,
1999), secured by all assets of the Company, and due June 30, 2000 $ 640,000 $ 625,000
Borrowing under a $250,000 line of credit with a bank, interest at
prime plus 2% (the bank prime was 8.5% at December 31, 1999), paid in
full during 1999 -- 249,610
--------- ---------
Total 640,000 874,610
Less: current portion (640,000) (874,610)
--------- ---------
Total noncurrent -- --
========= =========
</TABLE>
F-20
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
10. Notes Payable
Notes payable consist of the following:
Uncollateralized
Notes Payable to Affiliates:
<TABLE>
<S> <C> <C>
Notes payable, with effective interest rates ranging from 6% to 12%
per annum. Notes with aggregate principal amounts of $175,000 are
payable to individuals who are investors in limited partnerships
managed by the Company and are in default and classified as current. A
note of $210,815 is due to the spouse of a director, a major
shareholder, and is due January 2, 2001. Notes of $15,713 and the
$810,152 are payable to affiliated partnerships managed by the
Company. $ 1,211,681 $ 2,495,284
Note payable to an employee, with interest at 8% per annum, converted
into common stock in November 1999. -- 370,189
------------ -----------
Total due to affiliates 1,211,681 2,865,473
Less: current portion (190,714) (2,268,053)
------------ -----------
Total noncurrent due to affiliates $ 1,020,967 $ 597,420
============ ===========
</TABLE>
F-21
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
10. Notes Payable, Continued
Uncollateralized, Continued
Notes Payable to Third Parties:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
----------- -----------
<S> <C> <C>
Note payable, with interest at 8% per annum with monthly payments of
$11,182, paid in 1999 -- 46,011
----------- -----------
Total due to third parties $ -- $ 46,011
=========== ===========
Collateralized
Notes payable to individuals, paid in April 2000 $ 31,723 $ 296,164
Notes payable, collateralized by a vehicle, with interest at 9.50%
per annum. The note is due in February 2004, with monthly payments
of $714 29,396 --
Note payable, collateralized by a note receivable, with interest at
12.25%. This note was paid in September 1999 -- 4,000,000
Note payable, collateralized by Company facility, with interest at
Wall Street Journal Prime plus 1% per annum, (8.5% at December 31,
1999). Due in December 2003 with monthly principal payments of
$8,098 780,372 800,000
Notes payable, collateralized by equipment with interest ranging from
8% to 18.7% per annum. Maturity dates range from December 1999
to June 2004 2,219,514 2,099,578
----------- -----------
Total due to third parties 3,061,005 7,195,742
Less: current portion (727,717) (979,954)
----------- -----------
Total noncurrent due to third parties $ 2,333,288 $ 6,215,788
=========== ===========
</TABLE>
F-22
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
10. Notes Payable, Continued
Maturities of notes payable for the years ending December 31:
2000 $ 918,426
2001 1,597,388
2002 682,609
2003 349,915
2004 and thereafter 724,348
11. Obligations Under Capital Leases
The Company leases vehicles and equipment under long-term noncancellable
capital leases. Obligations under capital leases consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---------- ----------
<S> <C> <C>
Capital leases with effective interest rates of 9.5% and 9.75% per
annum, with aggregate monthly principal and interest payments of
$3,545 through December 1998 -- $ 7,924
Capital lease with an effective interest rate of 8.5% per annum, with
monthly principal and interest payments of $1,525 through September
2002 $ 36,737 49,960
Capital leases with interest ranging from 9.1% to 12.62% per annum,
with monthly principal and interest payments ranging from $924 to
$5,564, which aggregate $21,515. Maturity dates range from August
2000 to June 2001 302,021 518,464
Capital leases with an effective interest rate of 8.75% per annum,
with monthly principal and interest payments ranging from $4,125 to
$15,044, which aggregate $54,779 . Maturity dates range from October
to December 2003 2,636,259 2,998,728
Capital leases with interest ranging from 7.60% to 8.50% per annum,
with monthly principal and interest payments ranging from $394 to
$488, which aggregate $1,329. Maturity dates range from September to
November 2004 64,638 --
</TABLE>
F-23
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
11. Obligations Under Capital Leases, Continued
<TABLE>
<S> <C> <C>
Capital leases with interest ranging from 7.8% to 17% per annum, with
monthly principal and interest payments ranging from $1,040 to
$6,691, which aggregate $16,426. Maturity dates range from February
2001 to March 2003 $ 321,933 $ 622,614
---------- ----------
Total obligations under capital leases $3,361,588 $4,197,690
========== ==========
</TABLE>
Future minimum lease payments under capital leases at December 31, 1999 are
as follows:
<TABLE>
<S> <C>
2000 $ 1,063,752
2001 992,565
2002 683,799
2003 1,256,787
2004 14,920
-----------
Total minimum lease payments 4,011,823
Less: amount representing interest at the incremental borrowing
rate (650,235)
-----------
Present value of minimum lease payments 3,361,588
Less: current maturities (809,690)
-----------
Obligations under capital leases, long-term $ 2,551,898
===========
</TABLE>
F-24
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
12. Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
----------------- ----------------- ---------------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal -- -- $ (995,904)
State $ 3,200 $ 3,200 3,323
----------- ----------- -----------
3,200 3,200 (992,581)
----------- ----------- -----------
Deferred tax expense (benefit):
Federal -- -- (240,381)
State -- -- 184,487
----------- ----------- -----------
-- -- (55,894)
----------- ----------- -----------
Total provision (benefit) $ 3,200 $ 3,200 $(1,048,475)
=========== =========== ===========
Provision (benefit) allocated to:
Discontinued operations -- -- --
Loss on disposal of discontinued
operations -- -- --
Continuing operations $ 3,200 $ 3,200 $(1,048,475)
----------- ----------- -----------
Total provision (benefit) $ 3,200 $ 3,200 $(1,048,475)
=========== =========== ===========
</TABLE>
The deferred tax benefit for federal income tax purposes is primarily due
to the utilization of the net operating loss to offset prior years' income
taxes and the expected future tax liability. The deferred tax expense for
state income tax purposes is primarily due to the establishment of a
valuation allowance in fiscal year 1998 for the state deferred tax asset
recognized in fiscal year 1997.
The income tax benefit for the year ended August 31, 1998, is allocated to
loss from continuing operations as the tax benefit arising from the loss
from continuing operations is the same as the benefit arising from the
aggregate of all losses from operations. Consequently, no incremental tax
benefit remains for allocation to the loss from discontinued operations or
loss on disposal of discontinued operations.
F-25
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
12. Income Taxes, Continued
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Depreciation $ 42,427 --
Net operating loss carryforward 8,767,232 $ 2,822,273
Nondeductible writedowns related to discontinued
operations 282,954 3,331,355
State tax credit carryforward -- 250,462
Other 7,086 7,086
----------- -----------
Total deferred income tax assets 9,099,699 6,411,176
Valuation allowance (8,689,700) (5,722,651)
----------- -----------
Net deferred income tax asset $ 409,999 $ 688,525
=========== ===========
Deferred income tax liability:
Depreciation -- $ 350,917
Partnership loss $ 409,999 337,608
----------- -----------
Total deferred income tax liability 409,999 688,525
----------- -----------
Net deferred income tax liability -- --
=========== ===========
</TABLE>
The Company, based upon its recent history of losses and management's
assessment of when operations are anticipated to generate taxable income,
has concluded that it is more likely than not that none of the net deferred
income tax assets will be realized through future taxable earnings and has
established a valuation allowance for them.
The valuation allowances increased $2,967,049, $507,281, and $5,215,370
during the year ended December 31, 1999, the four months ended December 31,
1998, and the year ended August 31, 1998, respectively.
F-26
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
12. Income Taxes, Continued
Reconciliation of the effective tax rate to the U.S. federal statutory
income tax rate is as follows:
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
----------------- ----------------- ---------------
<S> <C> <C> <C>
U.S. federal statutory income tax rate (34.0)% (34.0)% (34.0)%
State tax provision 0.1 0.1 0.7
Nondeductible writedowns related to
discontinued operations -- -- 2.7
Nondeductible penalties -- 5.6 --
Other 0.3 0.5 1.0
Change in valuation allowance 33.7 28.0 23.4
---- ---- ----
Effective income tax rate 0.1% 0.2% (6.2)%
==== ==== ====
</TABLE>
The Company had a California Enterprise Zone tax credit carryforward. The
Company generated the tax credits through its farming operations located in
the Coachella Enterprise Zone. The tax credits can only be utilized by
generating income in the Enterprise Zone. In the current year, the Company
has discontinued all of its operations in the Coachella Enterprise Zone;
therefore, the deferred tax asset related to the state tax credit
carryforwards has been written off.
The Company has federal and state net operating loss carryforwards of
$22,483,572 and $12,701,550, respectively. The federal and state net
operating loss carryforwards will begin to expire in 2018 and 2003,
respectively.
13. Commitments
The Company leases certain of its biomass facilities and equipment under
noncancellable operating leases. Future minimum lease payments under
noncancellable operating leases at December 31, 1999 are as follows:
Continuing Operations
2000 $109,392
2001 38,628
2002 --
--------
Total future minimum lease payments $148,020
========
Rent expense from operating leases related to continuing operations was $
150,936 for the year ended December 31, 1999, $74,792 for the four month
period ended December 31, 1998, and $240,728 for the year ended August 31,
1998.
F-27
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
13. Commitments, Continued
Discontinued Operations
The costs associated with early termination of operating leases in the real
estate operations have been included in loss on disposal of discontinued
operations. Contractually required payments relating to these operating
leases are as follows:
2000 $110,590
2001 3,486
2002 --
--------
Total future minimum lease payments $114,076
========
Rent expense from operating leases related to discontinued operations was $
195,709 for the year ended December 31, 1999, $75,737 for the four month
period ended December 31, 1998, and $308,907 for the year ended August 31,
1998.
14. Contingencies
Concentrations
Cash Balances
The Company maintains cash balances in bank accounts which exceeded
federally insured limits by $983,031 and $161,838 at December 31, 1999 and
1998, respectively; however, the Company has not experienced any losses in
such accounts.
Customers
During the year ended December 31, 1999 and the four months ended December
31, 1998, a single customer accounted for 97% and 99%, respectively, of
revenue for the transportation subsidiary and 77% and 48% of total revenue.
This revenue is realized under contracts that have initial terms of 5 years
with renewal options up to 10 years. There were no transportation revenues
during the year ended August 31, 1998. This customer accounted for 59% and
47% of the total accounts receivable balances at December 31, 1999 and
1998, respectively. No other customers had accounts receivable balances
that exceeded 10%.
F-28
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
14. Contingencies, Continued
Concentrations, Continued
Fuel
During the year ended December 31, 1999 and the four months ended December
31, 1998, the Company purchased 97% and 94% of its fuel from one entity. In
all of its transportation contracts, the Company has terms that provide for
direct increases or decreases in the hauling rate based upon extraordinary
increases or decreases in their cost of fuel.
Certain Significant Estimates
Write-down of Equipment
At August 31, 1998 and at December 31, 1999 the Company recognized
impairment write-downs of certain specialized equipment previously utilized
in its biomass operations. In determining the amount of each impairment,
the Company obtained valuations from an independent equipment appraiser.
The valuations contemplate the orderly sale of this equipment in, and the
existence of, a market for used specialty equipment. Given the unique
economic and operational nature of the equipment and the limited market, it
is reasonably possible that the Company's estimate of the amount to be
realized from the disposition of the equipment to recover its carrying
amount will change in the near term. The carrying value of this equipment
is $159,000 at December 31, 1999.
Discontinued Operations
Discontinued operations include management's best estimates of amounts it
expects to realize on the disposition of its real estate operations. These
operations include significant estimates of amounts expected to be realized
related to completed houses and residential lots held for sale, and
receivables due from affiliated real estate limited partnerships. These
estimates are based on several factors including values of recent sales of
similar properties, and valuations by independent appraisers of real
estate. These valuations contemplate sale in an orderly liquidation and
assume the existence of a market for all the assets of the discontinued
operations, all or any of which may or may not materialize. Consequently,
the amounts the Company will ultimately realize could differ materially in
the near term from the amounts assumed in arriving at the loss on disposal
of the discontinued operations.
15. Stock Based Compensation Plans
Under terms of the Company's stock option plans, directors, officers,
employees, and certain vendors may be granted options to purchase shares of
the Company's common stock at no less than 100% of the market price of the
shares on the date the option is granted. Options generally vest over four
years and have a maximum term of ten years. At December 31, 1999 and 1998,
606,850 and 982,883 shares, respectively, were reserved for future issuance
under the plans.
F-29
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
15. Stock Based Compensation Plans, Continued
A summary of the activity relating to the Company's stock option plans as
of December 31, 1999, December 31, 1998 and August 31, 1998, and changes
during the periods then ended is presented below:
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 982,883 $2.43 1,012,883 $2.45 656,633 $1.65
Exercised (585,383) 1.62 -- -- (31,250) 2.00
Granted 364,350 1.18 -- -- 555,000 3.97
Cancelled/repriced -- -- (30,000) 2.81 (150,000) 4.60
Forfeited (155,000) 1.26 -- -- (17,500) 3.14
-------- --------- ----------
Outstanding at end of year 606,850 2.24 982,883 2.43 1,012,883 2.43
======== ========= ==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Outstanding at Remaining Contractual Exercisable at
Exercise Prices December 31, 1999 Life (in Years) December 31, 1999
--------------- ----------------- --------------- -----------------
<S> <C> <C>
$1.30 98,100 5 88,250
2.00 286,250 5 258,439
3.00 212,500 8 43,750
4.00 10,000 7 5,000
------------ ------------
$1.30 to 4.00 606,850 395,439
============ ============
</TABLE>
SFAS No. 123 requires the use of option valuation models to provide
supplemental information regarding options granted after 1994. Pro forma
information regarding net income and earnings per share shown below was
determined as if the Company had accounted for its employee stock options
under the fair value method of that statement.
The fair value of each option granted was estimated at the date of grant
using the Black-Scholes option pricing model (the "BSOPM") with the
following weighted average assumptions used for grants in the years ended
December 31, 1999 and August 31, 1998, respectively: dividend yield of 0%
for both years), expected volatility of 0.96 and 1.17, respectively,
risk-free interest rate of 5.57% and 4.90%, respectively, and expected
contractual life of 10 years for both years. The weighted average fair
value of options granted during the years ended December 31, 1999 and
August 31, 1998 was $1.89 and $3.07, respectively. There were no grants
during the four month period ended December 31, 1998.
F-30
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
15. Stock Based Compensation Plans, Continued
The BSOPM was developed for use in estimating the fair value of traded
options. The Company's employee stock options have characteristics
significantly different from those of traded options such as vesting
restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma
effect on net loss for the periods presented is not representative of the
pro forma effect on net loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior
to 1994. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Net loss, as reported $9,186,746 $2,033,064 $15,785,686
Net loss, pro forma $9,565,709 $2,069,014 $16,803,346
Basic and diluted loss per share, as reported $ 1.35 $ 0.31 $ 2.19
Basic and diluted loss per share, pro forma $ 1.40 $ 0.31 $ 2.21
</TABLE>
Common stock warrants issued in the periods presented to non-employees for
services rendered primarily under consulting agreements are accounted for
based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable. The
following is a description of warrants granted and outstanding and the
assumptions utilized involving the grants in the periods presented.
F-31
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
15. Stock Based Compensation Plans, Continued
A summary of the activity relating to warrants as of December 31, 1999 and
1998, and changes during the year ended December 31, 1999, and the four
month period ended December 31, 1998 and the year ended August 31, 1998 is
presented below:
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
-------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 479,500 $3.29 479,500 $3.29 362,500 $1.66
Granted -- -- -- -- 117,000 1.63
Expired (340,000) 2.00 -- -- -- --
------- ------- -------
Outstanding at end of period 139,500 6.43 479,500 3.29 479,500 3.29
======= ======= =======
</TABLE>
The range of exercise prices of warrants outstanding at December 31, 1999
was $4.50 to $6.67. The weighted average fair value of warrants granted
during the year ended August 31, 1998 was $3.25.
The following table summarizes information about warrants outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Estimated
Volatility Dividend Risk-Free Lives
Factor Yield Interest Rates (In Years)
------ ----- -------------- -----------
<S> <C> <C> <C> <C>
1998 warrant grants 1.032 0% 5.20% 4
1997 warrant grants 1.080 to 1.184 0% 5.34% 2
</TABLE>
16. Disclosures about Fair Values of Financial Instruments
The estimated fair value amounts of all financial instruments on the
Company's December 31, 1999 and 1998 balance sheets have been determined by
using available market information and appropriate valuation methodologies.
Fair value is described as the amount at which the instrument could be
exchanged in a current transaction between informed willing parties, other
than in a forced liquidation. However, considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. The Company does not have any off balance sheet financial
instruments.
F-32
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
16. Disclosures about Fair Values of Financial Instruments, Continued
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial statements:
Cash and equivalents, accounts receivable, cash held in escrow, other
current assets, accounts payable, current portion of notes payable,
and certain other current liability amounts are reported in the
balance sheet at approximate fair value due to the short term
maturities of these instruments.
The fair value of noncurrent notes payable is estimated by determining
the net present value of future payments. The carrying amount on the
balance sheet approximates the fair value as the interest rates
approximate current market rates with the exception of one noncurrent
not with a carrying amount of $810,153 and a fair value of $686,354.
17. Loss per Common Share
Basic and diluted loss per common share have been computed by dividing the
loss available to common stockholders by the weighted-average number of
common shares for the period. Loss available to common stockholders is the
loss after adding to the loss any preferred stock dividend requirements.
The additional common shares that would be issuable for options and
warrants outstanding are ignored, as to include them in the calculation of
diluted loss per share would be antidilutive.
The computations of basic and diluted loss per common share are as follows:
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
----------------- ----------------- ---------------
<S> <C> <C> <C>
Loss from continuing operations $1,734,717 $1,218,514 $5,838,804
Add: dividends on preferred
shares-declared -- -- 497,276
Add: dividends on preferred shares
- paid upon conversion 216,928 -- --
Add: dividends on preferred shares
- cumulative, not declared 671,850 297,133 362,059
Add: excess fair market value given
in preferred stock conversion to
common stock 609,284 -- --
---------- ---------- ----------
Loss to common shareholders 3,232,779 1,515,647 6,698,139
</TABLE>
F-33
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
17. Loss per Common Share, Continued
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
----------------- ----------------- ---------------
<S> <C> <C> <C>
Loss from discontinued operations,
including loss on disposal $ 7,452,029 $ 814,550 $ 9,946,882
-------------- -------------- --------------
Net loss available to common shareholders
$ 10,684,808 $ 2,330,197 $ 16,645,021
============== ============== ==============
Weighted average shares - basic and
diluted 7,896,229 7,737,135 7,595,556
============== ============== ==============
Loss per Common Share - Basic and Diluted
Loss per share from continuing operations $ 0.41 $ 0.20 $ 0.88
Loss per share from discontinued
operations, including loss on disposal 0.94 0.11 1.31
-------------- -------------- --------------
Net loss per share available to common
shareholders $ 1.35 $ 0.31 $ 2.19
============== ============== ==============
</TABLE>
The effect of the potentially dilutive securities listed below were not
included in the computation of diluted earnings per share because to do so
would have been antidilutive for the periods presented.
<TABLE>
<CAPTION>
For the Period From
For the Year Ended September 1, 1998 to For the Year Ended
December 31, 1999 December 31, 1998 August 31, 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
Shares of common stock issuable under:
Employee stock options 386,850 982,883 449,084
Warrants 379,500 479,500 182,227
Series A Convertible Preferred Stock 1,335,960 1,345,500 1,345,500
Series B Convertible Preferred Stock -- 591,621 404,414
</TABLE>
Warrants to purchase an additional 12,500 and 10,000 shares of common stock
with exercise prices of $4.50 and $6.00 per share, respectively, were
outstanding during the periods presented and were not included in the
computation of diluted earnings per share because their exercise prices
were greater than the average market prices of the common shares for each
of the periods presented.
F-34
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
18. Stock Transactions
Series A Convertible Preferred Stock and Related Transactions
During the first quarter of the year ended August 31, 1998, the Company
sold 747,500 shares of its Series A 9% Convertible Preferred Stock ("Series
A Preferred Stock") at $10 per share. In connection with the offering, the
Company granted the underwriters warrants to purchase 65,000 shares of
Series A Preferred Stock at $12 per share, which were exercisable in
September 1998 and expire four years thereafter.
The Series A Preferred Stock is convertible into the Company's common stock
at the option of the holder at any time at a price equal to 125% of the
common stock closing price on September 24, 1997 of $4.4375 per share,
which represents approximately 1.8 shares of common stock for each share of
Series A Preferred Stock upon conversion. The Company may convert the
Series A Preferred Stock to common stock at such time as the common stock
has traded for 20 consecutive days at 150% of the closing stock price on
September 24, 1997. In the event the number of shares of the Company's
common stock is increased or decreased as a result of a stock split, stock
dividend, reverse stock split, or otherwise, the number of shares of common
stock into which each share of Series A Preferred Stock may be converted
shall concurrently be proportionately increased or decreased. Further,
after five years, the Company may redeem the Series A Preferred Stock at
$10.00 per share. Upon notice by the Company to redeem, the holders of
Series A Preferred Stock will have 30 days to elect to convert their Series
A shares to common stock at 125% of its closing price on September 24,
1997.
The Series A Preferred Stock provides for a 9% annual dividend of $.90 per
share payable quarterly. Dividends accumulate whether or not declared and
must be paid prior to any dividend distribution to the holders of Series B
Preferred Stock or common stock. In any liquidation or dissolution of the
Company, the holders of Series A Preferred Stock will be entitled to a
liquidation preference of $10 per share plus all related accumulated,
accrued, and unpaid dividends. Further, if the Company does not pay
dividends on the Series A Preferred Stock for eight cumulative quarters,
the holders of Series A Preferred Stock have the right to elect the
majority of the Company's Board of Directors. As of December 31, 1999, the
Company had not declared dividends for six consecutive quarters, which
totals $1,008,234 ($5.40 per share). No dividend in April 2000 was declared
or paid. In March 2000, the Company declared and paid dividends for three
quarters, totaling $416,340 ($2.70 per share).
Series B Convertible Preferred Stock and Related Transactions
In December 1999, the Company exchanged 591,621 shares of its common stock
for Series B preferred shares in the ratio of one and one-half shares of
common stock for each share of Series B preferred stock. Upon conversion,
the cumulative dividends in arrears of $538,459 were paid by the issuance
of 53,846 additional shares of Series B. The terms of the Series B provided
for conversion of each share of Series B into one share of common stock.
The value of the enhanced conversion has been used to reduce earnings
available to common shareholders in determining earnings per share.
F-35
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
18. Stock Transactions, Continued
Shares Issued Under Stock Option Plans
During the years ended December 31, 1999 and August 31, 1998, stock options
were exercised resulting in the purchase of 585,383 shares for $979,111 and
31,250 shares for $62,500, respectively.
Common Stock Issued in Exchange for Debt
During the year ended August 31, 1998, the Company issued 14,927 shares of
common stock at market value in payment of debt of $70,899.
Shares Issued for the Acquisition of TransPacific Environmental, Inc.
During the year ended August 31, 1998, the Company issued 406,109 shares of
common stock for the acquisition of TransPacific Environmental, Inc.
Shares Issued in Connection with Legal Settlement
In the year ended August 31, 1998, the Company issued 144,000 shares of
stock in connection with a judgment rendered by a court in litigation
brought by an individual and the estate of a former officer and
shareholder. As a result of the judgment, the issuance of these shares is
recorded as settlement expense.
Treasury Stock Repurchase Program
The Company's Board of Directors on November 10, 1997 authorized management
to purchase up to $1,000,000 worth of its common stock over a 12 month
period. As of December 31, 1999 and 1998, the Company had repurchased at
market value 24,250 shares for $118,339.
Common Shares Reserved for Future Issuance
At December 31, 1999, the Company has reserved common shares for future
issuance as follows:
Stock option plans 606,850
Warrants 139,500
Convertible preferred stock 1,335,960
---------
2,082,310
=========
F-36
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
19. Business Segments
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Each of these operating segments is considered a reportable segment, and
the accounting policies of the operating segments are the same as those
described in Note 2. The Company evaluates the performance of its segments
and allocates resources to them based on revenue and EBITDA. The Company
defines EBITDA as earnings before interest, income taxes, depreciation and
amortization, and other nonoperating income and expense.
Certain financial information is presented below:
<TABLE>
<CAPTION>
Green Waste Waste
Recycling Transport Other Total
--------- --------- ----- -----
<S> <C> <C> <C>
Year ended December 31, 1999:
Revenue $ 2,084,098 $ 5,560,809 -- $ 7,644,907
EBITDA (627,099) 416,576 (579,283) (729,806)
Assets 1,916,002 5,444,436 $ 4,275,697 11,636,135
Depreciation and amortization 363,601 604,417 32,577 1,000,595
Interest expense 243,263 477,022 231,772 952,057
Four months ended December 31, 1998:
Revenue $ 1,122,595 $ 902,235 $ -- $ 2,024,830
EBITDA (503,322) 79,442 (507,565) (931,445)
Assets 3,430,480 5,382,814 17,670,183 26,483,477
Depreciation and amortization 173,533 97,173 16,419 287,125
Interest expense 146,688 85,166 158,516 390,370
Year ended August 31, 1998:
Revenue $ 2,005,611 -- $ -- $ 2,005,611
EBITDA (659,595) -- -- (659,595)
Assets 3,258,418 -- 18,212,661 21,471,079
Depreciation and amortization 207,963 -- 108,266 316,229
Interest expense 198,864 -- 463,025 661,889
</TABLE>
F-37
<PAGE>
USA Biomass Corporation
Notes to the Consolidated Financial Statements
For the Year Ended December 31, 1999, the Four Month Period
Ended December 31, 1998 and
For The Year Ended August 31, 1998
- --------------------------------------------------------------------------------
20. Subsequent Events
Sale of Series C Convertible Preferred Stock
In March 2000, the Company issued 3,000 shares of its Series C Convertible
Preferred stock at $1,000 per share. In conjunction with the offering, the
Company issued warrants to purchase 100,000 shares of the Company's common
stock at $4.65 per share. The warrants may be exercised at any time until
they expire on March 31, 2005.
The Series C Convertible Preferred shares may be converted at any time at
$4.65 per share and provide for a 6% annual dividend rate.
A portion of the proceeds of this offering was used for the acquisition
described below and for the payment of dividends on the Series A
Convertible Preferred Stock. The remaining proceeds of this offering will
be used for working capital.
Acquisition of American Waste Transport
In March 2000, the Company acquired substantially all of the outstanding
shares of American Waste Transport ("AWT") for cash in the amount of
$750,000 and up to one million shares of the Company's common stock,
subject to resolution of certain contingencies. This will be accounted for
using the purchase method.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of AWT had taken place at January 1, 1999.
Year Ended
December 31, 1999
-----------------
Revenue 22,588,000
------------
Net loss from continuing operations 1,570,024
------------
Net loss 9,022,053
------------
Net loss per share, basic and diluted $ (1.16)
------------
F-38
<PAGE>
21. UNAUDITED QUARTERLY FINANCIAL DATA
The following is a reconciliation of 1999 interim results of operations
which were impacted by the effect of year-end adjustments:
<TABLE>
<CAPTION>
Quarter
Ended
Quarter Ended Quarter Ended Quarter Ended December 31,
March 31, 1999 June 30, 1999 September 30, 1999 1999
------------- ----------- ------------- ----------- ------------- ----------- ------------
As reported As reported As reported
in Form 10QSB As adjusted in Form 10QSB As adjusted in Form 10QSB As adjusted Actual
------------- ----------- ------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 2,067,000 $ 2,067,000 $ 1,837,000 $ 1,837,000 $ 1,965,000 $ 1,965,000 $ 1,776,000
Costs and expenses (1) 2,487,000 2,840,000 1,998,000 1,976,000 1,747,000 2,264,000 2,300,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)(2) $ (420,000) $ (773,000) $ (161,000) $ (139,000) $ 20,000 $ (497,000) $(7,778,000)
=========== =========== =========== =========== =========== =========== ===========
Net loss per common
share, basic and
diluted $ (0.08) $ (0.13) $ (0.05) $ (0.05) $ (0.03) $ (0.09) $ (1.08)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
(1) Costs and expenses increased primarily due to adjustments relating to
depreciation, liability insurance, medical insurance, impairment losses, bad
debt expenses and losses on sale of assets.
(2) The reason for the significant loss of $7,778,000 in the fourth quarter,
when compared to prior quarters, is due to the recording of loss from
discontinued operations of approximately $7.4 million.
F-39
